French finance giant Natixis is nine months into a broad and ambitious initiative to overhaul its business and deliver by 2020 punchy financial targets.
The Paris-based group’s “New Frontier” was announced in November 2017, represents “a plan to deliver sustainable value creation” and has as its tag-line: “Deepen, Digitalise, Differentiate”.
Natixis offered a key first indicator of its progress under this new regime when it reported in August its financial results for the first six months of 2018.
The results were solid if unspectacular, with revenue up 3% on an underlying basis to €4.99bn and pre-tax profit up 7% to €1.49bn.
The Asset and Wealth management business was strong, with income up a tenth to €1.6bn and profit up a fifth to €515m.
But Natixis Corporate & Investment Banking (CIB), the group’s top earning business line, was off slightly, with revenue down 4% to €1.9bn and profit falling 7% to €737m.
Speaking at the time of the announcement in August, Natixis chief executive officer Francois Riahi, who was only appointed to that role in June, said: “Our Corporate and Investment Banking businesses continued to record solid revenues and a high level of profitability despite a mixed quarter in Global markets due to a high basis of comparison in the second quarter of 2017 and a volatile market environment.”
Luc Francois, the Head of Global Markets and Head of Europe, Middle East and Africa Corporate & Investment Banking at Natixis, told Global Investor the CIB return on equity of 17.2% was pleasing, adding: “Global market revenue was down slightly partly due to a very strong second quarter.”
Francois continued: “Generally, this is a good environment to be operating in. If you look at the broader situation now, there is risk on the geo-political front linked to tensions originating from the US or other countries which means there is less risk appetite among investors.”
The New Dimension programme has some tough objectives for the Natixis CIB arm, specifically: “become the “go-to bank” in four selected sectors and be recognised as a solution-based innovative house”.
Francois told Global Investor: “In terms of client segments, we are targeting insurance, private equity and financial sponsors on a global basis. We have also elected four sectors: energy and natural resources; aviation; infrastructure; and real estate and hospitality.”
Natixis has also implemented a green hub which works with the different sectors to promote environmentally sustainable investing.
The French bank has adopted a specific approach to growing its mergers and acquisitions (M&A) coverage beyond its core European markets.“We have taken this year stakes in Vermilion Partners in China, Fenchurch Advisory Partners in the UK and Clipperton in France. These, combined with similar deals last year, mean we now have six M&A boutiques focused on specific regions or sectors.”
And Francois promised “more of these types of deals”. “This is a constant process which depends on the opportunities that present themselves and the match between the boutique and the existing group. These could be in the Americas, Asia or the rest of Europe such as Italy or Germany, which are countries that we are currently not covering on the M&A side.”
Francois said: “Part of the strategy linked to our M&A capability is to implement a multi-boutique model which normally involves us taking a 51% stake in different M&A boutiques.
Natixis has a reputation as a high-touch house that works with clients to address their specific requirements rather than a “pile ‘em high, sell ‘em cheap” shop and this approach is reflected across its brokerage arm.
Francois said: “Our strategy in global markets and specifically in equity derivatives is that we don’t want to be a flow house that supplies prices and liquidity, rather we are more pushing for a solutions-based approach, adding value for all types of clients.”
He said Natixis seeks to differentiate itself from other equity brokers by offering flexibility around different underlyings, a choice of pay-offs, wrapping formats or working with third party distributors to market products.
Francois said: “We compete on more than just price; rather we are focused on adding value to clients. We have also adopted the solutions-based approach in equity derivatives, for example where we provide realtime and electronic pricing & trading devices to third party distributors.”
Natixis took an innovative approach to Mifid II compliance on the eve of the introduction of the vast European regulation in January when it announced a partnership deal with European equities broker ODDO BHF.
Francois told Global Investor: “The deal with ODDO was announced in December and completed in July so that all of the Natixis cash equities business including sales and research has been transferred to ODDO while the ODDO Equity Capital Market (ECM) business has transferred to Natixis. Under the deal, Natixis relies on the research capabilities of ODDO and we also use their distribution for our ECM business.”
The French bank also bought 5% of ODDO capital. The deal was a response to the Mifid II rules as they pertain to equity research and specifically, the unbundling of research from execution which has implications for how banks like Natixis get paid for the research they supply to clients.
Francois said: “The Mifid II rules on research are one of the elements we considered when making this decision. Mifid II has compressed the fees being paid by investors for equity research. When you are too small for example you are at risk of being excluded which is why being part of a bigger group is a good thing.”
He continued the ODDO deal helped Natixis mitigate the impact of the new research rules but the bank was not unaffected by Mifid II.
“With Mifid II, implementation was costly in terms of systems but also in terms of the teams we had to put in place. Eight months on, the rules have been well digested. In terms of cash equities, we were less concerned or exposed to the Mifid II discussions because we had handed
Natixis, like many other investment banks including its larger US peers, has also responded to post-2008 financial crisis capital adequacy and leverage ratio rules by looking to shrink the value of assets on its balance sheet, a move that can free up billions of dollars of much need funds for these banks.
Francois told Global Investor: “We want to be an asset light bank so we don’t want huge positions sitting on our books, rather we want to originate and distribute more.”
He added: “With this
Natixis maintains a strong presence as the arranger of collateralised loan obligations, particularly in Europe and the US, while it has also combined its fixed income and equity repo businesses into a single global securities financing arm. Francois said the bank also continues to invest in its trade finance and treasury solutions business.
Natixis’ New Frontier sets tough targets for the Corporate & Investment Banking arm, including two fifths of revenue from the Americas and Asia by 2020 and at least 7% revenue growth each year from investment banking and M&A.
Francois said: “In terms of the 40% of revenues from the Americas and Asia, we are very close to this target. I am also very comfortable to reach the target of 7% revenue growth in Global Finance and Investment Banking.”
He concluded: “Our M&A side is performing well but investment banking is a little below expectations over the first half. The market is generally less ready to tak risks so I am not extremely bullish on ECM over the second half for example.”