BNP's IB business posts Ç2 billion quarterly loss

BNP Paribas' investment banking business lost €2 billion in the last quarter of 2008, dragging the bank's full-year profits down to €3 billion -- a fall of more than 61% from the record profits in 2007, but in line with analysts' expectations.

BNP says it will redesign the investment banking group's product offering in 2009, including scaling back its business in the most complex structured products, expanding its flow business and developing tailor-made hedge products. It also said yesterday that it would "streamline" the division's organisation.

"Priority will be given to leadership in Europe," it said in a press release yesterday. "This move will enable [the investment banking group] to scale back its cost base by 5%, on a full-year basis, excluding variable compensation."

Amid a grim earnings season, BNP's results were strong enough to cheer investors -- at least initially. The stock rallied at the Paris opening and at one point was up as much as 5.3% spurred on by continued confidence in the bank's French retail banking and asset management businesses, which both contributed strong profits in 2008. However, after a volatile session that saw the stock fall back to unchanged around lunch time and then hit a fresh intra-day high in the afternoon, the share price eventually ended the session 0.5% lower at €24.50.

"For the financial services industry, 2008 was a year that saw an unprecedented crisis," says Baudouin Prot, BNP's chief executive. "With a €3 billion profit, which puts it in the top 10 banks in the world, BNP Paribas has confirmed its strength."

The investment banking business earned €879 million in the first nine months of 2008, but that was completely turned around in the horrible mess of the fourth quarter when the cost of risk sky-rocketed. BNP booked huge charges related to defaulting monoline insurers (€427 million in provisions), defaults from other counterparties (€304 million), exposure to Madoff's fraudulent funds (€345 million) and from subsidiaries in the US, Spain and the Ukraine (€939 million).

The equity and advisory business suffered most, thanks mainly to the unprecedented losses on its equity derivatives books. Fixed income and the financing businesses performed relatively better, with combined revenues of €1.7 billion.

The numbers could have looked worse were it not for changes to the IAS 39 accounting rule announced last summer. At the start of the fourth quarter, BNP transferred €7.8 billion of troubled financial instruments, mostly from its fixed-income division, into a part of its balance sheet that allows the bank to stop recognising any further losses in its income statements. Without this reclassification, the bank would have suffered an extra €424 million of losses in the fourth quarter.

BNP further reduced the damage to its performance by being one of the first banks to limit bonuses. This aggressive action, combined with other cost-cutting measures, helped it to pare back operating costs in the investment banking business by more than 22% in 2008.

The asset management business booked a €1.3 billion profit, which was down by almost a third on 2007, but clearly made an important contribution to BNP's earnings. Even more important, however, was the profits contributed by the retail banking business in France, which at €1.6 billion were up by almost 5% on 2007.

At the end of 2008, and after the French government's first round of bailout cash was injected, BNP's tier-1 capital stood at €41.8 billion, up by €5.3 billion from the end of 2007 and representing a ratio of 7.8%, compared to 7.3% a year earlier.

BNP also announced that it is swapping the heads of two of its key units. Jacques d'Estais will take over asset management from Alain Papiasse, who will move over to investment banking.