Rather overlooked amid the disappointing investment bank results being reported in the final months of 2010, Société Générale’s corporate and investment banking division surprised analysts and investors with better than expected earnings across its businesses in the third quarter compared with the second, boosting returns for the bank as a whole. "The 18% beat was due in large part to CIB, thanks to better than expected revenues in fixed income and financing, as well as lower provisions," pointed out analysts at KBW.
The French bank will not present fourth-quarter 2010 and full-year results until February but analysts have been upgrading their forecasts. KBW increased its 2010 earnings a share estimate from €4.29 to €5.24 and to €6.44 for 2011, while estimating a return on equity of 13.5% for 2011 on the basis of 8% capital.
CIB revenues by business line
Source: Company, KBW estimates
Long known for its strengths in equity derivatives, the bank has diversified in the past two years by improving its fixed-income derivatives capabilities and building up its conventional financing and advisory business. While overhauling its risk management in the wake of the Jérome Kerviel affair, it has continued to devise complex structured solutions, while some competitors have made a great show of embracing simplicity.
Michel Péretié, who took over as chief executive of the commercial and investment bank in 2008, says: "As a firm we’re well known for our quantitative and solutions-driven capabilities and we are one of the very few that has kept on investing in structured solutions programmes in the aftermath of the crisis in order to continue to accompany our clients. We have combined equity and fixed income into what we call a unique cross asset solutions group, mostly helping bank and financial clients, as well as investors and asset managers to address their asset-liability management problems." He stresses: "The world is not getting any less complex."
It’s an approach that appears to be paying dividends. Péretié says that while competition has returned and even intensified in flow businesses in the past two years, so shrinking margins, on the structured-solution side of the business just the opposite has happened. "We’ve seen competition fading," he says. "The barriers to entry are very high and if you don’t keep investing in your platform, across risk, legal, compliance, human resources as well as sales, traders and structurers, it can deteriorate very rapidly. And after a tough 2008 and early 2009, some banks clearly gave up."
"After a tough 2008 and early 2009, some banks clearly gave up"
Michel Péretié, Société Générale
Péretié says: "We’ve also been expanding in structured financing and in specialist financing such as commodity finance, trade finance, infrastructure and project finance, and all this brings a strong net interest margin component to our earnings."
The bank offered some guidance with its third-quarter results on how it intends to comply with Basle III rules on capital and risk-weighted assets, estimating 8.5% Basle III common tier 1 equity for the group by the end of 2013, structured with 10% for CIB, 7% for French retail and 8% for the rest of the bank. KBW analysts draw as their key take away: "Management points out it has the ability to comply with the new B3 capital requirement without a capital increase." If it manages its risk well enough to earn a 15% return on this equity, then Société Générale’s investment bank will have shown a winning business model.