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When Société Générale’s chief executive, Frédéric Oudea, spoke to Euromoney in early 2017, he rejoiced at how the European economy and regulation had turned “an inflection point”.
Almost a year later, speaking again to Euromoney, Oudéa says the environment has since “moved in an even better direction” – with upwards revisions to eurozone economic growth, the first signs of the ECB reducing bond purchases, an agreement on Basel III and the prospect of a more complete banking union.
“I have not changed my mind,” he says. “We are progressing from 10 years of remediation, to a better environment and more visibility. Beyond the geopolitical risks, banks will have greater capacity to focus on the transformation of their economies and societies.”
The market is clearly not fully convinced that SocGen can stage as much of an improvement to returns as these signs might suggest. By mid December, its share price was down about 6% year on year, compared with a rise of about 10% in the European banking sector.
Although investors in French banks welcomed a more favourable attitude to asset-backed financing in December’s Basel agreement, some analysts thought there would be less benefit to SocGen’s stock, due to its relatively low group capital buffer.
After better-than-expected results during the first half of the year, disappointing third-quarter numbers – particularly in wholesale banking – eroded most of the gain the share price achieved during the spring.
“Falling client demand in the equities and prime services division in the third quarter was more an issue for SocGen due to our strengths in those businesses, and because we had a particularly good third quarter in 2016,” says Didier Valet, head of global banking and investor solutions.
Valet says the bank’s 28% drop in FICC revenues versus the third quarter of 2016 was broadly in line with peers.
In the spring, the bank had the fillip of the presidential election victory of a pro-European former Rothschild banker, Emmanuel Macron. Nevertheless, the populist threat still lurks, even in France.
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| Frédéric Oudea |
Oudéa says SocGen was merely following Banque de France rules when it closed a National Front party account, but the decision sparked a torrent of protest in November aimed directly at SocGen (and HSBC) – not least from presidential candidate Marine Le Pen, who gained the second largest share of votes in the first round of voting in April.
As the eurozone economy has recovered, provisions persistently beat market consensus expectations during the first nine months of 2017, according to Berenberg.
French retail banking profits beat consensus expectations in the first half, but then also disappointed in the third quarter, as households took advantage of low rates to renegotiate and pre-pay mortgage borrowing. The group took a €400 million charge in the fourth quarter as it announced another 900 job cuts at the French retail network.
The third-quarter results prompted KBW, for example, to downgrade its recommendation on SG’s shares, citing dependency on market volatility through its relatively large markets and equity derivatives businesses. Meanwhile, litigation costs could also make 2018 a difficult year. Investors are awaiting resolutions of actions in the US over allegations of Libor-rigging and sanctions-busting.
For Oudéa, while uncertainty over litigation is a barrier to a re-rating of the stock, a positive boost should come from the steady implementation of a three-year plan unveiled in November.
The plan aims to lift return on equity from 8% to 11.5% and hinges on an ambition for much faster growth in revenue (3% annually) than costs (1.2%). The shares hardly moved on the announcement, with SocGen’s reliance on markets again a question mark, according to Credit Suisse.
“We can still do more to leverage our global leadership in equity derivatives and structured finance,” Valet insists. The bank, outside France, continues to expand its number of corporate and financial institution clients in Germany, and is winning important mandates in Italy. In January, it appointed a new Italy head – Alessandro Gumier, formerly at Bank of America. New real estate businesses in the US and Japan are examples further afield.
Still, Valet’s division is the only one permitted no increase in cost at all, in the plan. Automising and near-shoring will help, he says.
After a €1.3 billion listing of 20% in June, car leasing and fleet management arm ALD Automotive should see revenues rise more rapidly than wholesale, benefiting from its international and European business.
SocGen’s international retail bank network is another growth engine, especially in Russia and Africa. Its transformed Russian bank is slated to have the fastest revenue growth of all SocGen’s big businesses for the next three years, rising more than 11% annually.
