France's biggest banks have rediscovered their mojo by becoming boring.
When Pascal Augé, an investment banker at Société Générale SA, was transferred to the French lender's cash-management unit -- which helps companies manage their cash flow -- he was surprised: "For years, cash management wasn't considered as a very sexy business," said Mr. Augé, who now heads Société Générale's global transaction and payment-services unit. "But we rediscovered the virtues of that business with the crisis."
Now, a few years later, the decidedly unfashionable business generates nearly as much revenue for the bank as securities trading.
Société Générale and crosstown rival BNP Paribas SA have emerged from the financial crisis, the eurozone debt crisis and long years of European economic stagnation as two of the continent's strongest banks -- and two of the few able to withstand the invasion from U.S. investment banks in Europe.
Société Générale had a return on equity of 9.5% in the first half of the year and BNP Paribas 10.6%, making them among the most profitable banks in Europe.
Part of their success has come from using dull but important service businesses, such as handling cash and securities, to attract clients they can upsell to investment banking and trading. The French lenders also have benefited from having long had a focus on corporate banking. France's big corporate sector has remained comparatively strong through years of economic stagnation on the continent.
While European powerhouses such as Deutsche Bank AG, Credit Suisse Group AG and Royal Bank of Scotland Group PLC remain steeped in restructuring, Société Générale is expanding its lead in equities trading and BNP Paribas is growing its fixed-income business.
Société Générale saw its market share in equities in Europe rise to 16.4% in 2017 from 14.2% in 2013, while BNP Paribas's market share in fixed income rose to 14.6% from 13.4% in the same period, according to a recent study by Goldman Sachs Group Inc. based on the revenue of the top seven European investment banks.
Meanwhile, Credit Suisse's equities market share fell to 15.4% from 22.3% in Europe, and Barclays PLC's fixed-income market share dropped to 12.9% from 16.7%.
"Unusual suspects continue to outshine" investment banks, Goldman Sachs analysts noted.
France's largest lenders were relatively sheltered from the 2007-2008 financial crisis, despite Société Générale's embarrassing EUR4.9 billion ($5.85 billion) loss from rogue trader Jérôme Kerviel in 2008. Investment bank Natixis also ran into trouble in 2009 due to wrong bets on complex derivatives, eventually forcing the government to orchestrate a merger between its two parent companies.
Most French banks specialized in trading stocks, rather than the fixed-income products that were most hurt during the financial crisis. And more of their business came from traditional banking activities with corporate clients, not investment banking.
The sovereign-debt crisis of 2010-2012 hit them harder. French lenders were hurt especially by their dependence on short-term U.S. money markets, which became harder for some foreign banks to access during the crisis. Franco-Belgian lender Dexia SA ultimately had to be bailed out.
Crédit Agricole SA booked losses totaling more than EUR5 billion over five years before selling off its Greek banking arm Emporiki to domestic rival Alpha Bank for just one euro in 2013. BNP Paribas wrote down EUR900 million of goodwill related to its Italian unit BNL in the face of tougher regulation.
The sovereign-debt crisis forced France's surviving banks to find new funding in capital markets and through corporate and institutional deposits, and to restructure their corporate and investment-banking business.
"French banks responded quickly to the crisis," says Kinner Lakhani, head of pan-European bank research at Deutsche Bank. Because of the quality of their corporate loan book, French lenders were able to source new funding and rethink their business models, he adds.
The liquidity crunch in the summer of 2011 acted as a trigger.
"We realized that we needed to completely change the way we did business, " says Yann Gérardin, the head of BNP Paribas corporate and institutional banking.
French banks developed their cash management and securities services to attract new customers for other investment-banking businesses like fixed-income and foreign exchange.
Royal Bank of Scotland's departure in 2015 from the international cash-management business helped. The U.K. lender referred its clients to BNP Paribas as part of their agreement, and Société Générale hired some of RBS's top staff in Europe.
French banks also benefited from Deutsche Bank's financial trouble; many of the German lender's clients sought to work with a second bank to manage their cash, French bankers say.
French banks' focus on corporate clients, which have been far more active than institutional ones -- such as mutual funds, pension funds and hedge funds -- in recent quarters, has also given them an edge over many of their European rivals.
"French banks are well positioned to continue to gain market share across most corporate and investment banks products," says George Kuznetsov, of the research firm Coalition.
Still, French investment banks are starting from a relatively low base.
Investment banking accounts for roughly one-third of French banks' revenue, compared with more than half of revenue at Deutsche Bank or Credit Suisse. And French bankers are eager to preserve that balance.
"We believe in the strength of our diversified business model," said BNP's Mr. Gérardin.
French banks also remain largely focused on European markets.
"We don't want to be a merger and acquisition bank in the U.S. and Asia, that's not our core business," said Didier Valet, Société Générale deputy chief executive officer.
Write to Noemie Bisserbe at email@example.com
(END) Dow Jones Newswires
September 24, 2017 19:54 ET (23:54 GMT)