Equities dip highlights concern at SocGen

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By:
Dominic O’Neill
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Core division sees sharp fall as peers rise; follows exit of key investment bankers.

A substantial drop in Société Générale’s equities revenue, just as peers posted a big rise, has underlined concerns at its investment bank, after a string of departures.

SocGen said settlements to pending US litigation are getting closer, and might come within days, which analysts say has supported the share price leading up to its first-quarter results on Friday.

However, the results showed group-wide revenues were lower and costs higher than the market expected, with underlying net income falling 13.5% despite cost-of-risk improvements.

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Philippe Heim

The nastiest surprise came in global banking and investor solutions (GBIS), which had “a weak start to the year”, admits deputy CEO Philippe Heim, speaking to Euromoney.

Income in fixed income, currencies and commodities (FICC) dropped by almost a third, roughly in line with rivals. However, in equities and prime services – arguably the strongest part of the investment bank – revenues dropped 11% year-on-year.

Analysts had expected equities revenues to be roughly in line with last year, according to Berenberg. Other European banks with large investment banking businesses, including BNP Paribas, UBS and Barclays, have posted double-digit rises in equities.

The news comes at a difficult time for the French bank, as it tries to convince investors it can dramatically boost profit without cutting costs as part of a new three-year plan.

Didier Valet, former head of GBIS and another deputy CEO, resigned in March. The bank said on the eve of the first-quarter results announcement that Valet’s successor is Séverin Cabannes, former head of the group risk function.

Only a week before, however, it announced the exit of Richard Quessette, head of equities and equity derivatives, leaving investors hanging until announcing a replacement on Wednesday – Alexandre Fleury, in the equivalent position at Bank of America Merrill Lynch until March.

One analyst also notes Valet’s former number two, Christophe Mianné, left the bank in early 2017. He wonders whether there is some kind of meltdown at the jewel of SocGen’s investment bank, saying: “There seems to be a problem with the core business of equities derivatives.”

Heim dismisses this. He says a greater focus on Europe and on structured products instead adversely affected the firm, at a time when the US market was performing much better, thanks to volatility in the tech sector.

“We had the same performance in equity flow in the US as our peers,” he says. “It’s difficult to make year-on-year comparisons on a quarterly basis. What’s important is that we’ve gained market share over the past two years across FICC, commodities and equities.”

SocGen’s share of global equities revenues has risen from 5.5% in 2015 to 6.2% in 2017, according to Heim, citing International Swaps and Derivatives Association data – he says the latest data is not available until June.

“The fundamentals of the [GBIS] business are strong,” he says. “We have good commercial activity. Despite the first-quarter performance, we are one of the most profitable corporate and investment banks in Europe; the return on equity is over 10%.”

Unpleasant surprise

Guidance on costs in the French retail division – now expected to increase by up to 3% in 2018 – was another unpleasant surprise, according to analysts at UBS.

Heim says the 2020 strategic plan is nevertheless on track, across the group. “The trajectory is on line with our long-term targets,” he says. He also notes strong growth in revenues in international retail, which includes emerging Europe and Africa.

SocGen is “getting closer” to a long-awaited resolution of litigation over Libor-rigging and a dispute with the Libyan Investment Authority, with settlements on both now expected in “days or weeks”, according to Heim. Settlement over US allegations on sanctions busting, which could be bigger, are still “weeks or months” away.

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Didier Valet

The bank’s albeit vague communication on Valet in March suggested his exit might have been a kind of sacrificial offering to facilitate the legal settlements. 

Nevertheless, his departure brought questions not just over the investment bank’s leadership but also the group’s succession planning, as Valet was seen as a likely candidate to take over from long-standing CEO Frédéric Oudéa, after Valet was named deputy CEO in early 2017.

At the same time as announcing Valet’s replacement on Thursday, the bank elevated two other executives, bringing the number of deputy CEOs to four.

Diony Lebot, previously chief risk officer, was named deputy chief executive in charge of control functions (risk, finance, and compliance). Philippe Aymerich, previously head of its French retail bank Crédit du Nord, was named deputy chief executive in charge of its wider French retail division.

Meanwhile, the board will propose to shareholders that Oudéa be appointed for another four-year term, starting in May 2019.

As part of the changes, Heim switched from chief financial officer to head of the international retail, financial services and insurance.

Another deputy chief executive, Bernardo Sanchez Incera, has left the group. Previously head of both French and international retail, Sanchez Incera was one of the bank’s few foreign-born executives.