RPT-Fitch: SG's 4Q13 results resilient; balance sheet continues to strengthen

Thu Feb 13, 2014 7:34am EST

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Feb 13 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings says that Societe Generale's (SG; A/Stable/a-) 4Q13 results demonstrated the bank's ability to strengthen its balance sheet as capital and liquidity ratios improved and earnings remained resilient in a difficult operating environment.

The bank's adjusted pre-tax profit for the quarter (EUR0.6bn) was down by one-third qoq, due to a EUR446m charge for the settlement with the European Commission regarding Euribor litigation, but showed an increase yoy. Adjusted pre-tax profit excludes the fair value of own debt changes (EUR379m loss), credit value adjustments/debt value adjustments (EUR75m gain) and non-recurring realised capital gains (EUR166m). SG generated EUR4.2bn adjusted pre-tax profit for FY13, which represents a 9% adjusted pre-tax return on total equity. The bank's performance has improved thanks to cost reduction and de-risking measures.

SG's French retail banking business generated EUR440m in pre-tax profit in 4Q13, over half of the business divisions' pre-tax profit excluding the corporate centre and the legacy assets portfolio. Fitch does not expect the performance of SG's French retail banking business (the main contributor to the bank's earnings) to materially improve until interest rates rise from their currently low levels, the economy starts to grow and loan volumes increase. Loan impairment charges increased in 4Q13 (to 69bp of loans on an annualised basis vs. 57bp in 3Q13, 65bp in 4Q12), but we expect any possible deterioration in asset quality should remain manageable for the bank given its prudent underwriting standards.

SG's global markets business suffered from the cost of settling the Euribor investigation. Excluding this one-off charge, the global markets division generated EUR412m adjusted 4Q13 pre-tax profit, up 16% yoy driven by higher revenue from equity sales and trading. This offset a drop in fixed income sales and trading business (revenue down 24% qoq and 39% yoy). The bank confirmed that it is gradually expanding its fixed income franchise by geography and product, but growth should remain limited. The performance of SG's global markets business in FY13 benefited from the strong results in equity derivatives and solid performance in cash equities. In addition, revenue from SG's financing and advisory business improved, increasing 10% yoy and 8% qoq as a result of higher client activity.

Fitch does not expect any material losses from SG's EUR5.1bn legacy asset portfolio in the coming quarters. This portfolio generated a EUR58m operating loss in 4Q13, which is lower than in the past given the reduction in the portfolio. The non-investment grade portion of the portfolio is now small, at EUR0.7bn.

We do not think SG's investor solutions business will become a major contributor to the bank's earnings in the medium term. The contribution of this business to the bank's pre-tax profit was small (EUR15m), but it is being merged with the global banking business, which should generate more cross-selling opportunities and better cost efficiency.

Fitch considers that the bank's international retail banking and financial services (IRBFS) business generated a low pre-tax return on allocated equity (12% in 4Q13) given the related risks. Moreover, we think generating higher risk-adjusted profitability will take time and require a better operating environment in some countries where SG has a significant presence, notably Romania (EUR88m net loss in 4Q13). SG's other two large IRB markets are the Czech Republic, which continued to report satisfactory performance and drives IRBFS's operating profit, and Russia, which has a more modest but improving performance. The business confirmed the improvements in cost cutting, with a cost-income ratio of 54% for the business in 4Q13 (the best of the bank's businesses). However, loan impairment charges remain very high and rose in 4Q13 (to 204bp of loans on an annualised basis).

Fitch views SG's 10% Basel III fully applied common equity Tier 1 ratio as solid. The CET1 ratio is well within the peer group and improved because of a continued reduction in risk-weighted assets as part of SG's deleveraging plan and earnings retention. The bank's CRD IV leverage ratio (based on total CRD IV Tier 1 capital, including additional Tier 1 instruments subject to phase-out) reached 3.5% on a fully applied basis at end-September 2013, which was above the expected 3% regulatory threshold.

SG's liquidity has also improved due to deleveraging and increased deposits. Its Basel III liquidity coverage ratio remained above 100% at end-2013. Cash and central bank deposits and high quality liquid asset securities covered 138% of the bank's short-term wholesale funding maturing within one year (cash and central bank alone represented 60%). Moreover, the bank has completely repaid the LTRO.

Fitch believes that SG's activities expose it to regulatory and legal risks, but we expect that any further conduct costs should remain manageable for SG. However, a larger than expected loss, limiting SG's ability to maintain adequate capitalisation, could put the bank's Viability Rating under pressure. SG's litigation reserves amounted to EUR700m at year-end.

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