BNP Paribas should probably admit the plan for its investment bank is going badly wrong

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BNP Paribas strategy redundancies

So, BNP Paribas' corporate and investment bank (CIB) didn't have a great third quarter. The French bank announced its quarterly results today and revealed that CIB revenues fell 8.4% year-on-year in the three months to September. They also fell 9.6% year-on-year in the first nine months of 2018 compared to the same period one year earlier. It's not entirely pretty.

Of course, BNP's corporate and investment bank isn't the only one with issues. Revenues were also down 13% at Deutsche Bank's corporate and investment bank (CIB) in the third quarter, and by 9% in the first nine months. BNP Paribas isn't the only one shrinking.

BNP Paribas is, however, the only one with its head deep in the sand about the shrinkage that's taking place. Although the head of Deutsche's investment bank Garth Ritchie claimed yesterday that the bank has been adding market share whilst losing revenues, Deutsche does at least have a programme of cost cutting. BNP Paribas, by comparison, is publicly sticking to its 2020 strategy plan in which revenues in the corporate and investment bank are supposed to grow at a minimum compound average rate of 4.5% a year between 2017 and 2020 and obviate the need for big cuts.

This is already a problem. As the chart below shows, in the first nine months of 2018 revenues at BNP's CIB are already 14% below target. If the current trajectory continues next year, they will be 25% below target and in 2020 they will be 35% below target. BNP will not be outgrowing the need for cost cutting after all.

Although the bank has said little publicly about its plans going awry, increased cost cutting looks like a tacit admission that things aren't right. Under plan 2020, BNP is supposed to be cutting costs at its investment bank by an average of 1.5% each year. But in the first nine months of operating expenses, it's reduced operating expenses by nearly 9% in an apparent attempt to match the fall in revenues. Moreover, while plan 2020 focuses on cutting costs through efficiencies and digitalisation, BNP has been quietly making redundancies. Earlier this month, the Times reported that BNP was cutting 40 people from its investment bank in London. Insiders say it's more like 150 globally.

Most at risk would seem to be the French bank's fixed income salespeople and traders who have now presided over falling revenues for six consecutive quarters. It doesn't help that BNP's often brilliant macro trading team has been stymied by a weak environment for rates trading in Europe. Nor, though, does it help that BNP's fixed income trading business ranks between seventh and ninth in Europe and between 10th and 12th in the U.S. according to Coalition. The French bank is a bit-player in a market that's increasingly subject to consolidation.

So, what next? This is for BNP CEO Jean-Laurent Bonnafé to determine. In the meantime, though, it might help if Bonnafé admitted his plan isn't working out. It could only be more painful in the long run if he doesn't.

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