* Q3 net profit beats forecasts on bond-trading rebound
* Basel III capital ratio hits fresh high of 9.5 pct
* CEO says room for cost cuts in French retail banking
* Shares up around 5 percent (Adds fund manager comment, updates shares)
By Lionel Laurent and Matthias Blamont
PARIS, Nov 7 (Reuters) - BNP Paribas, France’s biggest bank, is looking to cut costs in its branch network to bolster its defences against a weakening European economy, after hitting a goal to strengthen its capital reserves ahead of schedule.
Banks across Europe are slashing costs and selling assets to cope with tougher regulations aimed at preventing a repeat of the 2008 financial crisis, as well as the impact of countries’ austerity drives to reduce their deficits.
Retail banking, once viewed as a stable counterweight to riskier investment banking, is now also coming under fire as it struggles to make money in a era of low interest rates.
“The European economy is slowing down but we have a very good, strict risk control, and we are also working quite efficiently on the cost base,” BNP Chief Executive Jean-Laurent Bonnafe told Reuters Insider television on Wednesday, citing domestic retail banking as an area with scope for cost cutting.
Bonnafe, who has yet to detail his vision for the group almost a year after taking the reins, was speaking after BNP posted a doubling of third-quarter profit, helped an industry-wide rebound in debt product sales, and said it had met a key capital target ahead of schedule.
At 1105 GMT, its shares were up 4.9 percent at 41.04 euros, the third-biggest rise by a European blue-chip stock.
“It looks like BNP can focus its efforts on generating cash rather than just on good solvency levels or cutting the balance sheet,” said Yohan Salleron, fund manager at Mandarine Gestion in Paris, who owns shares in BNP. “They also have room for cost flexibility on the retail banking division.”
BNP’s quarterly net profit surged to 1.32 billion euros ($1.7 billion) from 541 million the same time last year, beating analysts’ average forecast of 1.18 billion in a Reuters poll.
Revenue fell 3.4 percent to 9.7 billion euros, also topping the average forecast of 9.3 billion.
Like rivals, BNP benefited from central bankers’ moves to spur growth and promises to keep the euro zone from breaking apart, which buoyed trading in the quarter.
However, revenue at its French retail bank - traditionally a “cash cow” - fell 2 percent, testament to bankers’ views that domestic branch networks are ripe for cutbacks.
BNP has 2,250 branches in France, and retail banking there accounts for about 17 percent of its total revenue.
Analysts are not expecting BNP to launch a big programme of job layoffs, but rather think it will seek to reduce staff numbers largely by not replacing those who leave or retire.
BNP has stolen a march on rivals by cutting costs and shedding assets over the past year, helping it to achieve a solvency ratio of 9.5 percent under Basel III rules - ahead rivals UBS, Deutsche Bank and many others.
Its balance-sheet strength bodes well for the bank’s dividend policy and for rival Societe Generale’s results, due on Thursday, Nomura analyst Jon Peace said.
BNP’s corporate and investment bank posted the biggest revenue jump of its divisions, up 33 percent year-on-year.
Fixed-income revenue grew 38 percent, compared with a 67 percent rise for Deutsche and 20 percent at UBS and around 33 percent for U.S. rivals JPMorgan Chase and Morgan Stanley.
BNP has made fixed-income a key plank of its post-2008 strategy as traditional lending gives way to borrowing via the bond market, a transaction type that eases the pain of Basel III rules’ tougher capital requirements on traditional lending.
Playing down the threat of planned banking reform in France, which the government has said will curb banks’ risky trading activities, Bonnafe said there would be no significant cost impact and that France would support its way of doing business.
In an environment where UBS is cutting 10,000 jobs and exiting fixed-income, however, he warned that trader compensation would remain “reasonable”, without saying more.
$1 = 0.7812 euros Editing by James Regan and Mark Potter