TEXT-Fitch: Societe Generale ratings unaffected by operating profit
Feb 14 - Fitch Ratings says that Societe Generale's (SG) Q412 earnings release did not provide information that would prompt any immediate rating action. Operating profit for the quarter (EUR0.7bn as calculated by Fitch) was down by over one-third on Q312 (EUR1.1bn), but was higher than in Q411 (a loss of EUR0.2bn). This partly highlights the seasonality of quarterly earnings. Q4 is usually the lowest of the year, especially for the Corporate and Investment Banking (CIB) business. Fitch derives operating profit, its measure of underlying earnings, after adjusting for items such as revaluation of own debt (a loss of EUR686m in Q412 as spreads came in), impairment of goodwill (EUR392m) mainly relating to the brokerage subsidiary Newedge and non-recurring litigation and regulatory provisions (EUR300m). Operating profit from CIB declined in the quarter (EUR442m in Q412 excluding legacy assets vs. EUR554m in Q312). Revenue from capital markets activities (which represents two-thirds of CIB revenue) decreased, particularly due to equities where revenue was over 30% lower, a weaker end to the year than most European peers despite SG's strong franchise in equity derivatives. However, the bank is focusing more selectively on areas of strength in fixed income, where revenue was more stable. Financing and advisory activities generated slightly lower revenue quarter-on-quarter and continue to suffer from reduced volumes as part of the bank's deleveraging plan and losses on the sale of loans. Operating expenses appear to be under control and continued to decline in the quarter, translating into a cost/income ratio considered satisfactory by Fitch (63% in Q412 excluding legacy assets). Moreover, the agency views the impact of legacy assets as manageable (EUR135m of operating losses, similar to previous quarters). Operating profit from French retail banking (EUR386m) was negatively affected by an increase in loan impairment charges, especially on SMEs. However, Fitch believes these should remain manageable (65bp of average customer loans in Q412 on an annualised basis as calculated by the bank). The bank's specialised financial services & insurance business generated relatively stable operating profit (EUR231m in Q412). The contribution from international retail banking was poor (EUR63m in Q412) and continues to suffer from high loan impairment charges, especially in Romania. Loan impairment charges (183bp of average customer loans in Q412) absorb the bulk of pre-impairment operating profit. The bank's Viability Rating is negatively affected by exposure through commercial bank subsidiaries in CEE/Russia. Nevertheless, the bank sold its Greek bank subsidiary in November 2012, which will no longer weigh on impairment charges. The pre-tax loss on the sale was booked in Q312 (EUR375m). SG's Basel 2.5 core Tier 1 regulatory capital ratio rose to 10.7% at end-2012 (9.0% at end-2011), which is viewed positively by the agency. This was a result of deleveraging, largely by reducing legacy assets and selling loans, and retention of earnings. SG's estimated fully loaded Basel III ratio was 8.3% at end-2012 based on the bank's calculation of a negative impact of 240bp (including 30bp for the deduction of insurance subsidiaries). Fitch estimates the bank is on track to meet its target of a fully loaded Basel III ratio of between 9% and 9.5% by end-2013. Retained earnings led to an increase of 67bp in the core Tier 1 regulatory capital ratio in 2012 net of dividend payments despite the current pressure on profitability. The bank will resume paying dividends on 2012 earnings. No dividends were paid on 2011 earnings. SG's liquidity buffer amounted to EUR133bn at end-2012 (EUR114bn at end-June 2012) and the proportion of deposits with central banks increased to 49% (40% at end-June 2012). The total liquidity buffer covers the bank's one year short-term wholesale funding (EUR131bn). However, Fitch understands that deposits with central banks and investments in highly-rated government bonds do not fully cover the bank's one-year short-term wholesale funding. Additional information is available at www.fitchratings.com.
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