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Fitch: Societe Generale's 1Q14 Results Resilient on Lower Loan Impairment Charges
May 9, 2014 / 4:01 PM / 4 years ago

Fitch: Societe Generale's 1Q14 Results Resilient on Lower Loan Impairment Charges

(The following statement was released by the rating agency) PARIS, May 09 (Fitch) Fitch Ratings says that Societe Generale's (SG; A/Negative/a-) 1Q14 results were resilient and benefited from a decline in loan impairment charges (LICs). SG's net income was hit by the goodwill impairment of its Russian subsidiary, signalling that the difficult operating and political environment in the region will likely weigh on operating profitability at least in the short-term. For 1Q14, SG reported EUR1.3bn pre-tax profit adjusted for fair value of own debt losses (EUR158m), debit and credit valuation adjustments (DVA/CVA; EUR57m gain) and goodwill impairment (EUR525m). This was up 2% yoy and 27% qoq, after adjusting for the EUR446m settlement charge from the European Commission over Euribor litigation in 4Q13. SG's 1Q14 adjusted pre-tax return on total equity was 12%. Revenue from all the bank's business segments remained under pressure due to low customer demand in France, weak operating environments in some of its eastern European markets and less favourable capital market conditions. Nonetheless, this was partly offset by satisfactory cost reduction, and the bank's adjusted pre-tax profit was also helped by a sharp decline in LICs, mainly in its French retail banking and international retail banking and financial services (IRBFS) businesses. SG's French retail banking business is the main source of earnings generation, contributing one third of 1Q14 pre-tax profit. The bank's franchise continued to generate satisfactory profitability in 1Q14, with a 20% pre-tax return on allocated equity. However, Fitch believes that earnings will likely continue to suffer from persistent weak domestic loan demand and low interest rates, as is the case with domestic French peers. SG's average outstanding customer loan amount fell 2.5% yoy in 1Q14. Revenue was stable yoy but down 4% qoq, as pressure on servicing fees offset a rise in financial fees (8.1% yoy). Profitability should be helped by further cost efficiencies and reduced LICs in the French retail banking business. LICs declined sharply to 51bp of gross loans in 1Q14 on an annualised basis, from 74bp in 4Q13, mainly because of lower LICs in the corporate loan portfolio. Nonetheless, LICs could rise again if the domestic economy does not improve. SG's global banking business, which includes its global markets and financing and advisory businesses, reported a 19% yoy decline in operating income although 1Q13 had been a particularly strong quarter for the division. SG generated a sound pre-tax return on allocated equity of 20% in 1Q14 (allocating 10% Basel III CET1 capital), in what remains seasonally a strong quarter. As SG's capital market business is roughly evenly split between fixed income and equities, it is less exposed to revenue volatility than if it had a strong bias towards one of the two segments, particularly in light of expected weaker fixed income performance for most of its peers. Results in the global markets division was affected by more difficult market conditions; 1Q14 fixed income earnings dropped 32% yoy (excluding DVA/CVA), which was more pronounced than at most of its peers. Revenue in its equities business, which accounted for about 55% of global markets revenue, remained more resilient and declined only 2% yoy (excluding DVA/CVA). SG's financing and advisory business generated slightly lower revenue (-4% yoy), in line with lower lending and issuance volumes in the quarter. SG maintains a solid franchise in euro corporate bonds that should allow the bank to benefit from any improvement in client demand. The bank's operating profit in IRBFS declined 7% yoy, due to currency depreciation against the euro at some overseas subsidiaries (operating profit rose 6% at constant exchange rate). Nonetheless, the international retail banking part of the business is suffering from a difficult operating environment in Russia and in Romania: LICs were around 100% of pre-impairment operating profit in these two markets. In addition, Fitch believes that performance in Russia may worsen if the operating environment in the country becomes more volatile. SG's operations in the Czech Republic continued to report satisfactory performance and were the largest contributor to operating profit in 1Q14. The financial services and insurance part of IRBFS enjoyed increased business volumes and continued to generate satisfactory returns on allocated equity (21% in 1Q14). The two businesses constitute solid pillars of the IRBFS division's profitability (around 60% of operating profit). Fitch views SG's capital as sound. The bank's fully applied Basel III common equity Tier 1 (CET1) ratio of 10.1% is within the peer group average and improved 10bp in 1Q14. 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 3.6% on a fully applied basis at end-1Q14, above the expected 3% regulatory threshold, which compares adequately with European peers. Contact: Christian Scarafia Senior Director +44 20 3530 1399 Fitch Ratings Limited 30 North Colonnade London E14 5GN Francois-Xavier Marchand Associate Director +33 1 44 29 91 46 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@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 WEBSITE '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.

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