BNP Paribas

Stop. Think. Act

The secret of a French bank’s success

Oct 21st 2010 | PARIS | From The Economist print edition

BAUDOUIN PROT has an unusual habit for a chief executive. A talkativeman, the boss of BNP Paribas occasionally forces himself to pausebefore answering a question. The delay can be unnervingly long. Hegrimaces. He leans back. He scribbles notes to himself, as if wrestlingwith the finer points of semiotics. As you wait you wonder how many badideas have fizzled out in these self-enforced moments of reflection.Perhaps Mr Prot’s pauses are one of the secrets of BNP Paribas’ssuccess.

In 1999, when BNP bought Paribas after an epic takeover battle, itcrowned itself a European champion even though about 60% of its activitywas in France. Today the title is deserved. The bank is Europe’sthird-largest by market value and, measured by its borrowing costs, oneof the very safest. Less than 40% of its business is now in France. LikeSpain’s Santander and Italy’s UniCredit it runs retail operationsacross the continent (a position boosted by the purchase of bits ofFortis, a failed Belgian bank, in 2009). Unlike them it is also big inasset management, private banking and investment banking.

Success partly reflects what the bank didn’t do. Althoughacquisitive, it avoided big deals before the crash. It owns a subscaleretail operation in America but did not go on a subprime bender. Itspecialises in derivatives yet avoided losing billions on credit-defaultswaps. Mr Prot’s explanation for these dodged bullets is not his habitof reflection, or luck, but “professional management”. He keeps areassuringly tatty list of the telephone numbers of the top 100 managersin his wallet. The bank is mainly run by a tight-knit group of veteransfrom the original takeover. The executive suite looks like the set of acostume drama but the top brass still gather there and banter—thenearest you can get to a water-cooler moment in a building in whichNapoleon Bonaparte got married.

The most important thing these managers did not do was allow the firmto be dominated by its investment bank. Commercial and investmentbanking contributed almost half of the combined firm’s gross profits in1999. Today its contribution is about a third. Like Santander, HSBC andJPMorgan Chase, BNP Paribas has a cadre of executives under instructionsnot to go native when they are posted to its divisions. “I don’tbelieve in an autonomous commercial and investment bank separate fromthe firm,” says Alain Papiasse, who runs the unit and until 2009 led thebank’s asset-management and insurance arm.

That may help explain why the investment bank was restrained.Although it flirted with danger (a 2007 presentation boasts of itsexpertise in exotic credit derivatives), it took little “marketrisk”—by, for example, holding securities. That also means it will behit relatively lightly by the new Basel 3 capital rules.

BNP Paribas has bought quite a few retail banks since 1999. Mr Protsays that keeping the firm evenly balanced was not an explicit strategybut was in the back of managers’ minds. When the investment bank grewreally fast, between 2003 and 2007, BNP Paribas bought BNL in Italy for€9 billion ($10.8 billion). It overpaid but the integration of BNL isregarded internally as a success. That confidence helped BNP Paribas topick up bits of Fortis in 2009 at an attractive price, bringing a bigretail presence in Belgium and Luxembourg. It also bulked up itsasset-management and private-banking arms, run by Jacques d’Estais (whoused to head the investment bank).

How BNP grows now is a bit of a concern. Three-quarters of revenuecome from rich economies in continental Europe (although Mr Prot reckonsthese banking markets may grow faster than over-indebted America,Britain or Spain). The bank has a decent presence in Turkey and northAfrica but now that lending without raising deposits is frowned upon,the expansion there will be more branch-based than before—which takestime. Derivatives, the investment bank’s old rocket-fuel, which supplied70% of its revenue growth between 2003 and 2006, are maturing, partlybecause of more regulation.

One priority is to squeeze more from the enlarged group. Mr d’Estaissays he can cross-sell more savings products in the bank’s newerbranches. In Italy there has been a “huge difference made, like nightand day,” since the acquisition in 2006. At the corporate and investmentbank Mr Papiasse jokes that he could “have 200 mathematicians calculatea precise answer”, but reckons 5-10% of client revenues are fromcross-selling with the rest of the group and that this could double.Having jumped up the European league tables in fixed income, theinvestment bank is now expanding in equities and in Asia. The firmoverall is keen to sell more services to its big base of corporatecustomers, for example in cash management and trade finance.

All this might seem a little pedestrian for one of the winners of thecrisis. Mr Prot, chief executive since 2003, will probably becomechairman in a couple of years, replacing Michel Pébereau. These twoveterans could yet unbottle the animal spirits that won Paribas a decadeago. There is the odd hint of hubris—the bank suffers from an inflatedview of its capital and funding position, which is reasonable ratherthan outstanding.

Yet the overall impression is of discipline. BNP Paribas was recentlyoutbid by Santander for a Polish bank. When Mr Prot warns of thedangers of a “market psychology of complete risk aversion,” he soundsconcerned, not gung-ho. BNP Paribas’s recent history is not about beingbrilliantly contrarian—expanding in downturns and retrenching in booms.Instead it is a story of consistent, tightly managed expansion andrisk-taking. Tempered by the ability to stop, and for a moment, think.