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

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:; Elaine Bailey, London, Tel: +44 203 530 1153, Email: Additional information is available on 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below