He expects that heightened public pressure on the financial sector to act in society’s interest after the pandemic – coupled with the need to finance domestic economic reconstruction – will mean that there will be more limitations on where banks can deploy their capital.
And he believes that these limitations will last much longer than the current urgent need for loans to bolster business liquidity.
Frédéric Oudéa, Societe Generale
“The pressure we will have in the coming years to give a priority to financing of national and domestic economies where we operate will be very strong,” he says. "For us it means, certainly, more constraints in terms of capital allocation, because the need to support the economy will be on top of the agenda.
“In each country the attention of each government for the banking sector to play its role, not just to deal with the immediate urgency but beyond to potentially be able to finance the new investments, which might be desired to stimulate the economy, will be very strong.
"The capacity to enter new geographies will be more limited for some time. We will have to dedicate a lot of capital for existing franchises.”
Oudéa believes these constraints could be in place even within the eurozone. Before the Covid-19 outbreak, hopes had been rising for a new wave of cross-border takeovers in European banking. Indeed, SocGen is often cited as a merger candidate within the bloc, despite the fact that its eurozone retail presence outside France is negligible.
Oudéa told Euromoney last year that progress on a common eurozone deposit insurance scheme could pave the way for such mergers as early as late 2020; and that Europe had the opportunity to forge pan-continental universal banks to rival the big US franchises.
Now he says that the longer-term consequences of the coronavirus crisis for banks will partly mirror what is happening in other parts of the economy. Banks, like firms in other sectors, have been forced to adapt to remote working, something he says is going well and “opens a new way of thinking about the way we work and how we organize real estate and offices.”
Similarly, as governments and the public see the crisis as another reason to bring the production of strategically important goods back home, this will also have its equivalent in the banking sector.
“For all companies there’s the issue of how supply chains will change; whether you will have a kind of renationalization or re-regionalization of certain key production processes to secure more resilience,” he says.
Demands on banks’ capital from domestic stakeholders will be especially acute if there’s more dislocation in the asset management industry, as the previously booming non-bank sector has suffered crippling outflows in recent weeks.
“What we are all facing is: support for short-term treasury needs, more drawdowns of existing loans and more re-intermediation, to a certain extent. We will see how long it lasts… but, at least for some time, there’s a re-intermediation of the financing of the economy, which might be a weight on capital usage.
"One of the key questions will be the strategy to rebound and the capital that will be requested. Banks won’t be the only ones to provide this capital, but we will be one of the key players.”
As to whether the crisis will bring any fundamental changes to the banking industry, Oudéa thinks that it will only deepen and accelerate recent shifts towards prioritizing social and environmental goals, digital transformation and responding to public pressure to focus more on clients and the real economy.
One of the key questions will be the strategy to rebound and the capital that will be requested. Banks won’t be the only ones to provide this capital, but we will be one of the key players- Frédéric Oudéa, Societe Generale
“The overall direction won’t change, but the relative emphasis and the timing will change, and the urgency, for certain elements, is increasing,” he says. “Some of these priorities might be even more important for our different stakeholders and our own purpose.”
Despite this recognition of a wider set of stakeholders, Oudéa says the brake on paying shareholder dividends cannot become permanent (the European Central Bank has advised lenders to freeze dividend payouts and share buybacks until October).
His view is that, while dividends amount to a relatively minor portion of the total capital in the banking sector, private investors need to be rewarded, especially if banks are going to ask for more equity without resorting to public money.
“In the short term it [suspending dividends] helps give comfort to the capital trajectory,” says Oudéa. “In the longer term, the key question around dividends is how we are considered by investors. We are dealing with the most urgent impact. We should be able to do that well, as long as everyone works together.
“Beyond that, the banking sector might need additional capital. If investors are fundamentally not confident about banks, it might be a limitation for us, not just in terms of dealing with the immediate impact – the treasury needs of corporates – but also to help the economies to rebound.”