SocGen: Battle-hardened Oudéa sticks to his guns
Frédéric Oudéa has been CEO of Société Générale for longer than any other current head of a leading European bank. His success in bringing the bank through the financial crisis and its aftermath is widely acknowledged. But can he articulate a convincing vision of SocGen’s future?
The market has got it wrong about European banks. That, at least, is the characteristically dogged view of Frédéric Oudéa, who, at 53, is already the longest-serving CEO of a big European bank.
Since 2008, when Oudéa took the top job at Société Générale, investors have favoured domestically focused banks, especially simple and efficient retail and commercial banks. France’s second-largest bank, known for arcane markets businesses and structured finance, has found itself out of fashion. It has been the era, instead, of lenders like Lloyds, many of the Scandinavian banks and ABN Amro.
This is not a model Oudéa appears to buy into. SocGen, too, could theoretically have become just a French retail bank, focusing on what the CEO terms business-to-client, rather than business-to-business. But, as he passionately argues from an office with a commanding view of Paris, such a retreat would not have been in SocGen’s interests, nor that of its shareholders, for more than perhaps a couple of years.
“If there is one banking business that is going to be challenged in its model in mature markets like France, it’s B2C,” Oudéa tells Euromoney, leaning back and forth in his chair to emphasize his point. “I’m more positive for B2B because, fundamentally, I consider that technology will have less impact on the relationship model that we have with our clients.”
Investors could do well to listen. Oudéa has led one of Europe’s biggest banks through years of external crisis, from sub-prime to the eurozone, from France’s economic woes to Brexit. Since 2015, he has also been president of the European Banking Federation. Oudéa, moreover, seems likely to stay put. His mandate runs to 2019 – he stepped up from the CFO’s role in May 2008, when he was still in his mid 40s.
SocGen’s CEO is responsible for a huge and mind-bogglingly intricate balance sheet, carrying out millions of daily transactions. That might call for a certain strength of character, and he has a reputation as someone whose deep trust is not easily won, even if in person he appears at ease and amiable.
But the doubts remain. France’s economy continues to lag. SocGen has traded at a discount to the other big French banks, including its closest peer, BNP Paribas.
There still seems to be a popular image of Société Générale as a risky and far too complex institution – an image partly sustained by Oudéa’s hope for more growth from an investment bank best known for products like equity derivatives. Corporate and investment banking makes up about a third of profit and risk-weighted assets at the listed French banks, according to Berenberg. BNP Paribas’ CIB ambitions are in some ways similar to those of SocGen, yet its proportion is lower.
Then there are the related reputational sores. BNP Paribas and Crédit Agricole have reached settlements on US investigations into sanctions breaching, which are still pending at SocGen. Oudéa also had to appear before the French senate last year to deny accusations of close involvement in offshore tax evasion in the Panama Papers scandal. Finally, after a French court ruling highlighted insufficient oversight last year, ministers said France would re-examine the bank’s €2.2 billion tax credit against Jérôme Kerviel’s €4.9 billion loss in 2008.
Are these wounds healing at last? Analysts think the Kerviel tax credit is probably safe. It provisioned against much of the US risk, including €600 million for litigation, in 2015.
Slowly but surely, investors may be coming round to Oudéa’s perspective. After the Brexit vote, SocGen’s share price sank below €27. Half a year later, the price is almost double that.
Some analysts agree that there is a story to tell about how SocGen has cut costs and risk, both at home and in international markets, like Russia and Romania, where it owns big banks. They say its share discount is not justified, especially given that BNP Paribas now trades above or not far below book value and BNP’s greater global systemic importance means it has to put aside another 1% in capital.
One analyst says SocGen is “one of the few European banks with growth left”. That is precisely because of its potential in corporate and investment banking and emerging markets, says research from advisers Kepler Cheuvreux.
“Société Générale is still suffering from an image of a riskier bank, due to its investment banking activities,” says another Paris-based analyst. “Its corporate and investment banking used to be a bit of a hedge fund. This has ended. It is making money with its clients now.”
Those who work or have worked at SocGen describe an unusually close-knit culture – a consequence, perhaps, of it having achieved its size more organically than peers, without big mergers. BNP and Paribas only merged in 1999 – a deal that came close to absorbing SocGen.
“You start to exist after 20 years at the company,” says one former insider. Oudéa still looks to promote insiders first.
This might breed a degree of idiosyncrasy in how it manages standard banker-type tensions. It does not use a credit committee for big deals, for example, instead relying on credit guidelines. If there is still doubt between the front office and the risk team, they go to someone higher up – perhaps a deputy CEO – to arbitrate.
It is also a culture that seems to foster unusually long-lived CEOs. Oudéa’s predecessor, Daniel Bouton, became CEO in 1993, taking the chairman’s role in addition in 1997. Most of SocGen’s executive committee members, meanwhile, have been there 20 years or more.
Oudéa joined SocGen 20 years ago with a stint in London, after working as a French civil servant – he advised former president Nicholas Sarkozy while the latter was budget minister (coincidentally, both men have Hungarian family origins). Many of Oudéa’s fellow executives, by contrast, began their careers at SocGen.
Since the crisis, some outsiders have been brought in at the top, including deputy CEO Bernardo Sanchez Incera (the Spanish name belies a thoroughly French education and career). Former BNP Paribas alumnus Michel Péretié had a three-year stint as SocGen’s head of corporate and investment banking, after joining from Bear Stearns in 2008. Importantly, Oudéa put an end to the combination of the chairman and CEO’s role with the appointment of an Italian, former European Central Bank insider Lorenzo Bini Smaghi, to the chair in 2015.
|SocGen’s CEO Frédéric Oudéa is seen as an outstanding manager
Oudéa says the bank can now “better highlight all the changes, the benefits, how we can transform further”. Its image, in other words, should improve.
SocGen’s return on equity has hovered around the high single digits; analysts still predict a roughly 8% return on tangible equity over the next two years. Its shares trade not far from 0.9 times book, according to Berenberg. That is not as high as it wants, but it is comfortably above the majority of its eurozone peers.
“When you look at the European banking sector, Société Générale has done pretty well [in 2016] both in terms of results and share-price performance,” says Oudéa.
SocGen’s CEO is seen as an outstanding manager, especially well-suited to the initial years after the crisis and probably an appropriate replacement for Bouton, who was “less rigorous on the details,” according to a banker who worked closely alongside him. Spring 2008 was perhaps a natural time for the CFO to take the top job – particularly when Jean Pierre Mustier, at the time seen as an alternative candidate, was associated with the Kerviel and sub-prime losses thanks to his position as head of corporate and investment banking.
But the doubters remain. Some wonder if the bank has properly articulated a sufficiently compelling vision for the future: is it enough just to keep its position among the big European banks and be one of the best in such-and-such a product? Oudéa’s interview with Euromoney is full of words like “confirm” and “reinforce”.
Would it be possible, if a grander plan was well-communicated, to convince the market it should reinvest more of its profits and really transform the bank? (Its payout ratio was around 40% between 2013 and 2015.)
In Oudéa’s telling, SocGen has made progress on achieving synergies in its own international businesses and has staged some successful exits, such as the sale of its former asset management joint venture with Crédit Agricole, Amundi, which bumped up its tier-1 ratio by 25 basis points in late 2015. It reported a gain of €725 million in the first half of 2016 from its sale of shares in Visa Europe.
“We have refocused. We have concentrated capital allocation in the core businesses where we think we can compete,” says Oudéa.
Putting aside where we’re operating geographically, my fundamental strategic view is that we should pursue the development of the B2B business - Frédéric Oudéa, Société Générale
Most recently, the bank has been exiting emerging European markets that are very small or where it would be difficult to gain a top-tier market share, agreeing sales in late 2016 of its subsidiaries in Croatia and Georgia. This follows the sale of its Asian private banking business to DBS in 2014.
On the other hand, it could also be a buyer in what Oudéa thinks is much-needed consolidation in emerging European banking.
“We can absolutely look, conversely, at consolidation in countries where we already have leadership,” he comments.
This has been a difficult time for banks, especially in Europe, but Oudéa sees an “inflection point” in late 2016. What he calls the “naive dream of a global world” is fading. Just as important for banks is that key economic determinants may be changing. He marvels how early 2016 saw the extremes of an oil price heading for $25 a barrel and the ECB deposit rate cut to -0.4%: “At the end of 2016, on both items, there was a big change of climate.”
On the regulatory front he hopes 2017 is the year the rules are clarified and banks can get round to actually implementing them: “the beginning of the end of the transition” to a new era. Crucially, too, he thinks the new Basel framework will preserve SocGen’s ability to grow businesses where it has excelled, such as project finance. Global standards for risk weighting are of particular importance for French banks, due to their heavy use of internal ratings-based models.
“We can expand our client base and put more capital at work and leverage our cross-selling capacity,” says Didier Valet, SocGen’s head of corporate and investment banking and, since January, deputy CEO.
That is partly dependent on SocGen’s ability to use its structured finance bankers to alleviate capital deployment by computing an appropriate reduction of risk from security over cashflow or assets like ships, real estate and aircraft. Basel could make that harder, hitting European and French banks in particular.
|Didier Valet, SocGen’s head of corporate and investment banking and deputy CEO
But clamping down on existing methods of structured finance would imperil financing for infrastructure projects.
“I think that’s been acknowledged by the Basel committee,” says Oudéa. “It’s too crucial for world growth going forward.”
In investment banking, SocGen is unlikely to achieve the global scale of a top firm; nevertheless, its franchise still commands respect in France and, increasingly, in other countries, such as Germany. Like other French banks, SocGen has built and wants to further build a global name in derivatives and project finance.
Meanwhile, SocGen beats French peers in digital banking, according to Kepler Cheuvreux. It owns France’s biggest online bank, Boursorama, which aims to more than double its reach to 2 million customers by 2020. The sale of Amundi, not universally acclaimed, is also appropriate given a likely shift to passive funds and exchange-traded funds under the new Mifid [Markets In Financial Instruments Directive] rules.
“By keeping Lyxor as our asset management business, and Lyxor being one of the key players in European ETFs, I think we’ve made a choice which was absolutely appropriate,” notes Oudéa.
To describe Société Générale as a purely French bank would be grossly inaccurate. Certainly Oudéa’s sights are firmly set much further afield. For example, its Czech business is going well; over the past year it has, at long last, stopped losing money in Russia. During the Ukraine crisis, it took a €525 million goodwill write-down on Rosbank, a top-10 Russian bank in which it acquired a majority stake in 2008. One analyst says Rosbank is SocGen’s “wild-card” that could bring the bank gains from thawing relations with the US under Trump, or at least the oil-price recovery.
“International retail and financial services will be in my view the growth engine of Société Générale in terms of revenues and, given the current dynamics we see, it will probably be the most profitable business in the next three years,” says Oudéa.
The bank can boast particularly good loan and net interest-margin growth in Africa, where it owns the dominant banks in Cameroon and Côte d’Ivoire and has what it considers leading banks in Algeria, Guinea, Morocco and Senegal. In the last two years, it has opened in Togo and acquired the Mozambique operations of Mauritius Commercial Bank. It is also developing areas like cash management on the continent.
“If I look 30 years ahead, the biggest opportunity, and potentially the biggest problem, for Europe is Africa,” says Oudéa. “When I say opportunity: it’s the only continent which will grow both from a demographic and economic point of view. At the same time, if it does not grow or there is no stability in terms of migration pressure, it’s perhaps the biggest political challenge for all European countries. Africa is a key market in Société Générale’s strategy, and we will continue to focus on this region.”
Even if the continent lives up to long-term hopes, African banking markets are too small to change SocGen’s results dynamics soon. So what can the bank aspire to in the nearer term?
Its growth in private banking, for example, is more focused on its existing markets, essentially France, Benelux, the UK and Switzerland. A German acquisition seems unlikely. In Euromoney’s private banking survey 2017, it is not in the top 10 in Africa or emerging Europe.
SocGen is a force in European private banking, managing around €120 billion of assets. In France, where it has slashed the net-worth threshold for transfers to its private bank, it ranks third. The acquisition of Kleinwort Benson from the Oddo Group in 2016 roughly doubles its UK private banking operation, bringing it to £14 billion ($17.4 billion) in assets under management and building up SG Hambros, which took over ABN Amro’s London private bank after the financial crisis.
Still, from a group-wide perspective, both private banking and emerging markets seem something of a sideshow. SocGen will probably never have the kind of emerging-market focus of Standard Chartered, say, or even BBVA. That may be for good reason, given its relative paucity of links to Latin America and Asia, not to mention the threat of US protectionism.
When Russia faced the twin crises of the Ukraine and oil prices in 2014, Rosbank accounted for just 1.5% of SocGen’s total assets. Oudéa remains understandably wary of concentrating risks in any one emerging market.
“Development in emerging countries is all about risk diversification in different countries,” says Oudéa. “Emerging markets offer more political uncertainty, as well as higher growth potential.”
The arrest late last year of three SocGen bankers in oil-rich Equatorial Guinea may be another reminder of those kinds of risks. They are accused of breaking local banking secrecy laws by leaking documents to be used in a Paris corruption trial against Teodoro Nguema Obiang Mangue, the son of the country’s president. SocGen is Equatorial Guinea’s biggest retail and corporate bank.
Those are the opportunities. But like most of his peers, Oudéa spends a great deal of his time dealing with the regulatory and technological onslaught in developed markets. He is confident the bank can erase the discount to book value. He points to a sustainable 10% return on equity; he is not yet bold enough to promise anything higher.
Oudéa says the focus of his first four years as CEO, between 2008 and 2012, was to “react, protect and adjust”. The four years since, as the prospect of immediate collapse receded, have been about “preparing for the future: for this new world of regulation [and] starting the long-term transformation.
“There will be a further period until 2020, to further transform, to adapt to the regulation as it has just been decided, to new technology, which is impacting in particular the B2C business, and dealing with the geopolitical and interest-rate environment,” he says.
The reality for all European banks in the post-crisis period is that articulating a scheme for change and carrying out radical plans has been easier when it has meant cutting back rather than expanding. It has not always been easy to convince investors of an ambition for corporate and investment banking, particularly in Europe. Nor has it been an easy time to put forward daring investment plans to stock markets and regulators.
Even if Oudéa’s army had wanted to stage a bigger retreat, selling the bank’s largest foreign retail banking operation – Russia – could have been tough. The availability of a good buyer for its Egyptian operation in 2012 was perhaps something of an aberration, given Qatar National Bank’s unusual financial flexibility and the Qatari state’s desire to combine commercial and geopolitical expansion.
Doing a big acquisition, meanwhile, would have been difficult while the regulatory framework is in such flux. Since the introduction of additional capital requirements for global systemically important banks (G-Sibs), pre-crisis incentives to grow have changed. “It’s a different game,” acknowledges Oudéa.
The possibility of a merger with Italy’s biggest bank, UniCredit, has been one persistent rumour. Speculation on a merger peaked in spring 2007 as the two sides appointed advisers to study synergies. At the time SocGen’s then co-CEO, Philippe Citerne, sat on UniCredit’s board. The rumours then came back with a vengeance in 2011, when SocGen veteran Jean Pierre Mustier joined UniCredit as head of corporate and investment banking.
Although a BNP Paribas takeover of SocGen has sometimes appeared more likely, Mustier’s return to UniCredit as CEO in mid-2016 has revived the conjecture. Oudéa and Mustier are almost equal in age; both were students at France’s elite École Polytechnique in the mid 1980s (although Oudéa, like Bouton, also studied at the elite government college, ENA).
Clearly, Mustier now has other priorities, not least cleaning up his Italian balance sheet. He also envisages increasing risk-weighted assets, so a combined entity would probably still have a higher G-Sib bucket than SocGen and UniCredit do individually today.
On the other hand, UniCredit bought HVB, Germany’s third-biggest private bank, in 2005, so a merger with SocGen has the potential to create a truly pan-eurozone champion; one with top spots in each of the three biggest eurozone markets and a complementary franchise in corporate banking and emerging Europe. It could be a thrilling if unnerving prospect for a pro-European banker.
Oudéa believes that pan-European champions are needed to fend off the advance of the US investment banks and that these champions will arise – eventually.
“You should have more integration, more integrated capital markets in Europe. For example, you should have money from Germany moving more easily to finance projects in France or Italy, than is currently the case. In the next 10 to 15 years I hope to see a change of the landscape, but in Europe things will take time,” he says.
In the immediate future, making European champions a success, also, needs much more than a few non-performing loan sales and a capital raise. If German savings are not flowing to Italian SMEs or motorways in France, for example, it is partly because of structural impediments in the German banking system.
In retail banking, markets retain their national peculiarities, so French, German and Italian mortgages are all different.
“Yes, you can have synergies in certain activities, but at this stage, on the retail side, I don’t think cross-border consolidation would make sense in terms of synergies,” says Oudéa. “In five or 10 years’ time, when digital technology will have further developed, this could be different.”
He points to an agreement with French trade unions last year enabling what he calls “the most significant transformation of the French networks ever seen”, including a 20% branch network reduction. “I do not see, at all, the added value that any external partner could have brought to us to deal with that.
“It’s not at all in my agenda,” says Oudéa of the prospects for a transformational merger with another big European lender. “If I look at the next two to three years, the priority is still fundamentally to organically enhance our businesses and digest all these changes.”
Where Oudéa most clearly articulates a vision of what SocGen can and should be in the future is for corporate and investment banking, primarily in “Europe and its immediate neighbours” (in other words, including Africa). Its growth will reach other geographies only in products like cash management, structured finance, derivatives and capital markets, not retail.
“Putting aside where we’re operating geographically, my fundamental strategic view is that we should pursue the development of the B2B business,” he says. “We are growing and it is the strategy to grow it.”
Following the eurozone crisis, all French banks have had to cut their reliance on short-term market funding, particularly dollars, which has forced them to readjust big chunks of core businesses, like project finance. Now Oudéa thinks it has much further to go in building an originate-to-distribute model that uses less of its own balance sheet. Thanks to the entry of new investors, Valet sees particular growth for European structured finance in commercial real estate and infrastructure, for example.
Brexit does not help and banks still do most financing in Europe. But the portion raised by capital markets has increased since the crisis. SocGen, for example, is one of the strongest banks in European private placements. “We are still just at the beginning of the process,” says Oudéa. “The design of financing the European economy should be more balanced – probably not like the US – but more balanced between capital markets and the banking sector.”
Meanwhile, if SocGen has an advantage over competitors as an investment bank, it could be its long-standing capacity in derivatives and structured finance.
“We are building around these two strong pillars,” says Valet. He gives the examples of, say, a German client needing to hedge the cost of an acquisition in the US before it is closed. He also says there is a link to private banking, including Asian purchases of its structured products: “Derivatives provide the bridge to build investment solutions fitted to retail, wealth management and institutional investor needs.”
Valet points to especially strong progress in Germany and SocGen’s German corporate and investment-banking build-out. He says a breakthrough moment was its role as sole bookrunner on a €1 billion 2015 combined accelerating bookbuild and exchangeable bond offering for the Haniel family’s shares in retail and wholesale distribution group Metro.
German revenues are approaching $1 billion at SocGen, according to Valet. Global banking and investor solutions is only about a third of this, as its other big German earners include ALD Automotive (in leasing and fleet management) and Gefa Bank (in vendor and equipment finance). Valet says these subsidiaries can help it sell products like cash management for the big German truck companies, for example.
The next stage may be Italy, where it has also notched up some deals. Alessandro Gumier moved over from Bank of America Merrill Lynch in January. Gumier will be SocGen’s Italian head of global banking and investor solutions and head of coverage and investment banking.
Such hires will be heartening to those who think European banks should stop ceding market share to the US investment banks in their own backyard.
As Oudéa points out, between 2004 and 2007, bank CEOs made big strategy moves based around spurious assumptions about the rate and evenness of world growth.
“There was a kind of frenzy just to grow and develop, but overall probably on insufficiently robust foundations,” he says.
Any attempt to create a new and bigger European banking champion now – whether involving an acquisition of UniCredit, or perhaps Commerzbank – must be less stretched and with synergies that are easier to realize.
If they are better prepared (whisper it), the next big bank merger in Europe could actually work.
“Beyond 2020… you might perhaps enter more of a consolidation phase in the banking sector in Europe, but you will do that, I think, with a peer regulatory framework,” concludes Oudéa. “Banks that have done their homework, including on the retail side, will probably be more able to manage these transactions than the ones that did it before the crisis.”