As hedge funds and institutions ride what equity strategists at Morgan Stanley and Bank of America have characterized as a ‘bear market rally’, BNP Paribas, one of the biggest banks in Continental Europe (and bigger still now that it has absorbed more of Deutsche Bank’s prime brokerage and electronic equity trading businesses, which it bought during last summer’s firesale) has been aggressively building out its prime brokerage business and reviving a franchise that many believed was doomed to obsolescence as American investment banking behemoths like JPM increasingly dominate the Western Hemisphere.
In a sign of just how desperate Europe has become to prop up a Continental investment bank as a ‘European champion’ prepared to do battle with JPM, Morgan Stanley and – of course – Goldman Sachs, the FT on Monday adoringly quoted BNP global markets chief Olivier Osty in a story proclaiming BNP’s (however limited) success at building up its prime brokerage franchise against all odds.
In the process, the French bank has accomplished something German Finance Minister Olaf Scholz can only dream of: it purchased valuable assets like Deutsche Bank’s prime brokerage technology platform – known as Autobahn – and is now leveraging its stronger financial position to squeeze more value out of DB’s assets, even as interest rates in Europe and the US remain dismally low (though if the “V-shaped recovery” continues, the Fed might be forced to confront the possibility of raising rates…at least, in theory…).
“The combination of Deutsche’s technology and BNP Paribas’s balance sheet and long-term commitment to this business is compelling,” said Supurna VedBrat, global head of trading at BlackRock, which has remained a client. “The asset management industry needs European-based global prime brokers, those with a strong balance sheet and support from the senior management of the bank,” she added.
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France’s largest investment bank swooped on the German lender’s global prime finance unit and electronic equities business last summer as Deutsche scaled back its ambitions. BNP is one of the few European banks still committing resources to prime finance, the lucrative but tech-heavy and risky business of lending money as well as handling trades for hedge funds and asset managers. “Our combination could be the largest prime broker in Europe and be considered in the top four in the world,” said Olivier Osty, head of global markets at BNP. “This has to be seen, but that is the objective and we will make it…We would be trying to compete with Goldman for the third or fourth spot.” “There is a good opportunity for us to take leadership in Europe on CIB [investment banking] and global markets,” Mr Osty told the Financial Times. “US banks are retrenching a lot and BNP is stepping up.”
To be sure, BNP is still in the process of integrating the old DB businesses into its architecture, and the bank doesn’t expect all of DB’s clients to have transitioned over until 2021 (the bank steadfastly denied rumors about clients abandoning the DB prime brokerage business, rumors that have popped up from time to time).
The hurdles to overtaking Goldman at the No. 3 spot on the PB league tables are – as the FT readily acknowledges – “significant”.
However, the bank faces significant hurdles in disrupting the established hierarchy. Along with JPMorgan and Morgan Stanley, Goldman has dominated the prime brokerage business for years, followed by Bank of America and Barclays. By contrast, BNP ranked 11th last year and Deutsche has historically been placed seventh to ninth in league tables, according to data provider Coalition. To oust Goldman from the top three, the newly combined entity would have to increase its market share to more than 12 per cent, Coalition estimates. “We have been taking market share for the last year and a half and this increased in the first quarter,” said Mr Osty. “Are we there yet? No, but the trend is definitely positive and the [coronavirus] crisis will probably strengthen us” as smaller players withdraw. JPMorgan’s prime business handled more than $500bn in client assets at the end of September and the heads of the unit wrote “Next stop, $1 trillion!” in an internal memo at the time. When all client transfers from Deutsche are completed in early 2021, BNP’s prime brokerage business is expected to have more than $300bn of assets — as much as $200bn of that coming from Deutsche — and revenue in the hundreds of millions a year. Mr Osty declined to be more specific on financial targets.
About 125 staff out of a potential 800 have already moved across from Deutsche, including senior figures such as Brian Fagen, head of Americas execution services, and Andy West, global head of prime technology, according to Ashley Wilson, co-head of the German bank’s prime finance unit, who is himself transferring next year.
As an aside, it appears the restrictive lockdown conditions in France didn’t stop the businesses execution volumes from climbing…
At the peak of the historic market turmoil in March, execution volumes tripled and the two banks’ systems held up, dispelling lingering fears over the platform’s stability. “We are on track, which to be honest is surprising, because we could have been expected to slow down during three months of Covid,” Mr Otsy said. “Working from home did not have any impact on the integration. We have been able to continue to transfer the technology and people from Deutsche to BNP even more than we were expecting.”
Unlike retail traders who rely on cheap electronic brokerages like Robinhood (and increasingly TDAmeritrade, E*Trade and Schwab) that have proven alarmingly unreliable during recent market ructions, BNP said its system performed flawlessly during the worst of the selling in March, when turnover doubled compared with baseline levels from recent months. This business triumph is probably what inspired the bank’s internal PR machine to pitch this story to the FT in the first place.
Though in retrospect, this might have been a mistake. After all, preventing the rise of European champion powerful enough to challenge JPM and – more importantly, Goldman Sachs (as the writer was careful to make clear in the headline) is certainly in the Fed’s interest, or at least in the interest of the people who run the Fed.