It looks like BNP Paribas needs to make some traders redundant

Things aren’t exactly going to plan over at BNP Paribas.

Under the French bank’s 2017-2020 business development plan, the corporate and investment bank (CIB) is supposed to increase revenues at a compound annual average rate of 4.5% each year (5% in the global markets division). In 2018 this is not happening. Revenues at the corporate and investment bank are not growing at all; they are shrinking.

BNP Paribas released its second quarter results today. In the three months to June, revenues in the CIB fell 7% year-on-year. For the first six months of this year as a whole, revenues are down 8% on last year. The salespeople and traders in BNP's global markets division are partly to blame: there, revenues are down 10% this year; in corporate banking they're down 11%; in securities services they're up ever so slightly.

BNP isn’t saying its shrinking revenues are an issue – yet. It is blaming events beyond its control, like a weak environment for rates traders in Europe and a feeble market for FX and credit trading. But as the chart below shows, the French bank's fixed income sales and trading division really hasn’t done very well at all. In the second quarter it under-performed (even) Deutsche Bank.

[Hover over the chart to highlight each bank]

This is a problem to the extent that, a bit like Barclays, BNP is supposed to be growing itself to glory. Yes, there’s a cost-cutting plan, but it’s a comparatively modest one (this year the bank intends to cut €1.1bn or 13% from total costs) and is based on streamlining and simplification rather than heartily hacking at entire trading desks. While costs are being gently shrunk, BNP's boat is supposed to be lifted by what the bank describes as 'deeper penetration of global markets products within the corporate franchise,' the sale of 'cross-border solutions', and 'deeper relations' with clients. In fact the boat isn't being lifted, and BNP may need to loose some weight.

There is reason to believe the bank will cut costs more aggressively in the next six months 2018 anyway.  Of the €1.1bn of costs to be cut this year under the existing plan, just €394m were removed in the first half.  The CIB is likely to bear the brunt of the changes: of 42% in costs removed across BNP since the 2020 plan was launched, have come from the corporate and investment banking division.

Will BNP decide that 2020 was just a pipe dream? Not yet. For the moment, the bank seems to be hanging onto the notion that it can grow its way out of trouble. The French bank is known for its brilliant macro team, which has achieved some excellent results in the past. Away from macro, however, Coalition says BNP's fixed income trading franchise most ranks 10th or below. As a marginal player in a competitive market, BNP may soon need to make some hard choices unless revenues turn.

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