Top 3 BNP Paribas Global Markets Interview QuestionsLast Updated:
While BNP Paribas may not have the same name-brand recognition - especially state-side - as Goldman, JP Morgan, or Morgan Stanley do, they've heavily prioritized their Global Markets business in recent years and the results have been phenomenal.
In the wake of the Great Financial Crisis – as I’ve written about a few times before – there was a bit of split opinion from investment banks: some wanted to double down on sales and trading business, while others wanted to make it a lesser part of their overall business.
Those that chose to double down on sales and trading have been heavily rewarded over the past few years as volatile markets have produced record-breaking levels of revenue. Further, the value of an investment bank having a large sales and trading franchise has been on full display in recent quarters, as sales and trading revenues have stayed flat or grown while investment banking (i.e., M&A, LevFin, etc.) revenues have dramatically dropped (sometimes over 50% YoY!).
Anyway, in the past year or two nearly every bank that previously deemphasized their sales and trading business is trying to grow it out again (realizing that it acts as a great revenue diversifier to investment banking). But the one European bank that was most ahead of the curve and has been trying for years to rapidly grow its Global Markets business would likely be BNP Paribas.
And BNP has executed their plan exceedingly well, creating now only a much larger sales and trading operation but also growing both fixed income and equities trading during tumultuous markets…
In this post I’ll do something similar to past posts (i.e., on Numura, HSBC, etc.) where we’ll go through more market-based questions that could come up. With how volatile markets have been over the past year, this will give you a sense for some of the major themes to keep an eye on and that would be impressive to bring up in an interview.
BNP Paribas Global Markets Interview Questions
Just like many other banks, the sales and trading division of BNP has been re-branded to “Global Markets”. Below are a few questions you could expect in interviews. Just keep in mind my answers provide a bit more depth than you’d be expected to give in an interview.
Why do you think the rise in the average yield of the high yield index and growth stock performance have been quite correlated over the past year?
This is a great question but definitely one that skews toward being more difficult. The important thing to keep in mind is that your interviewer wouldn’t be looking for you to give a perfect answer (there are a number of possible answers!).
Rather, what your interviewer is hoping is that you can think about credit (high yield index) and equities (growth stocks) and try to figure out what could be at the root of their correlation.
If we think about the valuation of any stock, we can do so through the lens of a discounted cash flow analysis: just summing up all the future free cash flows the company will throw off and then discounting them back to the present at some discount rate.
Now growth stocks (i.e., QQQ) are, by definition, more risky than other types of stocks (i.e., utilities) because their cash flows are far in the future (i.e., because they’re growing so much, they may not have much free cash flow next year but are projected to have 2x as much in three years or whatever). Further, growth stocks tend to be in “newer” areas of the economy that are a bit riskier than just running a utility or making some consumer product.
Anyway, the point is that growth stocks are riskier and so should have a discount rate that reflects that level of risk (i.e., a three-year old software company should have a higher discount rate than a utility, partly because their cash flows in the future are more uncertain).
So, there’s a tendency for many to use the average yield of the HYG index as a proxy for the cost of capital (i.e., discount rate) for growth companies. And, given that we’ve just had the fastest rate hiking cycle of the past four decades, that average yield has gone up substantially and, conversely, that the present value of future cash flows for growth companies has fallen substantially (as we’re now discounting those future free cash flows at a much higher rate!).
Here’s a great chart from Goldman showing the relationship between a $1 in cash flow discounted at HYG yield and the performance of growth stocks…
As you can see, there’s a pretty tight correlation that signals that most of the poor performance of growth stocks over the past year have purely been due to rate increases (thus higher HYG yields and higher discount rates) not necessarily due to earnings deterioration or growth concerns.
As you likely know, in the world of global macro for the past few decades there has been one major outlier: Japan.
Unlike most of the developed world, the overriding issue that Japan has been grappling with for years is stubbornly low inflation that occasionally burgeons on disinflation. This was true all through 2020 and 2021 and it was only in 2022 that we began to see Japan’s inflation, for the first time in years, pickup over two percent.
While Japan is becoming (modestly) concerned about inflationary pressures buildings, their approach to tightening monetary policy is starting from a fundamentally different place. Since they currently have a policy of yield curve control (YCC) that has bound certain key parts of the yield curve (i.e., the ten-year JGB) in place, their “tightening” of monetary policy announced in December 2022 was simply loosening the band.
More specifically, they are allowing the ten-year to float +/- 50bps as opposed to the prior +/- 25bps. Which, given the current ultra-low yield environment, has led to the market pushing up yields to the +50bps barrier.
This policy of trying to control the band in which key parts of the yield curve trade in has created an odd kind of inversion in the yield curve where its immediately obvious what section is being controlled, and what section isn’t…
Most market participants are currently thinking the BoJ is going to keep widening the band to allow the yield curve to slowly inch up. While being mindful that tightening monetary policy too much – by Japan standards – could put it in a bind this year if there’s a sharp global slowdown, which would likely put inflation back below target and thus necessitate more easing again.
As of this writing, many market participants are banking for a soft landing of the economy whereby inflation gradually falls back down to target – primarily a result of goods deflation from things like used cars – and unemployment only gradually rises. Thus, skirting a recession.
If this sounds like a goldilocks scenario, it certainly would be and there are a numerous things that could derail it.
The one thing that I’d point to is that the lynchpin of the soft-landing argument is that rates won’t have to rise much more at all – just somewhere between 25-50bps – in order to have inflation flutter back down to target.
However, as the Fed has conceded, for inflation to get back down to target there needs to be a sharp slowing in wage growth from its currently extremely elevated levels. In other words, it’s inconsistent to think you can have 5-7% wage gains and 2% inflation, as consumers tend to spend most of what they earn (right now the personal savings rate is near historic lows).
Right now, there are some signs of wage pressures beginning to moderate as the economy begins to slow. But the question is how much wage growth will slow from its extremely elevated levels given just how tight the labor market currently is.
Many are concerned that inflation could rear its head again if a recession does not occur, as modest economic growth and tight labor markets could lead to wage inflation spiking back up or plateauing at too high of a level to be consistent with 2% inflation. Thus, putting the Fed in a quandary over whether or not to raise rates further to get the economy to crack a bit and get wage growth to more normalized levels.
Here’s a snapshot of where wage growth is today, from Goldman…
Note: In Europe, despite the weaker economic backdrop and sluggish wage growth, the ECB has made it clear that one of the reasons why they’re embarking on their own rate hike cycle is because of troubling signs over wage growth pressures building.
As I’ve written a few times before, all else being equal it’s always great to join a bank that has placed an emphasis on growing their Global Markets business. And that’s exactly what PNB Paribas has done over the past number of years. So, especially if you’re in Europe or the UK, you should make sure not to overlook BNP.
While this post has covered some recent market-based themes, be sure to check out the longer list of sales and trading interview questions or the (very) long post I did on what sales and trading is and what you should expect.