Morningstar | Natixis: Investment Banking Not Asset Management Drives Superior Profitability
All but ruined by the 2008 financial crisis, Natixis is one of Europe's most profitable banks today. Part of its turnaround strategy was to reduce its exposure to increasingly capital-intensive investment banking in favour of asset light insurance, asset management, and payment businesses. The increase in profitability and the perceived lower risk of Natixis has turned it into a darling of the market and one of the more highly rated banks in Europe.We are, however, not fully convinced that Natixis' current superior profitability will withstand a downturn in the cycle. We highlight that half of Natixis capital is still allocated to volatile investment banking. Natixis' investment bank is currently one of the most profitable investment banks in Europe. We do not believe that its superior investment banking profitability is due to a superior franchise, as much as it reflects a higher risk appetite. Natixis' aggressive investment banking expansion outside of its French area of expertise into the U.S. and Asia, speaks to our view of the firm's higher risk appetite. The asset management business itself is not immune from cyclicality, but it does not represent any balance sheet risk, which the investment banking business clearly does.Having giant French mutual bank BPCE as a parent is somewhat of a poisoned chalice. It brings with it the advantage of a huge distribution footprint for Natixis' asset management, investment banking, and insurance products; as well as access to BPCE's deep pockets for capital and funding. However, the relantionship comes at a price; as logic dictates that BPCE will look after its interests first before those of Natixis' minority shareholders. Transfer pricing will undoubtably be stacked in the favour of BPCE--considering that Natixis relies on BPCE for 40% of its funding requirements and that BPCE owns most of the the banking client relationships, this is a vital. The high degree of reliance on one counterparty for funding and capital also does not sit well with us.Natixis is a player in the European banking industry. As the banking partner of large companies in France, Co. also plays an active role in serving financial institutions (banks, insurance companies, pension funds, etc.). Co.'s activities are divided into in three main business lines: Wholesale Banking, Investment Solutions (Asset Management, Private Banking, Insurance, and Private Equity) and Specialized Financial Services. Co. operates in four geographical regions: France; other EU countries; North America (Canada, USA); and other OECD countries. As of Dec. 31 2013 Co.'s total assets totaled Euro510,131,000,000.
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