Photographer: Antoine Antoniol/Bloomberg
This French Bank Is Thriving on Exotic DealsBy and
CEO pushes complex products to grow as rivals struggle
Bank suffered billions in losses from CDOs in financial crisis
A decade after losses on complex financial products threatened to upend Natixis SA, the French bank is thriving on its taste for exotic deals.
Natixis is creating U.S. collateralized loan obligations, or CLOs, and equity derivatives as it embraces what its executives have called “financial engineering.” A securities financing unit that’s puzzled analysts helped boost earnings, while products including structured investments for Taiwanese insurers add to growth in Asia, a region where the Paris-based bank had scaled back after the credit crisis.
Those are some examples of the dealmaking that helped drive a jump in investment banking revenue this year, at a time when most rivals across Europe and the U.S. are struggling. Chief Executive Officer Laurent Mignon, 53, has spurned more straightforward trading businesses in favor of complex transactions that can be more lucrative as record-low interest rates and post-crisis rules render making money a challenge.
“The bank has come back from the ashes,” said Gildas Surry, a former bank analyst at BNP Paribas SA who now helps manage 1.2 billion euros ($1.4 billion) in financial sector debt at Axiom Alternative Investments in London, including Natixis debt. “But good growth never comes without risk. They very much have to strike the right balance.”
Natixis fell 2.2 percent in Paris, the worst performer Thursday among the 44 members of the Bloomberg Europe 500 Banks and Financial Services Index. The stock has risen 23 percent this year, beating the 8 percent gain for the index.
Natixis’s corporate and investment bank posted a 12 percent gain in revenue in the first nine months. Income from trading jumped 17 percent, a faster pace than at virtually all the big investment banks, except for Jefferies Group LLC. Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan Chase & Co. and others suffered declines. A 9 percent drop in third-quarter trading that the bank reported this week was the smallest decline among the French securities firms.
The corporate and investment bank had a 15.5 percent return on equity so far in 2017, the highest profitability among Natixis’s three main businesses and ahead of its targets. The unit is run by Francois Riahi and industry veteran Marc Vincent. Riahi used to work at the Elysee palace under President Nicolas Sarkozy, along with Francois Perol, the head of Natixis’s parent Groupe BPCE.
“We used to be a player of more modest size,” Mignon told reporters in August. “We are catching up.”
Natixis is scheduled to present its new targets and business plan Nov. 20 in London.
Created in 2006 by two cooperative lenders, Natixis posted the biggest net losses of any French bank from the subprime crisis. It has been profitable every quarter since a mid-2009 reshuffle when Mignon took over. During the early years of his tenure, the bank received guarantees from its parent to wind down more than 30 billion euros of dubious assets, trimmed most of its exotic operations and retrenched in Asia.
Since then, Mignon has embarked on a fresh expansion in Asia and the U.S., where it’s become a top arranger of CLOs, entities that pool high-yield debts and then slice them into securities of varying risk and return that are sold to investors. The lender has underwritten at least $11.2 billion new U.S. CLOs since 2016, the sixth-biggest volume among global banks and more than rivals such as Goldman Sachs and Deutsche Bank. It didn’t make the top 10 in previous years, data from Bloomberg and Creditflux Ltd. show.
While CLOs are similar in structure to the collateralized debt obligations, or CDOs, that hobbled Natixis a decade ago, they invest in corporate loans rather than subprime mortgages and weathered the crisis far better. Investors across the globe are flocking to the entities, lured by returns that can exceed 14 percent on the riskier portions, Bloomberg reported in June. Natixis has created such structures for asset-management firms including Fortress Investment Group and Onex Credit Partners.
Helping the bank compete in that market with far bigger rivals is its willingness to use its own capital, analysts said. Natixis will sometimes hold securities tied to the deals while trying to find buyers, a process known as “warehousing,” they said.
“One of Natixis’ competitive strengths, which has allowed them to compete for CLO business, has been their willingness to provide access to a balance sheet,” said Michael Barnes, co-chief investment officer at Tricadia Capital LLC in New York, which oversees about $2.4 billion invested for clients and which has an affiliate that’s done business with the French lender. “That is a key factor in their rise.”
Since the crisis, regulators across the world have forced banks to take fewer risky market bets with their own funds, a practice known as proprietary trading, and to hold more capital as protection against possible losses on trades. Still, warehousing a CLO’s securities exposes a bank to the risk, even if the lender only seeks to hold them for a short period of time.
Natixis hasn’t increased its balance sheet usage on U.S. CLOs in three years, and is instead selling on assets more quickly to allow it to do more deals, said Riahi, the investment bank’s co-head.
The bank’s value-at-risk, an internal model used to estimate potential losses, was an average of 7.1 million euros in the third quarter, down from 7.5 million euros a year earlier, filings show. At Deutsche Bank, home to Europe’s biggest investment bank, the average VaR was about 30 million euros, according to filings, up from 28 million euros a year earlier.
“There is no possible comparison between Natixis in 2008 and Natixis’s situation in 2017,” Mignon said Tuesday on a call with reporters. “We don’t keep the assets on our balance sheet. We take part in generating the products but we are not a carrier of long-term risks.”
CLOs are also helping Natixis expand again in Asia, a geography where it took outsized risks before the crisis, much of it with its own money. The firm has since built up a client business there, while stopping proprietary trading. Earlier this year, the bank packaged together hundreds of loans with more than $500 million outstanding into a CLO and began selling its securities to investors across Europe and the U.S. Yet it was clients in Taiwan who wanted the riskiest piece, known as the equity tranche, according to a company report.
The Taiwanese investors included insurance companies that faced regulatory restrictions on such an investment, according to a person familiar with the matter. Natixis created a structure that enabled the firms to get exposure to the equity tranche, while limiting risk, the person said. The transaction was later named best insurance deal by StructuredRetailProducts.com.
Natixis has also targeted expansion in credit and equity derivatives in Japan and South Korea, said the person. Asia now accounts for about one-fifth of the bank’s markets revenue and the investment bank’s headcount in the region has climbed about 50 percent to 600 in four years, the person said.
The French bank has this year helped arrange loans for Chinese clients including Sinochem Hongrun Petrochemical Co., an oil refiner, China Everbright Bank Co., a lender trying to bolster its capital levels, and China National Chemical Corp. Natixis provided a “warehouse” facility to PrimeCredit Ltd., a Hong Kong-based lender to borrowers on lower incomes, as it securitized a portfolio of consumer loans in May, a company presentation shows.
Another business that thrives is the Global Securities Financing unit, or GSF, which was created through a series of internal mergers. It focuses on repurchase agreements, or short-term loans known as repos that lenders use to finance their day-to-day trades, and “collateral management,” which oversees the assets that counterparties pledge in the event of a default, according to filings.
Rules introduced since the financial crisis have prompted U.S. banks to pull back from the repo market and Natixis is among overseas rivals to push into their turf. The business also has a “special situations” team engaged in “dynamic product creation,” including derivatives for money-market funds that are restricted in the assets they can purchase, Christophe Bensoussan, global head of the business, wrote in an article for Securities Finance Monitor.
The rise of GSF triggered some puzzlement among analysts, because while investment banks engage in repo and collateral management, they don’t always flag them as drivers of profit. They often exist to mainly “facilitate market-making and customer businesses” rather than serve as standalone businesses, said Moorad Choudhry, a finance professor at the University of Kent and former senior treasurer at the Royal Bank of Scotland Group Plc.
Natixis has explored the darker corners of trading before. The firm structured almost $15 billion of CLOs in 2006, and was ranked among the world’s biggest CDO creators that year. But losses began to mount soon after as the U.S. mortgage market imploded. The bank wrote off investments in CDOs and “complex derivatives” while “high volatility” in Asia tore through its equities business, annual reports show.
At the height of the crisis, the French state backstopped Natixis’s parent, which gave a guarantee to its investment banking unit to help it unwind its riskiest assets. Executives then overhauled the lender by halting “more complex capital markets activities,” including “complex equity derivatives, complex fixed-income derivatives,” and cutting staff in those businesses, a 2008 statement shows.
As part of its restructuring, Natixis executives created a so-called bad bank for billions of dollars of unwanted assets, including derivatives and CDOs. Employees who helped unwind and dispose of the soured investments honed an expertise in creating complicated financial products that could help the bank make money, according to Surry, the Axiom portfolio manager.
“They took the lessons they learned from dealing with their own problems internally and turned it into an approach to dealing with clients,” said Surry. “The view was taken that there was some market share to be won.”
— With assistance by Charles E Williams, and Miaojung Lin