SocGen investment bank cuts signal more pain ahead

Tue Jan 10, 2012 12:06pm EST

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By Lionel Laurent and Christian Plumb

PARIS, Jan 10 (Reuters) - Societe Generale's freshly overhauled management team is promising more pain for its investment bank unit this year, sounding a deeply pessimistic note likely to be echoed by rivals in France and elsewhere in Europe.

The news that France's second-biggest lender is eyeing a "significant" fall in investment banking revenue for 2012 and has decided to exit or deeply cut several businesses is the latest dollop of pain for investment banks worldwide after businesses such as debt and equity capital markets were hammered last year.

For SocGen's domestic rivals BNP Paribas and Credit Agricole, SocGen's plan to drastically scale back in areas like property and shipping finance and physical energy trading, could offer a roadmap for further retreats on what used to be key business lines.

The French banks' erstwhile empire-building designs in particular have been throttled in recent months by an evaporation in dollar funding as U.S. investors spooked by the euro zone crisis have dashed for the exits.

But the cutbacks at SocGen, which recently brought in a new chief financial officer formerly at rival Credit Agricole and replaced its corporate and investment banking chief, also reflect a grisly environment for investment banks worldwide as once reliable businesses such as stock issuance have dried up.

"Today, they're preparing for an environment in which funding is harder and harder to come by, and it's as a direct result of that that they're restructuring," said Francois Chaulet, a fund manager at Montsegur Finance in Paris, which owns shares in both SocGen and BNP Paribas.

"At the same time, you have markets and an economy which are depressed, and thus there's not very much top-line growth potential for the investment banks."

MILD BY COMPARISON

Even the European Central Bank's offer of three-year ultra-cheap loans, which French banks have rushed to take advantage of, seems to have done little to ease the gloom.

"SocGen and its peers are all pulling back to focus on their home markets ... (But) you would have thought that with the ECB's offer of three-year funding at 1 percent, the outlook for SocGen's cost of funding would not have deteriorated that much," said Andrew Lim, analyst at London-based brokerage Execution Noble.

In large part, SocGen's moves, which echo belt-tightening at investment banks such as Switzerland's UBS and Japan's Nomura, reflect declines in once reliable businesses.

Debt capital markets activity sank 5 percent in 2011, as bond issuance fell, while equity capital markets activity, slammed by the sovereign debt crisis, plunged 30 percent, according to a recent Mediobanca analyst report.

In cutbacks that will make recent lay-offs at SocGen and its domestic rivals look modest, Royal Bank of Scotland is likely to cut between 3,000 and 4,000 investment jobs as part of an overhaul to be unveiled this week.

After dealmaking fell 31 percent in the fourth quarter, according to data from Thomson Reuters, and other areas such as fixed income, currency and commodities trading suffered through their worst period since the 2008 financial crisis, SocGen and other banks have little reason for optimism.

"Therefore it is tough not to be cautious into 2012, barring major policy responses," analysts at Morgan Stanley said in a research note predicting a 5 to 15 percent drop in investment banking revenue for the year.

Adding insult to injury for the French banks is a host of other factors, ranging from French President Nicolas Sarkozy's determination to levy a tax on financial transactions to growing speculation that Greece's private sector creditors will have to accept substantially larger haircuts than had been suspected.

French brokerage Cheuvreux cited both those factors, along with expectations for poor fourth-quarter earnings, "weak capital markets, slower volumes and continued margin pressure" when it downgraded both BNP Paribas and smaller rival Natixis on Tuesday.

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