BNP’s US subsidiary is the wild card of the merger deck

Parisians may be famous for their sense of fashion. Not so much the Parisians of BNP Paribas and their hard-to-fit American retail bank. But BancWest, with some $ 96 billion (79 billion euros) in assets, offers something very chic to continental Europe’s largest bank by assets: the chance to get on the M&A dance floor. The sale of BancWest would give President Jean-Laurent Bonnafé money to buy something. And it offers leverage for a merger.

The purchase of the BBVA subsidiary in the US by PNC Financial Services, for 11.6 billion dollars (9.7 billion euros), at a price of 1.1 times the book value, has focused the attention of investors on the BNP’s California business. With the same multiple over the book value that BBVA’s business could be worth around 13,700 million (11,300 million). This could be useful given Bonnafé’s aspirations to create the European equivalent of JP Morgan.

In fact, it is equivalent to almost four-fifths of the market value of its troubled French rival Société Générale; 60% of the capitalization of its Italian competitor Unicredit and almost two Commerzbank. And it wouldn’t be the first time that Bonnafé has sold New World assets to reinforce itself at home: in 2019 it ditched First Hawaiian to increase its capital.

Furthermore, BancWest’s bland profitability will not actually be missed. If the 392 million euros it earned before tax in 2020 is taxed at the 24% BNP rate, the division recorded an annual return on equity of less than 6%, below the 7% ROE of the group. Selling it to a US bank like Citigroup, which can justify the payment by rolling over the overlapping costs, makes sense.

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BNP can argue that BancWest’s deposits help reduce financing costs for its US investment bank, which also offers higher-margin products to corporate clients. This opens up another, more radical option for Bonnafé: a complete merger with Banco Santander or HSBC, both of which have mid-level US entities. The overlap in the United States offers potential cost savings that justify joining.

In fact, the combination with the bank led by Ana Botín and the elimination of, say, 15% of total operating expenses in the US could lead to savings of € 5 billion in present value terms, according to our calculations.

A last, perhaps less convincing alternative would be to sell BancWest to a regional US bank. It is true that hooking up a portion of the capital of a larger, more valuable bank could be a capital charge depending on the size of the holding. But that could sell out over time, so BNP is guaranteed to have plenty of options to continue to look classy on the dance floor.