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Natixis shares sharply down after Asian markets warning

Shares in Natixis fell more than 7% on Dec. 19 as investors fretted about the French investment bank's risk management, after it said revenues would be hit by derivative transactions on volatile Asian markets.

The bank said losses would shave €100 million off fourth-quarter net revenues and result in provisions of €160 million.

"The model used to manage some specific products traded with clients in Asia led to a hedging strategy that proved to be deficient under current market conditions," Natixis said.

Its shares were down 7.8% by 2:26 p.m. Paris time, underperforming the broader banking market, with the Stoxx Europe 600 Bank index up slightly. The bank's shares have fallen 34% since the start of the year, while the Stoxx Europe 600 Bank index has dropped 28%.

Fourth-quarter net revenue should be around €2 billion, compared with €2.25 billion in the fourth quarter of 2017, Natixis said.

Geopolitical turmoil

Rising trade tensions and concerns about economic growth have sent Asian markets tumbling this year, and Natixis said the deteriorating market conditions had weighed negatively on its equity derivatives activity. The MSCI AC Asia Pacific Index has fallen nearly 15% in 2018.

Natixis CFO Nathalie Bricker told a third-quarter earnings call in early November that, while the momentum for equity derivatives was "pretty strong" in Europe, the Middle East and Africa, especially in France, the bank was "facing challenging market conditions in some geographies in Asia."

Analysts at Swiss bank UBS noted that the risk of structured products to global banks has increased given the "fundamental changes" seen in the market in 2018 as equity markets fell and volatility swung "from decade-low levels to multiyear highs."

"While we cannot forecast specific risk management issues at Natixis, we argue the more volatile markets increases the likelihood of these risk management missteps," they wrote in a Dec. 18 research report.

Hedging strategy

Jérôme Legras, head of research at Axiom Investments, said the bank had not geared its hedging to the market volatility and would need to review its derivatives strategy.

"They have made a good living on them, but they will need to review their pricing and their hedging strategy," he said.

Natixis said the dent in revenues was a one-off, adding that it would not have an impact on the bank's long-term strategic plan, which targets a 5% rise in annual revenues and 2020 revenues of €10 billion.

UBS analysts said they saw a "downside risk to Natixis' 2019-2020 consensus earnings expectations as a result of more difficult markets."

Natixis also said it would pay out a special dividend €1.5 billion following the sale of retail banking activities to parent Groupe BPCE. It had previously said it would pay the dividend if no large strategic acquisition comes up. Natixis had reportedly been interested in taking over Ingenico Group SA, but the payments firm said it had ended merger talks.

"They wanted to compensate the bad news with some good news, but it hasn't worked very well," Legras said.