French Banks Release Interim Investment Banking Revenues

PARIS--Although French banks do not break out interim FX revenues, these banks are showing strong half-year gains from investment banking.

According to market analysts, the French, among other European banks, have diversified heavily into emerging markets and derivatives in recent years, and the strategy paid off during the first half.

"The approach of euro-land pushed the European banks to become late and aggressive participants in the emerging markets, particularly in Latin America and Asia," says Michael Wallace, manager of European currency analysis at Standard & Poor's MMS International in London.

A recent survey by the Organization for Economic Cooperation and Development (OECD) revealed that European banks hold five times the amount of emerging markets debt compared to their US rivals. In total, European banks' exposure to these markets is $571 billion, which compares with US banks' exposure worth $118 billion.

Recent developments have highlighted that this level of exposure to the emerging markets is a double-edged sword for participants. However, a number of European institutions had a successful first half in emerging markets FX--when risk management, rather than risk avoidance, was uppermost in clients' minds.

"A lot of these banks have been looking to build treasuries in specific areas, such as the emerging markets, and we have seen some aggressive leveraging of the Swiss franc and the yen into other currencies and assets," Wallace explains. "These banks have also done well in many of the crosses. The volatilities were good in US dollar/yen and dollar/Deutsche mark from the beginning of the year, as well as Europe/yen."

These views are supported by Loic Meinnell, Paribas's European head of FX trading and global head of options in London, who says that currency options, emerging markets and yen trading made a significant contribution to the bank's Capital Markets and Advisory Services group.

"Foreign exchange is no longer about spot trading. We have a well-diversified business and a very active derivatives operation," Meinnell says.

The Capital Markets and Advisory Services division reports pre-tax income of FRF4.439 billion ($732 million) for the first half of 1998, an increase of 22 per cent on the FRF3.637 billion ($620 million) reported for the same period last year. The 1997 figure has been restated following the merger with Compagnie Bancaire.

Earlier this year, Paribas established a global emerging currencies team under former proprietary trading chief, Eric Kalfon (FXW, March 9). A second major initiative was the globalization of the bank's capital markets activities. Eric Nicolas, former global head of FX, took the senior role as head of global trading in New York, and Olivier Dyer, the bank's former European trading and sales head in Paris, took over as global head of marketing (FXW, March 30).

"We are very happy with the structure and the product range. The emerging markets desk has been set up and we have consolidated our activity in the G7 currencies in spot and forwards," says Meinnell. "Overall, we are making very good progress."

Banque Nationale de Paris, the largest French investment bank, shows revenue gains of 29 per cent from its Global Banking and Markets group to FRF8.661 billion ($1.428 billion) from FRF6.740 billion ($1.149 billion) for the same period last year. The figure includes income from foreign exchange, fixed income, interest rate derivatives, equities, emerging markets and corporate advisory activities, such as venture capital and mergers and acquisitions, says a spokesperson.

BNP's global banking and markets group also reports a 39 per cent increase in gross operating income to FRF3.752 billion ($619 million). The report notes that gross operating income generated by financial markets activities was up 54 per cent, and there was an increase of 47 per cent from specialized finance.

BNP restructured its currency derivatives business earlier this year, naming Daniel Rothman as global head. He previously ran the bank's exotic currency options business in Paris. His appointment to the global position marked an integration of exotics into BNP's mainline customer business (FXW, January 19).

BNP does not release FX trading income and is therefore not included in FX Week's Top 50 ranking of banks in the foreign exchange markets.

Societe Generale is currently the only French bank ranked in the FX Week Top 50 table and was placed 21st based on 1997 earnings.

At the half-way stage, SocGen reports operating income from global investment banking activities of FRF2.7 billion ($445 million) for the first half, an increase of 81 per cent from the FRF1.5 billion ($256 million) reported last year from trading activities.

SocGen also underwent a period of change during the first half. Initiatives included the launch in January of an emerging market currencies trading desk in London, under Tim Chapman (FXW, January 19). The merger with Hambros Bank, completed in June, also beefed up SocGen's off-balance sheet activity (FXW, March 16) and the bank is continuing to restructure and expand its alternative investments divisions, Societe Generale Alternative Investments, Barep and Fimat; which make up the largest French commodities trading advisor.

Douglas Plant, SocGen's global head of FX, was unavailable for comment on the impact of these initiatives on the half-year forex earnings.

Credit Agricole also released half-year results this month. Credit Agricole Indosuez (CAI), the Wholesale and Capital Markets division, reports a 33 per cent decline in consolidated net income to FRF362 million ($60 million), from FRF537 million ($91 million) for the same period last year. The earnings were depressed by heavy provisions in the emerging markets, notes the report.

CAI covers FX and fixed income in a combined Debt-Forex division; as well as equities, emerging markets, asset-based finance, corporate banking, trade commodity finance and private banking.

The report says: "The Debt-Forex segment saw a sharp rise in activity…Derivatives business offset weak volatility on European markets via closely targeted operations for major customers. Forex business benefited from the volatility in non-euro zone crosses."

Credit Commercial de France also reports "moderate" growth from its interest rate and FX businesses in the favourable trading conditions of the first half. However, the bank does not breakout trading income figures.

Credit Lyonnais has yet to release its half-year report, according to a bank spokesperson in London.

First-half earnings were converted into US dollars using the dollar/French franc conversion rate of 6.0635 for June 30, 1998 and 5.8665 for June 30, 1997. Rates were supplied by Thomson Global Markets.