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Fitch: Societe Generale Delivers Sound 1Q17, but Dented by Litigation
May 5, 2017 / 3:17 PM / 7 months ago

Fitch: Societe Generale Delivers Sound 1Q17, but Dented by Litigation

(The following statement was released by the rating agency) LONDON, May 05 (Fitch) Fitch Ratings says that Societe Generale's (SG) 1Q17 results benefited from its diversified franchise, as lower loan impairment charges in international retail and corporate banking and a rebound in trading revenue from a weak 1Q16 offset continued revenue pressure in French retail banking. Results were dented by a EUR350 million provision relating to a EUR963 million settlement agreement reached with the Libyan Investment Authority (LIA) to conclude civil litigation in the UK relating to a commercial dispute between the LIA and the bank in relation to investments entered into on behalf of the LIA. Separately, the bank continues to cooperate with US authorities on the LIA matter. SG generated EUR1.3 billion pre-tax profit in 1Q17, 18% higher yoy and adjusted for own credit and debt valuation adjustments, PEL/CEL (home loan purchase schemes) provisions and a EUR218 million Euribor fine refund in 1Q16. Excluding the settlement charge and the seasonal effect of banking levies, the group reported a sound 10.5% adjusted return on equity. Although the total size of the settlement is high, the impact on 1Q17 results is manageable, and it has not eroded capitalisation. Resolving pending litigation issues will be an area of management focus for the remainder of the year. The improvement in the group's underlying performance was led by all operating businesses, with the exception of French retail, which saw continued revenue challenges amid increased investment in digitalisation and branch network optimisation. Pre-tax income in French retail fell by 7% yoy to EUR474 million (excluding PEL/CEL), as low interest rates and still high loan renegotiation volumes depressed net interest income, which was down 7% yoy. In line with its French peers, SG was able to partly offset pressure on net interest income by increasing fees, which rose 5% and accounted for 44% of French retail revenues in the quarter. Gross loans grew marginally yoy, despite strong origination volumes, as early repayments remained material. The bank expects French retail revenue to decline by between 3% and 3.5% (excluding PEL/CEL) in 2017, while operating expenses should rise by a similar percentage. The results in French retail highlight the importance of maintaining sound cost control and concentrating on fee income to mitigate the effect of low interest rates on the domestic business. Pre-tax income in International Retail Banking and Financial Services (IBFS) rose 45% yoy to EUR710 million, reflecting primarily a continued decrease in loan impairment charges, notably in Romania, which benefited from an insurance indemnity, but also in the Czech Republic, which saw loan loss reserve releases. Loan impairment charges for the division stood at 35bp of gross loans, materially lower than the average level of 65bp in 2016. Adequate revenue growth was underpinned by volume growth, notably in most African countries, and international retail was the main contributor to IBFS's pre-tax profit. Retail operations in Russia were breakeven, reflecting the group's focus on larger corporates, modest loan growth and the appreciation of the rouble against the euro. Within IBFS, financial services to corporates saw a strong 21% yoy revenue increase, driven by sound business growth in SG's vehicle fleet, both organic and through the integration of the Parcours Group, as well as loan growth in equipment finance. Business growth resulted in an 11% increase in operating expenses, which was however outweighed by revenue growth and pre-tax profit increased by 29% to EUR233 million. Continued gross inflows into life insurance products, along with rises in premium income underpinned a sound 9% increase in insurance's pre-tax profit to EUR125 million. We expect SG's specialised businesses to continue providing diversification benefits for the rest of the group and strong revenue growth. Global Banking and Investor Solutions' (GBIS) pre-tax income rose by 3% to EUR514 million (30% of the group excluding the corporate centre), predominantly led by recovering sales and trading revenues following industry-wide weakness in 1Q16. Revenues in GBIS rose 5% yoy, buoyed by a 13% rise in fixed income trading revenues (31% of GBIS revenues in 1Q17), underpinned by a strong quarter for rates and credit. Client appetite for equity derivatives, notably in Asia, helped equity trading revenues increase by 4% yoy. Prime brokerage remained a relatively minor revenue contributor, but the 9% yoy revenue growth partly reflected market share gains, according to the bank. Financing and advisory revenues fell 3% yoy, while asset and wealth management revenues rose on the back of net new asset inflows. GBIS' performance also benefitted from a sharp reduction in loan impairment charges in financing and advisory. SG's fully-loaded Basel III CET1 ratio rose 10bp qoq to 11.6% at end-1Q17, primarily reflecting retained earnings. The group's risk-weighted assets fell marginally qoq, reflecting the technical impact of the removal of an add-on on the domestic corporate book, while leverage exposure grew in line with seasonally higher balance sheet utilisation compared to year-end. This led the group's fully-loaded Tier 1 leverage ratio to fall by around 15bp qoq to 4.1% at end-1Q17. We expect SG to continue optimising its capital structure as it progresses towards meeting 2021 loss-absorbing capacity requirements. Contact: Christian Scarafia Senior Director +44 20 3530 1012 Fitch Ratings Limited 30 North Colonnade London E14 5GN Luis Garrido Associate Director +44 20 3530 1631 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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