Natixis CIB: Transition will be a key growth driver

The French bank feels it is ahead of the game on ESG and hopes the transition to a net zero-carbon economy will help fuel its growth plans, Mohamed Kallala tells Peter Cripps

It is a sweltering July day in Paris, and there is a party atmosphere in the capital city as it rides the crest of the Olympic wave.

In the centre of the action, the Petit Palais, a grandiose museum of fine art, which was originally built for the 1900 Exposition Universelle, has been repurposed as a venue for corporate hospitality. It is here that I meet Mohamed Kallala, global head of Natixis Corporate & Investment Banking (CIB), who is keen to talk about his bank's ambitious growth plans.

It is a fitting backdrop for the conversation. The Olympics has been used to showcase the splendour of Paris to the world at a time when its increasingly confident banks are en marche and are looking to assert themselves on the global stage.

Sometimes during our conversation it was hard to hear Kallala over the cheering from patriotic French onlookers crowded around giant TV screens, as their country's Judo players pinned down their opponents.

Natixis CIB, part of Groupe BPCE, has recently launched a strategic growth plan called Scale Up, which aims to grow its revenue by more than 5% per year on average by 2026, although Kallala said he believes it can exceed this as it partners with other financial institutions across the world.

His vision is for the bank to benefit from three economic transitions, which are already underway: the green and energy transition, the transition to digital infrastructure catalysed by the boom in artificial intelligence, and the transition to private assets which are becoming an increasingly big part of investors' allocations.

"We plan to take full advantage of all three," he explains.

When it comes to the transition to a net zero-carbon economy, he says the bank is already "reducing our support to companies that have not transitioned. We have a team that looks at the strategy of each company and if we don't believe in it, we stop financing. If we believe in it, we support them."

There are numerous ways in which it hopes to benefit from this theme. For example: "We think that solar PV farms and wind will be an area for growth – but this will require storage to manage the intermittence of green energy. A PV farm in Spain, for instance, may generate excess electricity at 11am leading to sharp decrease of prices without storage."

"We are ahead of the curve on the ESG business"

He points to 'green ammonia' as another opportunity. It aims to help grow the market by acting as an advisor and helping to structure deals.

"Before lending, we need to structure the project, find the equity investor, structure the debt and then distribute it. We are going to be the 'M&A advisor'," says Kallala.

"The key driver of success here is not only ROI (return on investment), you have to ask: 'Do you know the stakeholder, do you know the business, are you able to put them all together around the table?'

"If you're connected and have the balance sheet, you can put people together, structure the deal, underwrite the deal, and have enough balance sheet to make the transaction happen – and then you can syndicate to investors.

"Of course, other banks can do it, but we are ahead of the curve on the ESG business," he argues.

Sustainable aviation fuels (SAF) are another exciting opportunity, which it can target by lending with hedging.

"We are going to hedge [airlines] against the [cost of] brown fuel decreasing dramatically – because if the cost of the oil is $100 a barrel you can buy SAF, but if the price goes down to $20 ... you need to hedge.

"This [SAF] market will be driven by airlines and industrial gas companies or the oil and gas producers. It's our job to put these guys together – the airline plus the SAF producer – and structure the debt."

Hedging is currently a small part of the business but is rapidly growing, and he points out that not many other banks retain the capability to carry out this function.

When asked if Natixis is applying its hedging ability in the carbon markets, he says: "Not yet but we are doing some repos" in the mandatory carbon markets. Repos, or repurchase agreements, are a form of short-term borrowing for dealers, typically in government securities.

But he sees the voluntary carbon market as "a tricky business because it's not regulated": "You can take the best deal ever and still get criticised."

He sees the EU's incoming Carbon Border Adjustment Mechanism, which will apply a carbon price to goods imported into the bloc, as a significant opportunity but adds: "Today no one understands how it is going to work."

"I think one day, when everyone understands how it will work better, we can start buying certificates to hedge exposure to the value of carbon certificates."

I ask him which are the most exciting markets, and he answers without hesitation: "Data centres – today we all hear about AI (artificial intelligence). AI is a huge consumer of data services and power.

"I don't think that [any] new administration in the US will change the IRA, because many states including oil producers are taking advantage of the IRA"

"GAFA (Google, Apple, Facebook and Amazon) and others are all trying to have the capability to do AI, they need chips, but they also need power for data centres – and they want it to be green power.

"And this becomes really interesting when you know that, with AI you have the learning phase, which consumes 85% to 95% of the energy. Then comes the using phase, which needs just about 10% of the energy.

"If you need AI in the US, you can do the learning phase in Chile or Saudi Arabia. Or you can do it in Australia where you have plenty of green energy.

"We talk to different clients saying that 'We can find a way for you to have data centres – one data centre will take the learning phase and the other the using phase'.

He believes the opportunity for green energy-powered data centres is most enticing in Australia: "You have wind and solar power, as well as [a strong] legal framework and a politically safe environment.

"Instead of using power in Europe and Japan you can just use the power in Australia to learn [with regards to AI]."

I wonder if Kallala is worried about the strength of governments' commitments to net zero and renewable energy, amid the ESG backlash in the US and increasingly in Europe.

"Well, that is a risk," he concedes, "but I don't think that [any] new administration in the US will change the IRA (Inflation Reduction Act), because many states including oil producers are taking advantage of the IRA. Maybe they will reduce it, but they will not cancel the agreement.

"And I think that a mix of solar, wind and batteries can be competitive if it's a huge investment – the scale matters.

"Today solar plus batteries is aligned with gas-fired power prices, by 20%, more or less. This business doesn't need to be subsidised anymore."

He thinks that, as Natixis structures deals associated with the transition, it can attract investment from third parties, either one a deal-by-deal basis or as part of a collateralised loan obligation (CLO) or a fund.

Kallala sees no shortage of appetite for green deals, using the EU's Sustainable Finance Disclosure Regulation (SFDR) as an example: "More and more clients want Article 9 and are saying Article 8 is not enough."

Funds categorised as Article 9 under the SFDR are the most sustainable, followed by Article 8.

"There are plenty of investors willing to invest in green assets," he adds.

This ties in with another of the bank's key growth themes, which is the financial shift towards private assets. He sees this as a continuing trend as investors help to mitigate volatility in financial markets.

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