October 31, 2017 / 2:36 PM / a year ago

UPDATE 1-BNP Paribas' FICC suffers in line with rivals

(includes comments from bank’s chief operating officer)

By Christopher Spink

LONDON, Oct 31 (IFR) - BNP Paribas was unable to avoid the impact of quieter markets in the third quarter, reporting an adjusted 23.6% drop in fixed income, currencies and commodities revenues to €801m.

This was worse than analysts had forecast and knocked the French bank’s shares down by as much as 3.6% to €66.42 on Tuesday morning.

“The market context this quarter was unfavourable for the market activities,” said the bank, noting that all areas – rates, FX and credit – saw lower levels of business.

The five major US banks had reported an average 22% fall in third-quarter FICC revenues but Deutsche Bank and Barclays performed worse, reporting drops last week of 36% and 31%, respectively, though Barclays’ figure was for all its markets activities.

In the same period a year ago, BNP Paribas’ FICC unit reported a 41% rise in revenues on the back of volatility after the UK unexpectedly voted to leave the European Union.

The three months to end-September was the second quiet trading quarter in a row. The lack of volatility is not seen as permanent with more uncertainty expected again as central banks start to reduce their bond-buying programmes.

Equity and prime services recovered a little, showing a 9.4% rise in revenues at constant currencies to €433m. A year ago the division reported a 15% fall in revenues indicating business has not come back to the levels of two years ago.

Overall global markets saw revenues decline 17.2% to €1.23bn.

However, the bank put less capital to work across its corporate and institutional bank, €21.4bn, or 3.6% below the level of a year ago.

It also reduced CIB operating expenses by 6.2% to €1.9bn. That meant pre-tax income fell only 4.2% to €778m and returns on equity were broadly unchanged at 3.6%.

“FICC revenues in the third quarter were clearly below trend,” said Philippe Bordenave, the bank’s chief operating officer. “Volatility was at record low levels in the market. Our VAR [value at risk] was extremely low too so capital consumption is low and our RoE is improving in the business.”

Bruce Hamilton, analyst at Morgan Stanley, welcomed this “flex in cost base as revenues weakened”, saying the bank continued to have “strong cost discipline”.

Bordenave said he was hopeful that volatility would return, eventually.

“We are not following the Japanese situation. Economic growth is picking up in Europe. Central banks will start to decrease the level of QE at the end of next year and are already tapering purchases before that,” he said.

“So the long end of the yield curve will start to steepen again but it will be some time before we get to the right level. We could be back to more free movements in markets as that happens.”

Half of BNP Paribas’ CIB revenues come from more resilient services, such as corporate banking and securities services, insulating it somewhat from more unpredictable markets activity.

The former saw revenues fall 1.1% to €948m year-on-year with adverse FX blamed. The latter reported a 4.2% rise to €476m as the bank won more mandates.

The bank does not strip out its revenues from underwriting and advisory work but said it remained a leader in euro bond origination.

Bordenave did not comment on reports that BNP Paribas might be interested in bidding for Germany’s Commerzbank, noting that the bank preferred to grow organically. However, he said more consolidation among investment banks was likely.

“Investment banks are under pressure through regulation. There is more transparency and less margin in the business,” he said. “Banks founded on institutional business have had to change their models to act for more corporate clients.

“At the same time as there are regulatory pressures there is the technical revolution too. Ultimately there will be fewer businesses than before the crisis and the remaining ones will be stronger.” (Reporting by Christopher Spink)

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