A logo sits on display outside a Societe Generale SA bank branch in Paris, France, on Friday, July 31, 2020. Picture: NATHAN LAINE/BLOOMBERG
A logo sits on display outside a Societe Generale SA bank branch in Paris, France, on Friday, July 31, 2020. Picture: NATHAN LAINE/BLOOMBERG

France’s biggest banks have lost their savoir-faire at one of the worst possible times. Bets that went awry on equity derivatives — once a craft in which the French firms excelled — have cost BNP Paribas SA, Societe Generale SA and Natixis SA hundreds of millions of dollars in income in 2020. They’ve also cost several top executives their jobs.

Of the three banks, only BNP will get past this relatively unscathed, and that serves as a cautionary tale to others. Relying too much on a hugely volatile, risky activity such as stock derivatives is a dangerous strategy reminiscent of pre-financial crisis times. The companies’ boards and regulators should have seen this coming.

BNP, the largest of the three lenders, expects profit to fall by no more than 20% this year, partly thanks to a surge in fixed-income trading that helped it offset the dismal performance in equities. Amid a global pandemic, a dent in income of this relatively small magnitude would be an achievement, helped too by comparatively low provisions for bad loans.

The news wasn’t so good at Societe Generale. The Paris-based bank posted its biggest quarterly loss in a dozen years in the three months to June as revenue from equity derivatives plummeted. After downsizing its fixed-income business in 2019 Societe Generale was even more exposed to complex trades, which made up a fifth of the revenue at its market unit last year.

Stock derivatives are financial instruments that let traders speculate on movements in equities and indexes, while hedging some of the risks. They can be lucrative trades if things go well, but that isn’t always the case — as the French banks have demonstrated.

Within hours of reporting the dismal results, Societe Generale revamped its management, axing two deputies to CEO Frederic Oudea. In the top job for more than a decade, Oudea is now counting on cutting costs across the investment bank, retreating from some structured products and redeploying capital to where he can eke out bigger profits. The firm is paying the price of Oudea’s overreliance on trading.

At Natixis, the derivatives blunder has been just as costly. The bank posted a loss in the three-month period, its second consecutive quarter in the red, and ousted its CEO Francois Riahi. Concerns about the running of one of its affiliates, H20 Asset Management, which overinvested in thinly traded bonds, had already raised concerns about the company’s risk management and controls. Riahi had rebuilt Natixis by betting on yet more speculative trades.

The three banks have one thing in common: they all focused on structured products that are more susceptible to market swings, and they were exposed to derivative bets on corporate dividends, which backfired when the pandemic struck and companies halted shareholder payouts to preserve cash. The three made almost 40% of their equities revenue from structured products last year. That’s three times as much as their competitors.

How they emerge from the setback could set them further apart. Natixis and Societe Generale — minnows compared to BNP — are both working on new strategic plans to be presented in 2021. Oudea told analysts on Monday he will remain focused on costs. He let one of the departing deputies explain whether the firm should keep bothering with investment banking if returns remain low. That doesn’t bode well for the division’s future.

Taking outsized risks in a hugely competitive market wasn’t a winning strategy, as shareholders have learnt painfully. Societe Generale and Natixis have little option but to keep cutting, and hope for a white-knight suitor to emerge.


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