LONDON (Reuters Breakingviews) - Société Générale can finally put its litigation worries behind it, almost. After months of waiting and breathless updates predicting a settlement within “weeks”, the French bank has agreed a $1.4 billion settlement with US authorities over sanctions violations related to Cuba. The snag is that the deal comes with a three-year deferred prosecution agreement to ensure good behaviour. Higher compliance spending will make it harder for boss Frederic Oudea to tackle the lender’s cost base.
The settlement with the U.S. Department of Justice and four other U.S. regulators removes a perennial source of investor uncertainty and management distraction. And, at $1.4 billion, the final cost is in line with the bank’s provisions, meaning it will have no impact on capital or earnings. Still, Oudea will be disappointed that, following more than a year of waiting, shares fell by over 3 percent on Tuesday, underperforming the sector.
But the deferred-prosecution agreement (DPA), which is subject to US court approval, has a sting in the tail, as peers HSBC and Standard Chartered have found out. Oudea will need to spend more on compliance to ensure the bank meets tougher standards - a fact the lender acknowledged in a statement pledging “to enhance its compliance program” beyond actions already taken. Partly as a result of its own DPA, HSBC saw its compliance spending rise by 14 percent and 7 percent in 2016 and 2017 respectively.
That represents cost pressure Oudea doesn’t need. The bank is targeting a cost-to-income ratio of 63 percent by 2020, compared to around 67 percent currently. Based on projected revenue of 25 billion euros and costs of 17.6 billion euros this year, Oudea would need to grow the top line by a heady 6 percent each year and keep cost inflation below 1 percent to hit that target, according to Refinitiv.
True, Société Générale achieved a respectable 11 percent return on tangible equity in the third quarter, helped by buoyant trading. But Oudea can’t count on that to continue given choppy markets, and a slowing global economy. The extra burden of a DPA will put extra pressure on him to sharpen the knife.