FT.com / Business Reports / Banking in Europe 2004 - BNP Paribas: Wary leader sits on his war chest Wednesday Oct 27 2004 . All times are London time. Roger Bove Edit Profile Take a Tour Log out HomeWorldBusinessMarketsMarkets & funds dataIndustriesLexComment & analysisTechnologyManagementYour moneyArts & WeekendSportJobs & classifiedsIn today's FT FT ReportsCreative BusinessFTfmFT-ITWorld reportsBusiness Reports Partner sites Chinese.FT.com FT Deutschland Les Echos Expansion The New York Times Recoletos CBS MarketWatch Vedomosti Investors Chronicle Business Reports / Banking in Europe 2004Print article | Email article BNP Paribas: Wary leader sits on his war chest By Martin Arnold Published: October 8 2004 07:38 | Last updated: October 8 2004 07:39 When Michel Pébereau handed over the reins as chief executive of BNP Paribas to his deputy Baudouin Prot last summer, it was more a case of plus ça change than a radical revolution at the top of the eurozone’s biggest bank by market capitalisation. Mr Pébereau, one of France’s best-known bankers, spent much of the past 20 years training Mr Prot in preparation for the handover. They still work closely together, as Mr Pébereau has remained chairman and kept a strong influence over the bank’s strategy. However, this has not stopped investors from worrying that BNP’s new boss could be tempted to use its growing pile of surplus capital for risky acquisitions, breaking with Mr Pébereau’s carefully nurtured reputation for skilful deal-making. “These fears were overblown,” says Pierre Mariani, BNP’s head of international retail and financial services and architect of much of the bank’s recent expansion. “We have been told for 18 months that we have too much cash and are on the brink of doing a crazy deal,” says Mr Mariani. “But we have never done it, instead everything we bought has been within our strict criteria for return on investment.” BNP has spent about €2bn on acquisitions since Mr Prot took over. It has expanded its US presence, made a pioneering move into Russia, invested in Turkey and added to its European leasing and fleet management activities. This string of deals, combined with a €2bn share buy-back programme launched last summer and a 21 per cent rise in the dividend, seem to have eased many investor worries about what Mr Prot would do with BNP’s €6bn excess capital. He seems to have won over Sylvie Dalmaz, Standard & Poor’s banking analyst, who praised “the group’s focused strategy, which is well-implemented by a stable management team, as well as its good acquisition track record” as she upgraded BNP’s rating by one notch to AA in July. BNP’s tier one capital ratio has fallen from 9.4 to 8.4 per cent. At June’s results presentation, Mr Prot described this as “a much more satisfactory level, compared with the excess capital situation at the end of last year”. Mr Prot says he is not worried by the prospect of BNP losing its crown as the eurozone’s biggest bank by market capitalisation to Santander Central Hispano after the Spanish bank’s takeover of the UK’s Abbey National. He says BNP will remain the eurozone’s most profitable bank. After dividend payments it is expected to generate at least €2bn of excess capital this year. The French bank has used most of its excess capital almost to double its US presence this year, buying Community First Bank for $1.2bn in March and Union Safe Deposit Bank for $245m a month later. From its 1980 acquisition of First National Bank of San José, a small West Coast bank, BNP has built its US subsidiary into the fifth-largest bank in California and the seventh-largest on the US West Coast, mostly through acquisitions. By all accounts it has no plans to stop there. “We hope to continue to both consolidate the footprint of our US operations and to expand into new areas, near to where we are already present,” says Mr Mariani. BNP has been forced to focus its expansion on the US because of the lack of opportunities in France and the difficulties of expanding in Europe. Big cross-border mergers in European retail banking are hampered by political opposition and fragmented financial regulation. In Europe, it has only made niche acquisitions in less-developed markets. In Russia it has formed a consumer finance joint venture with Russian Standard Bank. In Turkey it is in talks to buy a 50 per cent stake in Turk Ekonomi Bank, the country’s 10th-largest bank. By far the most obvious takeover target is French rival Société Générale. But Mr Prot has been quick to rule out a merger with SocGen, for which BNP has made several failed approaches since its privatisation in 1993. He says the “cultures and histories of both banks” make the execution risks too high. Analysts say Mr Prot has been “inundated” with proposals from investment bankers keen to advise him on big cross-border deals in Europe since he took over. “Anyone who has a plan to create a pan-European bank must talk to BNP,” says Benoit Vincenzi, analyst at Lehman Brothers. Mr Prot is rumoured to have examined a merger with Dresdner Kleinwort Wasserstein, the investment banking business of Germany’s Dresdner Bank. But he is understood to have backed away after deciding the risks were too great. Nonetheless, BNP may be forced to look for a merger closer to home as US opportunities dry up. Mr Mariani warns that prices of US assets have already been inflated by the recent spending spree of big financial groups, such as Bank of America and Citigroup. “There is a bit of a bubble in the US,” he says. “We are not willing to overpay, so we will first have to integrate our recent acquisitions while looking for new opportunities.” EMAIL ARTICLEPRINT ARTICLEMOST POPULAR Contents Hopes of mergers revive on continent The UK: Property triggers alarm bell London: Ingenuity and sterling service Spanish property: Fears that building in Spain may yet cause pain SCH: Hunter in search of big game France: Back to a hostile environment Switzerland: Happier than in a long time BNP Paribas: Wary leader sits on his war chest Germany: A need to keep up good work Landesbanken: The lesser of two evils Americans in Europe: Looking for a marriage of cultures RBS: Making a rod for its own back? 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