Financial engineering sin no more as Natixis digs complexity
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 US collateralised 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 deal-making that helped drive a jump in investment banking rev- enue this year, at a time when most rivals across Europe and the US are struggling. Chief Executive Officer Laurent Mignon, 53, has spurned more straightforward trading businesses in favour of complex transactions that can be more lucrative as record-low interest rates and post-crisis rules render making money a challenge.
The lender has underwritten at least $11.2 billion new US 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.
"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 per cent 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 per cent this year, beating the 8 per cent gain for the index.
Natixis's corporate and investment bank posted a 12 per cent gain in revenue in the first nine months. Income from trading jumped 17 per cent, 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 per cent 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 per cent 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 sub- prime 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 US, 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 US 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.