April 9, 2019 / 10:50 AM / 5 months ago

Breakingviews - SocGen trading cuts are just a start

The logo of Societe Generale is pictured outside the headquarters of the French bank at the financial and business district of La Defense in Puteaux, outside Paris, France, May 16, 2018. REUTERS/Charles Platiau

LONDON (Reuters Breakingviews) - “I trade therefore I lose.” This version of René Descartes’ famous maxim is probably not what Société Générale had in mind when naming its proprietary trading unit after the 17th Century French philosopher. Yet low returns are what the division tended to deliver. Closing it down, and pulling out of commodities trading, is a logical but insufficient response to SocGen’s mediocre investment banking performance.

The lender run by CEO Frederic Oudea offered little financial detail when it outlined plans to cut 1,600 jobs on Tuesday. But, given its recent terrible results, a response was overdue. SocGen shares have completely missed out on this year’s broader rally in bank stocks, falling by 4 percent in the year to April 8. Domestic rivals BNP Paribas and Natixis are up 13 percent and 22 percent, respectively, over the same period.

Assuming most of the job cuts fall at the investment bank, which employs 18,000 worldwide, the plan will make a modest dent in the division’s expenses, which ate up 82 cents of every euro of revenue last year. Oudea has already promised 500 million euros of savings by 2020. That would push the unit’s return on equity from less than 8 percent last year to almost 10 percent, according to a Breakingviews calculation which assumes stable revenue, capital and bad debt provisions, and a 25 percent tax rate.

The trouble is that the top line is not fixed: like most of its rivals, SocGen’s investment bank probably suffered a year-on-year revenue decline in the first quarter. Putting the business on a more sustainable footing might require deeper cuts, particularly in fixed income where SocGen ranks behind the global top six banks, according to Coalition data. However, a more radical restructuring might mean deeper short-term losses, something the bank’s common equity Tier 1 capital ratio of just 10.9 percent at the end of last year is ill-placed to absorb.

SocGen shares, which barely budged on Tuesday morning, trade at less than half the bank’s tangible book value. There may be more savings to come but, until Oudea finds a way to deliver sustainably higher returns, shareholders will remain philosophical.

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