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Fitch: SG's Strong 3Q16 in Investment Bank Offsets Pressure on French Retail
November 7, 2016 / 5:16 PM / in a year

Fitch: SG's Strong 3Q16 in Investment Bank Offsets Pressure on French Retail

(The following statement was released by the rating agency) LONDON, November 07 (Fitch) Capitalising on fee generation opportunities in Societe Generale's (SG) French retail market will be key to offsetting sharp pressure on profitability in this division, says Fitch Ratings. We expect performance in the French retail segment to remain subdued as efforts to streamline processes, improve efficiency and develop commission income will initially weigh on operating costs at a time when net interest income will likely continue to fall. For 3Q16, pressure on domestic retail was offset by a strong quarter in investment banking. SG's overall sound 9.7% return on equity (excluding own debt adjustments) was underpinned by a marked yoy improvement in sales and trading revenue in the investment bank, particularly in rates and credit, where most global trading and universal banks (GTUBs) also posted good results. Loan impairment charges at group level continued to fall as profitability in the bank's international operations continued to improve, notably in Russia, which the bank expects could also break even in 4Q16. Reported pre-tax profit increased 26% yoy to EUR772m in 3Q16, principally helped by a 27% fall in loan impairment charges to EUR417m, as underlying revenue growth (excluding corporate centre, debt valuation adjustments and provisions for home loan purchase savings schemes) was a muted 1% yoy to EUR6.3bn. Operating expenses remained contained (up 2% at constant scope and exchange rates) and in line with the group's stated target of limiting cost increases, excluding the impact of the Euribor fine refund and bank levies, to 1% yoy for 2016 (0.5% for 9M16). French retail banking generated EUR539m operating profit excluding provisions for home loan purchase saving schemes (PEL/CEL), 17% lower yoy, reflecting the challenges posed by continued low interest rates, and despite a 13% yoy decrease in the cost of risk. Excluding PEL/CEL, revenues fell 6% yoy to EUR2.1bn, largely reflecting pressure on asset and deposit margins on higher balances, but also higher revenue in 3Q15, when the bank benefited from early redemption fees. While interest margins on business customers held up well, individual customers saw a 6% yoy decrease in interest margins. To offset this trend, SG intends to focus increasingly on developing fees and commissions, which were 3% lower yoy. Significant volumes of housing loan renegotiations and early repayments last year boosted 2015 revenues through early repayment penalties and renegotiation fees. Together with lower locked-in loan rates for 2016, these effects contribute to sharp reductions in net interest income. Operating expenses in domestic retail banking increased 2% yoy, reflecting ongoing investments in digitalisation, branch closures and the development of SG's online retail platform, Boursorama. A continued reduction in loan impairment charges in the international retail segment, particularly in Eastern Europe and Russia, contributed to improved results in International Retail Banking and Financial Services (IBFS), as operating income rose 17% yoy to EUR677m in 3Q16, the largest divisional contribution to the group. IBFS includes SG's international retail and insurance operations, as well as financial services to corporates. Revenue growth remained overall subdued and negatively affected by foreign exchange fluctuations, but was strongest in insurance operations. Russian retail operations generated positive pre-tax profit in the quarter, having also completed the de-risking of the USD mortgage portfolio, which is now substantially covered by provisions. The quarter also benefited from strong fleet growth in financial services to corporates, which underpinned a 15% yoy increase in operating income to EUR212m. The largest revenue and pre-tax profit yoy improvement came from Global Markets and Investor Services, which includes sales, trading, securities and prime services. The segment accounted for 53% of the Global Banking and Investor Solutions (GBIS) division's RWAs. A 42% yoy improvement in fixed income, currencies and commodity trading revenues boosted GBIS's operating income, which rose almost 50% yoy to EUR590m, equal to about a third of the group's operating income excluding the corporate centre. Equity sales and trading revenues also rose 17% yoy, a strong performance compared with GTUB peers, reflecting SG's smaller structural exposure to cash equity flow business and its strong equity derivative franchise. The bank continues to develop its prime brokerage franchise, but it remains a small contributor to GBIS profits, generating about 6% of divisional revenues in 3Q16. Financing and advisory revenues were 1% higher yoy, partly reflecting continued activity in acquisition and leveraged finance. SG disclosed its capital requirements under the 2016 Supervisory Review and Evaluation Process (SREP) following the ECB's pre-notification, which is subject to confirmation. The Pillar 2 element has now been split into a binding requirement (P2R) and an additional undisclosed CET1 guidance (P2G). SG's P2R component, in terms of CET1, has been set at 1.5% of risk-weighted assets (RWAs), which together with the phased-in 0.5% G-SIB, 1.25% capital conservation buffers and the 4.5% Pillar 1 requirement results in a 2017 CET1 requirement of 7.75% on a phased-in basis. Under the ECB's new approach, the regulator has also set a 9.25% Tier 1 capital and an 11.25% total capital requirement for 2017, subject to final confirmation. Compared with the 2015 SREP exercise, the binding CET1 requirement which is the relevant trigger for the calculation of maximum distributable amounts (MDA) has now been lowered to 7.75% for 2017 from 9.75% for 2016, resulting in an increase in the buffer over MDA triggers of around EUR7bn to EUR14bn. This should provide further support for the AT1 market, which will help SG as it plans to replace around EUR3bn in legacy instruments with Basel III-compliant AT1 securities. Once the G-SIB and capital conservation buffers are fully phased in, and assuming no changes in SG's P2R or 1% G-SIB buffer, the bank will be subject to a 9.5% CET1 requirement from 1 January 2019, 200bp below the lower bound of SG's medium-term 11.5% target. SG continued to make progress towards its capital targets. Its fully-loaded Basel III CET1 ratio rose 30bp qoq to 11.4%, close to the lower band of its 11.5%-12% medium-term target range. The increase in capital ratios was predominantly due to earnings generation net of dividend accruals rather than a reduction in RWAs, which remained broadly flat qoq. The group's Tier 1 leverage ratio also improved 25bp to 4.1% at end-3Q16, reflecting the seasonally large leverage exposure in 2Q16 when the group bolstered liquidity buffers in its US operations. Contact: Christian Scarafia Senior Director +44 20 3530 1012 Fitch Ratings Limited 30 North Colonnade London E14 5GN Luis Garrido Analyst +44 20 3530 1631 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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