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BNP and SocGen make i-banking cuts, but more may be needed

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BNP and SocGen make i-banking cuts, but more may be needed

andBNP Paribas SA arereducing their investment banking operations, but industry experts warn theyare still overweight and that more cuts could be on the way.

Buffetedby volatile markets and under pressure to bolster capital, the French banks arestruggling to generate solid returns and are reducing costs. SocGen, whichpulled back from the Britishgilts market in January, iscutting corporate and investment banking expenses by €220 millionand eliminating 420 posts, on top of previous €850 million and €900 millionrounds of cutbacks. BNP Paribas is set to reduce its corporate andinstitutional arm by 602 employees, its capital market arbitrage division by 83and IT by 284 through 2018, Les Echosreported May 9. In theglobal markets business, which includes derivatives and foreign exchange, 41jobs are being cut; BNP is also creating about 200 less well-paid positions inits digital operations.

SocGenhad 146,000 employees globally at the end of 2015, and BNP Paribas had 189,000.

SamTheodore, a managing director at Scope Ratings in London, said in an interviewthat the cuts were a long time coming and that more may well be on the way.There is a perception in the market that SocGen and BNP have been slow torespond to trends, he suggested.

"Thequestion is what took them so long," he said. "I don't know of anyEuropean bank that isn't reducing both wholesale and retail activities."

Post-financialcrisis regulation has restricted the risks banks can take in capital markets,while profits from direct lending to individuals and businesses have beenimpacted by near-zero interest rates. Further, the need to replace antiquatedcomputer systems and provide sleek online services has come at a time whensignificant litigation expenses have sent operating costs soaring.

"Fora while, French banks acted as though these circumstances didn't apply tothem," Theodore said. "Swiss and U.K. banks realized the need forcuts some time ago."

Thesteps those banks have taken include a potential move by Royal Bank of Scotland Group Plc to slash as many as14,000 staff from its investment bank, as reported by Bloomberg News in March.Meanwhile Credit Suisse GroupAG said in February it would cut about 4,000 jobs from its globalworkforce, and HSBC HoldingsPlc said last year that it will cut tens of thousands. Even so, the sector might stillbe bloated, Theodore said, with too many people working in banks.

John Raymond, an analyst with CreditSights in London,stressed, however, that one must not measure all banks with the same yardstick.

"Their business mixes are different from those atgroups that have a bigger investment banking specialization, like or the Swiss and U.K.investment banks," he said in an interview.

He said the French banks will probably downsize in lessprofitable areas, noting that equity derivatives businesses, a specialty of thetwo firms, will likely be spared. He thought the impact of the cuts on thebanks' brands would be minimal.

Accordingto another bank equity analyst, as SocGen and BNP look to meet their cost ofcapital, they will likely need to make more cost reductions in order toincrease return on equity to about 12%, especially if market conditions remainas tough as they have been over recent months.

"Theyare now around 8% to 10%. You cannot have 8% profitability in such abusiness," said the analyst, who wished to remain anonymous because ofconfidentiality clauses.

SocGenand BNP might want to further rejig their trading services due to their highexposure to market volatility, the analyst said. Profitability suffers whenmarkets are not good, and low profitability is an obstacle to development andinnovation, he said. He also pointed to uncertainty around capital and riskregulation for banks, with institutions such as the Basel Committee stillpushing for tougher requirements that end up hurting all bank bottom lines.

Forthe first quarter of 2016, SocGen posted net income of €924 million, while BNPreported €1.8billion. Annualized return on equity at BNP was 9.4%, excludingone-off items. At SocGen in the first quarter, group ROE after tax was 7.1%,while adjusted ROE was 9.8%. Both banks had underwhelming returns intheir wholesale departments at the beginning of 2016, analysts said.