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Paris's new business centre at La Défense is home to most of the major French banks. Société Générale towers, both literally and figuratively, over all of them. From the top of its new 35-storey headquarters, the chairman looks down on the top of the Grande Arche, up the Champs Elysées to the Arc de Triomphe, and over to the Tour Eiffel. It's probably the best view in Paris.
Marc Viénot, SocGen's cigar-wielding, 67-year-old chairman, is as expansive as his views. He has centralized almost all SocGen's operations to La Défense and cut back on branch staff numbers. Now he's more interested in the growth area of his bank: commercial and investment banking outside France. He intends to expand international operations until they account for half of total profits.
London and New York, he says, should prepare themselves for dealing with a major new player, and it might not approach from France. Société Générale already has five branches in China, and is on the hunt for strategic acquisitions in Hong Kong. Emerging markets offer a much more level playing- field to medium-sized capital markets players than does the US.
Analysts are unconvinced. No French bank, they say, has ever been world-class in capital markets. At one point SocGen looked as if it might be the exception. Its capital markets division made a creditable Ffr3.57 billion ($704 million) in 1993, up from Ffr1.56 billion the year before. At the time, its derivatives team in New York was second to none. But management in France got scared. Risks and personalities were both getting out of control. The operation was scaled back, making just Ffr1.05 billion in 1994 and Ffr1.2 billion in 1995. In retrospect, this was probably a good idea: in 1995 Ffr500 million was written off to dispose of a nasty bond position in New York. It could have been far worse: SocGen probably had less control over New York in 1993 than Barings over Singapore two years later.
Any other French bank would kill to have such problems. SocGen would be forced into international expansion even if it didn't particularly like the idea, if only because it has so big a share in the French domestic capital markets. But Viénot's real reason for looking abroad is the fact that the domestic situation has barely improved over the past few years.
Everything you ever learnt about French banks is still true. Their return on equity and tier-one capital ratios are among the lowest in the developed world; this is true even for those banks that have been privatized. Their cost/income ratios are extremely high (although mainly because their incomes are so small, and not because costs are particularly high). The legal and legislative situation in which they find themselves is certainly changing, but painfully slowly. And to top it all off, their loan margins are all but non-existent.
For the past year French banks have complied with the Trichet ratio. This was introduced by central bank governor Jean-Claude Trichet with the intention of bringing loan margins out of the gutter: France has a deadly mix of state-owned banks with an incentive to keep profits down to avoid paying dividends to an unhelpful shareholder, mutuals with no profit motive at all, and a history of magnanimity and banking as social service.
The Trichet ratio is simple enough: no loans should be made at less than 60 basis points over treasuries. Unfortunately, not long after it was introduced, French government bond interest rates started falling to below German rates. The 60bp hurdle barely affected nominal loan rates. And according to Goldman Sachs, the minimum interest rate to originate a typical mortgage profitably is closer to 200bp over treasuries.
The French banking system needs much more fundamental reform than fiddling with loan margins. It has to be possible to sack employees, if only because there are simply too many branches for too few customers. In the longer term, however, French demographics are such that the problem will be finding sufficient staff. The solution in the short term would be legislation allowing shift working and other productivity-enhancing measures.
Many French bankers and foreign analysts are pinning hopes for a quick restructuring programme on the EU. The French government is unpopular enough as it is, without sacking employees of profitable (however minimally) banks, or taking away the French public's tax-free Livret A savings scheme. The hope is that the right-wing government will put up no resistance to EU directives designed to level the European not specifically the French playing field before monetary union.
"There's a realization in France that far-reaching restructuring and deregulation is inevitable," says Christopher Potts, chief economist at Paris broker Chevreux de Virieu. "It's easy to take a positive medium-term view." But change, when it comes, will come slowly. Any rosy future is still a long way off.
Euromoney: Would you say that Société Générale and other French banks are moving towards Anglo-Saxon values in banking?
Marc Viénot: I don't know exactly what is meant by Anglo-Saxon banking, except that it is defined by return on equity. And you have to look at ROE in historical terms. When we talk about the present glorious returns on equity of British and US banks, we mustn't forget that they were negative five years ago, or three years ago. This is not meant as a criticism. Our return on equity is mediocre, I fully agree. But it's relatively steady. It's not great. But it's the same return on equity as that of the three Swiss banks; the same as Deutsche Bank's.
Compared with good-performing international mostly Anglo-Saxon banks today, some foreign banks have much better ROEs than the French banks. I'm thinking of the singular situation of Banco Popular [the Spanish bank]. It's very specialized. But French banks are at the bottom of the lists globally, in terms of return on equity. And do you know why?
There are some structural problems, resulting from the distorted state of competition which have certainly adversely affected margins, which is I think the main reason for the poor situation. Banks in France are not competing on the same basis, according to the same rules. We have competitors who compete without having the same targets.
Can you give me some idea of what's involved in this competition?
First, there are the mutuals. This group has two components. One is Crédit Agricole, which is now operating almost like a conventional bank. But it has substantial support from its high level of equity. It has Ffr124 billion, whereas our equity is only Ffr50 billion. This has been accumulated from a very large captive customer base, which was built up because over the years Crédit Agricole was the only bank channelling state subsidies to farmers and so on: loans which might be on 1% interest rates over 40 years. As such, they captured a very large base. Today the agricultural community is a very tiny customer base. But Crédit Agricole has still managed to maintain its network very cleverly. It's a well-managed bank. But it started from a very strong position, and has had no international role until now. It recently bought Indosuez. Eight or nine years ago Crédit Agricole also tried to become international, and lost many billions of francs. Now it's being a little more cautious. The operation has a whole internal logic. Crédit Agricole does not show too large a return on equity. By tradition, it returns 8%. It could easily have shown 10%.
The other mutual is Crédit Mutuel. Here, the distortion is a bit more spectacular, because, together with the Caisse d'Epargne and the post office, it markets a special product the Livret A, which is very attractive because it is tax-exempt. I don't know if it is really necessary to the French public: I think it's stupid that it exists. Every grandmother, when she gets a new grandchild, opens a Livret A account. If it's so necessary, why is its sale restricted to certain institutions? We can also offer a Livret, but not on a tax-free basis. We have offered to sell it, and at a lower cost than the cost to the state today. They are paying 1.5% to the Caisse d'Epargne today. We claim that we can do the same for 1%.
Through the Livret A, Crédit Mutuel has attracted small business, provincial business, church associations. That's well done too. The bank is well managed, but its return on equity is 5.5%, and it doesn't want to improve it.
Then comes the Caisse d'Epargne. It's a special case quite close to US savings & loans in character. For us, the main problem with it is that it also markets the Livret A, and is not at all concerned with return on equity or making profits. It is a non-profit oriented institution.
Then comes the post office. It's a financial services concern. It offers overdrafts, cheque cards, life insurance, mutual funds... And its accounts are a mystery. It recently got legal independence from the state budget, and can now do anything it wants, except lending. Its advertising budget is 10 times ours, and nobody cares about it except the taxpayer.
But then there are the normal banks, which are defined by law. Again, we need to make a distinction between the state-owned and the privately-owned banks. State-owned banks normally compete on the same legal terms as privately-owned ones. However, state-owned banks never die. This is another problem. Take Crédit Lyonnais, or Marseillaise de Crédit. They display behaviour that's not exactly bank-like. They're taking risks, failing to make proper provisions, and so on.
What's the overall effect of this?
Well, it means that half the players in French banking are not concerned about making profits or a respectable return on equity. Some are not concerned about hedging any sort of risk, because they have the state as a shareholder. This results in a very tight squeeze on margins. Margins are thinner than in any other market. That doesn't mean, though, that it's impossible for improvements to be made, even within the same legal framework.
Under present conditions, we can compete by introducing better cost control and by expanding our international operations. Even so, in our domestic operations we still believe that we can make money by a very energetic policy of cost control, particularly a reduction in staff numbers but not, so far, a reduction in branch numbers. What we are trying to do is to reduce costs by concentrating back offices and trimming back on administration, while keeping a strong commercial and sales force.
Could you put a number on that? At the moment you've got a 74% cost/income ratio.
That's too high. We should get it down to between 60% and 65%. If we reached 65% it would be a really great achievement. Perhaps we have to distinguish the domestic and international sides. In France it's very difficult to reduce staff because of the high levels of protection afforded by labour regulations. When I met Tom Labrecque [president and chief operating officer of Chase] in Paris a month ago he told me that he has had to fire 11,000 people after the merger with Chemical and that everybody in New York had applauded. But when I want to cut employee numbers, I have to face the labour administration, and they will tell me: "I'm sorry, sir, but you are profitable. You can't do it." We have to operate by ourselves. We have reduced the number of employees in the network by 2.5% since 1993. Globally the bank has stable staff numbers, but this is because of expansion in capital market operations and abroad. We are reducing staff in our domestic operations. We were among the banks that foresaw the development of overcapacity long ago. The chairman in 1974, Maurice Lauré, convened a meeting I attended. He said: "There is a crisis. French demographics are going down. There are too many branches, everybody has already got a cheque book. Let's stop the expansion." We had been growing at a rate of 7% for the previous six years, opening branches everywhere. We were buying up all the well-located restaurants and cafés in France. At that time the same chairman, a mathematician, calculated that at that rate of growth by 2045 the whole of the active population of France would be working for Société Générale.
How successful have you been in slowing the growth trend?
It was very important to react, but it was very difficult. We had to make it understood by the network that we had to stop expanding. Since 1974, we have decreased by 1%, mainly through retirements. There was resistance in the bank itself, and also from the authorities. We are totally blocked by the government administration. And that also explains why it is difficult to undertake mergers.
However, some things are changing. I am optimistic. We have criticized the distortions in competition so much that perhaps some changes may be considered by the goverment. For example banks and only banks, the post office and Caisse d'Epargne aren't affected are prevented from opening their branches at the very time customers need them. We are compelled to open all our branches for five consecutive days so if you open on a Saturday you cannot open on Monday, as others institutions would do. We cannot introduce shift working. These constraints could be amended. Perhaps also factors springing from growing European economic integration could be taken into consideration. Another factor favouring reforms is taxpayer discontent after the Crédit Lyonnais debacle.
So what's going to happen to Crédit Lyonnais?
Right now, anybody who comes along with one franc can buy it. Make an offer. You'll get a red carpet to the minister of finance. The government missed its opportunity, and is now five years too late. And its support came in an inappropriate way: they tried to rebuild Crédit Lyonnais to how it stood before its expansion into non-core activities.
They want to privatize: they have understood that the rescue operation doesn't work. Even after having put in Ffr135 billion, the thing hasn't recovered. But who can buy it? I don't see anyone. It would be easier for them to sell it to a foreigner, which would be the logical thing to do.
You've made it clear that there are certain legislative changes you would like made, and that you'd like to reduce costs.
The legislative situation can only improve. More equality in conditions that affect competition must be introduced, in order progressively to eliminate and reduce distortions. This especially applies to the post office, which shouldn't become a bank. It would add 17,000 branches to the national network and benefit from unfair competitive advantages.
Second, we can reduce costs, and third we have to grow. A concentration will take place one way or another. The number of banks will be reduced.
That brings us to loans, and the fact that margins on loans in France are the smallest in Europe.
There are two factors in France putting pressure on margins. One is the number of banks, and the other is the fact that they are not playing the same game. If you don't need to get a return on your capital, there's no reason for you to look for high margins. And once very big actors Crédit Agricole, Crédit Mutuel and Caisse d'Epargne play that game, the pressure on margins is enormous. Even if 10 or 20 banks were to disappear it would not be enough. The rules have to be the same. However, the number of actors is still too large, and concentration will help.
We discussed it recently with the governor of the Banque de France, Jean-Claude Trichet. He said: "It's quite easy, gentlemen. Just behave, increase your margins, and the others will follow." If we had done that, three months later the landscape would have been totally different. We'd have lost a huge amount of market share.
So I tried to introduce another line of reasoning. I said the central bank should ask each institution to make a minimum return on equity. This would make sense. But the governor chose a rather different approach, recommending that the loan should be made at a rate more than 60 basis points above the treasury bond of the same maturity.
To improve profitability, can you see cost reductions in the next three or four years?
Yes. But it will come automatically. In 2003 and 2004, all the people we recruited in the years up to 1975 will start retiring. We are in the very difficult situation of trying to reduce staff today and then all of a sudden we'll have to recruit. But we have to survive until that stage. Perhaps we can slightly anticipate this by finding ways of encouraging early retirement. But we know that after 2000 to 2002, the problem will not be how to cut back, but how to recruit.
What is Société Générale's approach to risk?
Globally, our bank is traditionally risk-averse, but that is the case with all the commercial banks in France. It seems that not only have we been risk-averse, but that we've avoided the worst risks more than our competitors very often by chance, I think. We missed Eurotunnel because we were involved in a competing project: a Channel bridge. We missed EuroDisney. That was slightly more a case of judgement than good luck: we looked at it in some detail. And we were wary of real estate earlier than others.
Do we have special techniques? I hope so; I'm not sure at all. We are usually considered to be good risk managers. Many small or medium-sized banks can't spread risk like Société Générale. I'm not especially proud of any institution's reputation up to now. We didn't avoid Robert Maxwell. In terms of market risk, one is never safe. The limit system makes operators take risks. From time to time they will take them the wrong way. It's normal. But they shouldn't be of such a size that it imperils the bank's reserves. Could a Barings accident happen to Société Générale? I think not, but I can't prove it.
What about credit risk?
Credit risk is part of the basic training at Société Générale. We have a very broad system of delegation. We don't have a risk committee at the centre of the bank. Crédit Lyonnais has one: it meets with the chairman or the general managers and looks at risk every week. That set-up doesn't exist here. People are responsible for what they do, and up until now they've done it properly. It's not very scientific.
What we are now trying to improve is the allocation of equity. We are still a bit unclear about the way we measure the returns we are getting from different operations.
I understand that your bank has a substantial equity portfolio. How does that fit with your banking strategy?
Anglo-Saxon analysts find it difficult to understand why we have a portfolio of stocks worth Ffr22 billion. They don't understand it. They say: "Why do you have this? You should sell it." That's not my opinion. We decided in 1987 that there should be a certain portfolio. The amount today is at the correct level. We shouldn't go beyond it, or much beyond it. We shouldn't commit more than half of the bank's capital and reserves. These currently stand at Ffr51 billion so there still is a small margin.
We now have to manage that portfolio. There were three reasons for building it up. One was an exotic reason, if I may call it that. We were subject to an aggressive raid by Georges Pébereau and a group of investors, and we had to resist that raid. At that time, we made some commitments to people who came to our rescue. So we took stakes in some companies.
So there's a historical basis for the portfolio. But my opinion is that from then on it proved to be a sensible move. This first reason for its existence has disappeared. We are not trying to protect ourselves through cross-participation. We have two views. One is that we should make a profit out of the management of the portfolio: we are managing Ffr350 billion for our customers, so why shouldn't we manage Ffr22 billion for ourselves?
The second reason is that we have deliberately chosen to invest in French corporations: corporations with which we would like to maintain or develop a relationship. This does not mean being involved in their management; just getting a better knowledge of them. And it works.
Have you managed to make active use of your equity portfolio?
We have this capital-gain reserve, which can be used. At the time we acquired the portfolio in 1987 we took the decision to create the capital markets division, and the team was Léopold Jeorger and Patrick Duverger. We were starting from scratch. I had in mind that it was risky. I was afraid of the ups and downs of the market, however confident I was in the long term. The portfolio can produce between Ffr500 million and Ffr800 million of profit annually, which we use, depending on the state of our reserves.
Now why is it considered dangerous? Why are the Anglo-Saxons against this sort of strategy? I don't know. They say it's illiquid. But it's much more liquid than a credit risk. To securitize a wholesale loan to a big corporation is not very easy, but to sell stocks on the stock exchange is not very difficult. In my opinion, it's liquid, and the internal return is 11%. I can't see the scandal in that. I'm not defending it it is as it is.
Also, if we had it in mind to make an acquisition, we could liquidate our portfolio. Perhaps we have too much real estate in our portfolio about Ffr12 billion. It's a bit too much. In any case, if we were to make an acquisition we'd have large possibilities. We can sell part of the portfolio though not the real estate under current conditions and we can tap the capital markets, because we are big enough. We are increasing our own capital ourselves, by 10% a year. Two-thirds of our profits goes into capital. We pay our dividend in shares. Our employees subscribed for Ffr942 million this year. We could easily issue a convertible bond. Our position is sound.
You do have the strongest credit rating of any private French bank.
But it's not a very good one: AA minus. We were double-A, and were downgraded with a demonstration which I didn't like very much: "You're a good bank, but you're a French bank." I can understand that. I don't like it, but I understand it.
So the stock portfolio could be easily liquidated, and the markets like you. It would be easy to find the money for an acquisition. But there's a perception that you're very acquisition-averse, especially on the capital markets side. Have you been deciding that these companies are far too expensive and that if you're going to go into it you'll do it organically? You haven't made any major acquisitions.
That's true. We made one medium-sized acquisition in the UK, buying Touche Remnant and selling it back three years later. It was not a misunderstanding. It was a misperception of the nature of the beast.
Why should we buy CIC? I don't know. It has a market share. And potentially we can move it from a 3.5% return on equity to between 8% and 10%. It would take two or three years. Is it worthwhile? It would involve many people, and cost a lot of energy. It would improve our market share by only 4%, but it's not a bad idea to be strong domestically. But it might be too energy-consuming, if we have other targets.
Today, the accent is on developing investment banking, both domestically and abroad. We had hoped to make an acquisition in the US: Donaldson Lufkin Jenrette (DLJ). In my opinion, it was too expensive at $2.5 billion, and didn't fit with our plans. It is and was a very good and well-managed firm. They were concerned with their own interests. They didn't want to change, whereas we wanted to develop joint projects in America and south-east Asia. And finally I'm not so sure it was for sale. Because it belongs to Equitable, and makes most of the profits of Equitable. They had a wonderful life, because they had a shareholder who didn't care what they were doing, because they were doing it very well. So finally they went to the stock exchange. But it was interesting for us to investigate and to talk.
Then we brought in a consultant, who advised us not to buy anything in the US. There are no examples of big successes in that field. So we came back to a brick-by-brick development plan. This doesn't prevent or exclude buying small companies, but not a huge acquisition. At the time we were contemplating DLJ, I think we were also a bit too young. I'm afraid we would have become a subsidiary of DLJ, which was not exactly my ambition. So there was reason not to do it.
When the London opportunities came up, I must confess I was not interested. SG Warburg, Barings: it was just intuition. I didn't want them. There is one good firm: Schroders. But it's not for sale. That's because it's so good. And it would be very expensive today.
So we need to find one way or another of financing in dollars: that's what we are short of. And direct access is simplest. I don't know if we'll succeed. We've put some energy in that, and earned some money. You can say it is very ambitious, or not if you're comparing it with the acquisition of DLJ. We will expand in London, and in Hong Kong. Perhaps we will make an acquisition there, but it will be a small, specialized firm. We are looking at the way that ABN Amro has developed its business in the US. It's true: we're not very acquisition-minded. If we can't buy cheap, we won't buy.
You've been here both before and after privatization. What difference does it make?
I think that Société Générale post-privatization is a very sound operation, for many reasons. First of all there's the chairman's position. You don't have to report to the treasury any more. It's very interesting to see how long it takes the treasury to understand that. Six months after we were privatized, Trichet gave me a call: "Marc, why haven't you sent me your monthly accounting report?"
You can say what you like in the newspapers. That's something. Second, you are much more concerned with return on equity and results. We were state-owned for 42 years. In that time, the game was not to pay dividends, because the state was such a bad shareholder: it never put any fresh money into the banks. So we were hiding the profits as much as we could.
This had an effect on people's behaviour. They were not concerned with profits. If you demonstrate that you're profitable, you lose. State-owned banks are totally free from any concern with return, and I think this is bad.
The employees have also had a different perception since privatization. They see that it is a different bank: that you have to behave properly, be profitable and so on. The fact that 8% of the bank's capital is owned by employees is another element.
It also helps if we want to make an acquisition: we can pay for it in stocks instead of cash. We haven't used this approach yet, but stock is a way of paying for something. On the other side, it makes you vulnerable to acquisition.
We went through a difficult period. Corporate raiders managed to get 14% of the stock. At that time I discovered the importance of the board, which until then I thought of more as a bore than a help. I managed to convince the board that they should resist. I simply said that while the raiders had 14%, they didn't bring anything to the bank. There was no synergy. They were asking for some seats on the board, and we said no. The day that they had 51%, we'd leave. But before that, no. It was an interesting moment in the life of the bank. And the board was a good board in my opinion.
One of Trichet's targets is that we should have all the actors privatized and playing by the same rules. If, for reasons which are beyond me, we have to maintain a state-owned group, it should be asked to get and maintain a specified return on equity. But I'm dreaming, eh?
It's not going to happen?
Yes, I think it will. But it will take some time. The EU will apply pressure on all the singular features of the French marketplace.
If you tell an English or American analyst that in two or three years we'll see high return on equity and low costs, they'll laugh at you.
That's fine by me. It protects French banks from takeover. So keep them saying that. Tell them we're old-fashioned and that there's no hope for the future. No, I'm optimistic.
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