Societe Generale makes a costly exit from Russia
SocGen’s deal to sell Russian lender Rosbank back to Vladimir Potanin’s Interros Capital is painful, but could help it to move on from the war in Ukraine.
Societe Generale’s rapid sale of Rosbank to Vladimir Potanin’s Interros Capital comes after weeks of frantic talks at the French bank over what to do with its Russian subsidiary.
SocGen is selling Rosbank back to Interros, which was the Russian unit’s previous owner before a stepped acquisition by the French firm starting in 2006. SocGen maintained close relations with Potanin, Interros’s founder and president – signing a strategic cooperation agreement with Norilsk Nickel for banking services late last year, for example. Interros has a 35.9% stake in the miner, whose chairman is Potanin.
According to SocGen, the hit to its CET1 ratio of the disposal will be around 20 basis points. In early March, it stated there would be a 50bp impact if it was stripped of property rights to its banking assets inside Russia, raising the prospect of nationalization. Deconsolidating local exposures of €15.4 billion at end-2021 will mitigate the hit. Moreover, there will be a payment by Interros, including repaying €500 million in subordinated debt extended by SocGen to Rosbank.
On March 11, SocGen said it would cease its banking and insurance activities in Russia and exit the country “in an effective and orderly manner”.
Although SocGen’s shares rose on the news in early trading, there is no doubt that this is a painful moment for the bank and its chief executive Frédéric Oudéa. SocGen is writing off the net book value of the disposed assets, about €2 billion. It is also accounting for an exceptional non-cash item of €1.1 billion relating to the reversal of a conversion reserve on its income statement.
SocGen spent years turning around Rosbank, which struggled after the 2008 global financial crisis. Successive goodwill write-downs on the bank cost SocGen more than €1 billion, although it subsequently posted respectable returns. Now, despite the sub-debt payment, some will wonder about the extent to which Potanin is getting the bank back almost as a gift, given the lack of disclosure on the total amount he is paying.
This is merely a “contemplated transaction”, for now. Moreover, it leaves the question of how much SocGen will get back on the €3.2 billion of offshore exposures that it disclosed in early March, mainly in its corporate and investment bank. There will be more detail on that at its first-quarter results in early May.
Yet the agreement might free SocGen from even trickier ethical and financial dilemmas. Without Potanin, it could have faced the question about whether to walk away in a potentially disorderly exit – hurting staff and clients – or to stay put, and even recapitalize the bank. The latter option would have risked more opprobrium outside Russia, and more concern from the home supervisor, especially if it involved injecting more equity.
The news of this agreement, painful as it is, could therefore add to the pressure for more concrete announcements on an exit by the other international banks that own large lenders inside Russia: namely, Italy’s UniCredit and Austria’s Raiffeisen Bank International (RBI).
Despite attending a video conference with Russian president Vladimir Putin only a few weeks before the invasion, UniCredit chief executive Andrea Orcel said in late March that his bank was considering an exit from the country. He said the bank was working out the practicalities of doing so, while still supporting Russian staff and international corporate clients who were also trying to exit.
Two days later, Johann Strobl, CEO of RBI – which is by far the most dependent on Russia profits of the three – said it, too, was considering strategic options for its Russian bank, including a managed exit. According to Moody’s, such an exit could involve RBI donating its Russian bank to a local foundation, because of the difficulty of extracting hard currency from a sale.
Until now, it was less clear that SocGen was even considering a sale. Now it is the first one of the three to announce an agreement to exit.
In some respects, SocGen could even appear lucky. There are not many unsanctioned Russian companies big enough to do such a deal at short notice.
Up to now, Potanin has been one of the few top-tier Russian businesspeople not sanctioned by either the US, UK, or the European Union – although he appeared on a sanctions list published by Canada on April 6. Perhaps if Potanin had been among those sanctioned earlier, this agreement would have been more complicated.
One source says the aftermath of the Ukraine invasion has been an awkward time for Oudéa because others at the bank had been more in favour of exiting Russia, after the 2014 Crimea invasion. Oudéa was not CEO when SocGen entered Rosbank in 2006, but he oversaw new commitments to Russia, including increasing the stake in Rosbank to 99% in 2014, at the expense of Potanin’s remaining 7% share.
Other French companies are among the biggest foreign investors in Russia, including energy companies Total, supermarket Auchan and carmaker Renault. Some in Paris counted SocGen lucky when Ukrainian president Volodymyr Zelenskyy did not mention the bank in an address to France’s parliament on March 23. Zelenskyy urged French companies to exit, and specifically pinpointed others – including Auchan and Renault, which subsequently suspended its industrial operations in Moscow.
One senior Paris-based investment banker at a top-tier US firm says the French government has left the question of whether to stay in the country more up to the corporations in question and has put less pressure on them to leave than the US and the UK. Those firms would find it useful to have a French transaction bank inside Russia, the banker commented.
But like other international companies, SocGen has faced mounting anger at home about its presence in Russia, on social media and in the political sphere.
Before Russia’s invasion of Ukraine, SocGen had been one of Europe’s best-performing bank stocks and seemed to be coming out of a long period of underperforming peers. Adding to its confidence was the news before the invasion of its acquisitions of LeasePlan, merging with SocGen leasing business ALD, and ING France, adding to its online bank Boursorama.
Now Oudéa will be hoping this recovery can get back on track – not least as SocGen has reconfirmed plans for a €1.65 per share dividend for its 2021 financial year and a €915 million share buyback.