BNP Paribas: The Big Bank's Big Score

Its grab of a share in Lyonnais could make it No. 1 in Europe

It was Friday evening, Nov. 22, and Michel Pébereau, the head of France's mighty BNP Paribas (BNPQY ), was relaxing in a first-class train car en route to London, looking forward to a weekend of visiting museums. As the sleek train shot out of the Channel Tunnel, Pébereau's cell phone began to ring. The news from an excited aide back in Paris could hardly have been more momentous: Within minutes, Pébereau was told, France's Finance Ministry would announce an unprecedented 22-hour auction for the government's remaining 10.9% stake in Crédit Lyonnais.

The 60-year-old bank executive hurried home on the next Paris-bound train. Some 19 hours later, working with a hastily assembled team at BNP's central Paris headquarters, Pébereau came up with his own stunner. He bid $2.2 billion to buy the stake in the 139-year-old Lyonnais--a 49% premium over its Nov. 22 share price. And he didn't have to wait long for an answer. At 10 p.m. an exhausted Pébereau got the call he was waiting for. French Finance Minister Francis Mer's message was short but sweet: "Michel, you've won."

Won the first round, at least--and looking good for the rest of the match. Now, BNP becomes the largest shareholder in Crédit Lyonnais and moves into the favored position to take over France's fourth-largest retail bank. The next round could come when a core-shareholder pact--in which a group of shareholders agreed not to sell their shares--expires in July. Absorbing Crédit Lyonnais would make BNP the undisputed powerhouse of French banking.

And maybe one day the powerhouse of European banking. BNP's ascendancy is a clear sign of how vibrant--and profitable--France's big banks have become. German institutions such as Deutsche Bank (DB ) and Commerzbank (CRZBY ), once the kingpins of European finance, are reeling from a sick home economy that has sent loan losses spiraling. Italian banking still needs plenty of consolidation, while Spain's once-robust Banco Bilbao Vizcaya Argentaria (BBV ) and Santander Central Hispano (STD ) have been hit head-on by turmoil in Latin America and falling capital ratios at home. In contrast, France's top four banks--BNP Paribas, Société Générale, Cr´dit Agricole, and Lyonnais--together turned in $8.5 billion in profit last year, with BNP alone accounting for more than $4 billion. Even this year, one of the most difficult on record, BNP could still rack up profits of more than $3 billion, according to Lehman Brothers Inc.

France's financial institutions are largely sitting pretty because the country was the first in the euro zone to start seriously cleaning up its banks. Beginning in the late 1980s, Paris began reversing the disastrous wholesale nationalizations forced through by Socialist President François Mitterrand in 1982. The minority stake in Lyonnais was the last, unmourned relic. "France simply got its act together much earlier, and banks really did get shareholder-friendly," says Dennis Ischenko, London-based European banking analyst at Schroder Salomon Smith Barney. "The result is that they are now some of the best market-oriented animals in Europe."

If anyone deserves credit for making French banking what it is, it's the mild-mannered but intensely cerebral Pébereau, who guided the privatization of Banque Nationale de Paris after becoming chief executive in 1993. When rival Société Générale attempted to merge with investment bank Paribas in early 1999, Pébereau responded as both white knight and predator, with an audacious bid to combine all three institutions. After a bitter, six-month battle, Pébereau walked away with Paribas.

The merger of two distinct financial cultures can be difficult, but in the case of BNP Paribas, it has worked well. Of 700 senior staff changes at the merged institution, for example, only 30 failed to work out. "Pébereau deserves credit for the entire integration process of BNP and Paribas," says Hervé de Carmoy, Paris-based managing director of private-equity firm Rhone Group.

Just as important, Pébereau didn't get carried away by trophy acquisitions of tony investment banks and big retail chains. Although he has expanded BNP's presence in California--through wholly owned Bank of the West, it now has the state's fourth-largest retail network--BNP Paribas has avoided the kind of buying binges that are now blasting away the balance sheets of heavyweights such as Credit Suisse and Deutsche Bank. Plus, he recognized a simple truth: Retail banking in France can be highly profitable. Unlike banks in Germany and elsewhere, French banks rake in a rich stream of fees from services such as insurance and stock transactions. In France, for example, close to 80% of all insurance products are distributed by banks, compared with around 15% in Germany. The result is that BNP Paribas earns a fat 20% return on equity on its French retail-banking business.

That's one reason some analysts are saying the implied $21 billion valuation BNP puts on Lyonnais--which is especially strong in French retail banking--may not be so steep. "The idea is quite simple," says Guido Hoymann, who analyzes European banking at Frankfurt's Metzler Bank. "The bigger the presence in French retail, considered more profitable and less risky, the more you'll be able to leverage yourself."

But to accomplish what? So far, banking consolidation has taken place only within individual European countries, with few cross-border deals. It's just a matter of time, however, before national barriers start falling. "BNP now has the biggest profit pool on the Continent," says SSSB's Ischenko. If Pébereau can keep those numbers up, guess who could be leading the next wave in European banking consolidation?

By John Rossant in Paris

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