SG's investment bank seeks margin improvements

LONDON, Nov 28 (IFR) - Societe Generale wants to increase its investment banking revenues by an average 2.5% annually over the next three years but keep its costs flat, which, if successful, will see the division’s return on equity rise by 3.4 percentage points to 14%.

Chief executive Frederic Oudea outlined the new goals as part of an investor day, setting out a wider strategy for the French bank as the sector confronts the challenges of adapting businesses to meet wide-scale digital changes.

“After 10 years of remediation our industry is faced with 10 years of transformation because of this industrial revolution,” he said. “New technology will provide a better service for customers at lower costs.” He added that he himself was learning to code “to see how it all works”.

Most of the group’s changes will be made in its retail division, where Oudea said 300 of its 2,000 branches will be closed involving 900 additional job losses. He envisages slower annual revenue growth of only 1% in this area over the next three years.

Within investment banking, SG wants to build on its leading positions in equity derivatives and structured financing and increase prime brokerage revenues too, rather than expand into entirely new areas. Oudea said the investment banking market might see a further shakeout too.

“Players will continue to exit over the next few years. Many have sold portfolios in the last few years and I believe in the next few years, we will see more people exit from certain activities,” he said.

Oudea foresees some opportunities in derivatives to benefit from the regulatory changes coming in, such as MiFID II. The greater transparency this should herald could lead to more passive investment products being used in Europe, he said, potentially benefitting SG.

The bank said it might sell or close some businesses too, from across the wider group, accounting for 5% of its risk-weighted assets but did not specify which particular units were under scrutiny. In the last three years it has already made 45 disposals.

Oudea envisaged more consolidation within European banks but said SG would prefer to grow organically.

“There are too many banks in Europe. There will be more domestic consolidation,” he said. “We aim to be a leader in European banking in a world which will have fewer banks and be more integrated.”

When delivering results earlier this month the bank said it hoped to reach agreement with the US authorities about issues concerning interest rates and its dealings with the Libyan Investment Authority “in the coming weeks or months”. It gave no update on these two discussions.

It has set aside €2.2bn for costs relating to these incidents.

Overall SG wants to add €3.6bn of revenues by 2020 to reach €29.3bn and keep costs to €17.8bn through a €1.1bn cost-savings plan. The top line is expected to increase by 3% annually and costs by 1.2%.

“While we welcome the ambition, we suspect (like for peers) investors will take a “wait and see” approach to pricing in the benefits of strong markets-led revenue growth with little cost increase,” said analysts at Credit Suisse in a note.

Andrea Usai, senior vice president at ratings agency Moody’s, was more positive noting the focus on cost discipline. “We expect the firm’s well-diversified business model to support these ambitions.” (Reporting by Christopher Spink)