BNP Paribas Debt Trading Disappoints After Falling Behind

(Bloomberg) -- BNP Paribas SA's trading woes continued in the second quarter as its key debt-trading business posted a further slide in revenue, offsetting unexpected gains in the equities business.

The French lender blamed a lackluster market, especially in Europe, for its fifth straight quarterly decline in revenue from buying and selling bonds, currencies and commodities. Income from BNP Paribas's biggest trading division also missed analyst estimates and trailed larger Wall Street rivals. Equities trading, by contrast, reached a three-year high.

Chief Executive Officer Jean-Laurent Bonnafe's plans to improve growth and profitability through 2020 depend on expansion at the corporate and institutional bank. The unit is growing in cash management and trading in Germany and other European markets. It's also expanding in the U.S. at a time when Deutsche Bank AG is cutting thousands of jobs, while at the same time confronting muted client demand and persistently low interest rates.

‘Structural Decline'

“The fixed income business has been seeing structural decline for several quarters,” said Jean-Pierre Lambert, an analyst at Keefe, Bruyette & Woods in London who rates the stock market perform. “Fortunately, they've been successful in developing the equities business.”

Leaving aside the investment bank, earnings surpassed expectations at BNP's main consumer banking and personal finance divisions, including BancWest in the U.S. and BNL in Italy. Group net income also topped estimates, spurred by lower provisions for bad loans. Revenue for the bank's international financial services business gained almost 9 percent, boosted by rising loan demand.

“These are good results where you see the benefits of diversification but were probably at the top of the cycle for provisions,” Lambert said.

BNP fluctuated between gains and losses in Paris. The shares were little changed at 55.50 euros as of 5:07 p.m.

BNP Paribas confirmed its 2020 strategy and financial targets, which include increasing total revenue by at least 2.5 percent annually on average, with faster growth coming from international financial services and the investment bank. Chief Financial Officer Lars Machenil said on a call with analysts that he sees “no issues” for BNP Paribas reaching its target for a core capital level, known as common equity Tier 1 ratio, of 12 percent.

The bank earlier this week said it plans to sell almost 20 million shares in First Hawaiian, raising about half a billion euros. Over time, the bank plans to sell all its holding in the lender, Chief Operating Officer Philippe Bordenave said at a press conference. BNP Paribas is anticipating a 300 million-euro gain from the disposal in the third quarter.

Debt Trading

Fixed-income revenue fell 17 percent in the second quarter to 729 million euros ($851 million) compared with estimates of 782 million euros. That trailed the combined 6.7 percent increase at the five largest U.S. firms. Stock trading unexpectedly jumped 12 percent. Last week, Deutsche Bank reported declines in both fixed-income and equities trading.

“Compared to a year ago the economic context is less favorable for the corporate and investment bank, particular in FICC and particularly in Europe,” Machenil said in a Bloomberg Television interview, referring to the bank's fixed income, currencies and commodities business. “The market is more subdued.”

Shares of big European banks this year are failing to impress, and BNP is no exception. The stock is down 11 percent, trailing the 9 percent decline of the benchmark STOXX 600 Banks Index.

Here are other highlights from BNP Paribas's second-quarter results:

• Net income at 2.39 billion euros, beating analysts' estimates
• Revenue rose 2.5% to 11.2 billion euros, also surpassing analyst estimates
• Bad-loan provisions fell 14%, partly thanks to continued improvement in Italy
• Pretax profit at CIB division fell 26%; corporate banking revenue fell 14%
• CET1 capital ratio was 11.5% at end June, down from 11.6% at end March

To contact the reporter on this story: Fabio Benedetti-Valentini in Paris at fabiobv@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Andrew Blackman, Keith Campbell

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