BPCE's buyout of Natixis will simplify structure, reduce risk

Groupe BPCE is planning to buy out the minority shareholders of its investment banking subsidiary Natixis to streamline its businesses at a time when lenders are suffering from tough competition, low interest rates and the economic impact of the coronavirus.

The decision also takes place after two turbulent years at Natixis including derivative losses and liquidity concerns at its U.K. fund H2O AM LLP.

BPCE, which holds just over 70% of the bank, announced Feb. 9 that it would buy out Natixis' minority shareholders and then delist the investment bank from the market.

The move comes at a challenging time for the banking industry, BPCE Chairman Laurent Mignon told journalists following the announcement. European lenders are under pressure from a competitive landscape, regulation, negative rates as well as digitization, he said.

"The crisis has accentuated this phenomenon," he said.

Capital considerations

Regulatory and structural issues "are going to result in long-term difficulties for banks to have a return on capital at a level expected by the market," he said, adding that European banks are trading at a discount to their net tangible assets. Many of Europe's largest banks are trading below their price-to-book value, which compares a company's market capitalization to its book value, largely due to the sector's low profits.

"It makes sense. BPCE doesn't need the capital that minority shareholders can bring. BPCE has enough capital as it is," Jérôme Legras, head of research at Axiom Alternative Investments, said in an interview.

At the end of 2020, BPCE had a common equity Tier 1 ratio — a measure of capital strength — of 16%, up from 15.9% at the end of September, and well above ECB requirements of 9.32%. It expects the Natixis buyout to shave 70 basis points off capital.

The unlisted BPCE is offering €4 per share to buy out shareholders. Prior to the announcement on Feb. 8, Natixis' shares were trading at €3.70, but had risen to €4.00 by Feb. 12, while on Feb. 16 the stock was priced at €3.99 at market open in Paris. Over the previous year, the bank's shares have fallen around 8% while the S&P Europe BMI Diversified Financial Index has risen by about 1.3%.

With Natixis incorporated into its parent company, BPCE would create a new business called Global Financial Services, merging BPCE's wealth and asset managements businesses, Natixis Investment Managers, Natixis Wealth Management as well as Natixis' corporate and investment banking unit into one structure. Natixis' payments and insurance business would be merged into Groupe BPCE retail operations, which includes retail banking networks Banque Populaire SA and Caisse d'Epargne.

"It will allow them to rationalize the group, improve the quality of controls, risk monitoring, create synergies between different activities," Legras said.

BPCE has been streamlining parts of its business for some time. It has shed assets in Africa, announced plans to divest in its online bank Fidor Bank AG and in 2018 it acquired Natixis' consumer financing, factoring, leasing, sureties and guarantees and securities services businesses for €2.7 billion.

Risk control

It is also the culmination of two years of concerns about Natixis' risk control. In December, the bank warned of a revenue hit from derivative losses in Asia, sending its shares south, and pushing it out of loss-making South Korean derivative hedging. Derivatives also got the better of the bank in the first half of 2020, mainly due to dividend cancellations and volatility in dividend futures after the ECB recommended banks suspend dividend payments.

Its investment banking business took a second-quarter €143 million revenue hit from dividend futures after the ECB recommended that banks cancel dividends. That led the bank to reduce its offering of complex investment products and those that are sensitive to dividend movements.

Natixis also said in January that it had signed an agreement to sell its 50.01% stake in H2O Asset Management LLP after concerns about its holdings in illiquid bonds of businesses backed by German businessman Lars Windhorst. It also raised governance concerns because H2O CEO Bruno Crastes was appointed to the advisory board of Windhorst's private equity firm Tennor Holding BV in May 2019.

H2O suspended eight of its funds late August 2020 after France's financial market authority, the AMF, flagged liquidity concerns at three of its funds and requested that the asset manager suspend them.

The derivative and H2O debacles "clearly tipped the scales," Legras said of the decision to delist the bank, noting that it was easier to strengthen risk controls in an entity where they hold 100% instead of one where there are minority shareholders.

The delisting also fits into the changing landscape of investment banking units of large European lenders, such as BNP Paribas SA and Société Générale SA, that are "more risk-averse, and more integrated into the groups' other mainstream business lines, Sam Theodore, financial analyst and consultant, said in a research report for Scope Insights. SocGen has also revamped its derivative business, while BNP Paribas has reviewed its investment banking operations.

BPCE's integration of Natixis "would be entirely in tune with the banking industry’s new dynamics," he said.