DBRS Comments on Société Générale 2008 Results, Maintains SocGen (Canada) Short-Term Ratings at R-1 (high), Negative Trend

DBRS has today commented on the Q4 and full-year 2008 results for Société Générale (SG or the Group). Based on the announced results for the Group, DBRS does not see any impact on the ratings for its subsidiaries, Société Générale (Canada) (SocGen Canada) and Société Générale (Canada Branch) (SocGen Canada Branch), which have Short-Term Debt ratings of R-1 (high) with a Negative trend. The ratings of SocGen Canada and SocGen Canada Branch reflect the strength of their parent, SG, which owns 100% of the shares of these subsidiaries and guarantees their rated debt instruments.

Overcoming substantial market turbulence and increased provisioning, SG managed to deliver marginally positive results in the quarter and a year-over-year increase for earnings in 2008. SG reported net income of EUR 2.0 billion for the full-year 2008. While below trend, this result was up substantially from EUR 947 million in 2007, which includes losses for the unauthorized, concealed market activities that occurred in 2008. On a quarterly basis, the Group generated marginally positive net income of EUR 87 million in Q4 2008, which was a modest decline compared with net income of EUR 183 million in the prior quarter but a significant turnaround from the Q4 2007 loss of EUR 3.4 billion. On a like-for-like basis, 2008 net banking income decreased by just 3.9% year over year to EUR 21.9 billion, indicating the strength of the franchise, while operating expenses increased by 6.2% and provisions increased to almost three times the level in 2007. (Year-over-year comparisons calculated on a like-for-like basis adjust for changes in the Group structure and use constant exchange rates.) This drove gross operating income down 21.9% from the prior year to EUR 6.3 billion.

The profit for the year was mainly due to SG’s core business of retail banking, which contributed 95% of net income. The French networks reported net banking income of EUR 1.9 billion for the quarter, which compares well with the historic quarterly run rate of approximately EUR 1.7 billion. International Retail Banking generated net banking income of EUR 1.3 billion in Q4 2008, consistent with Q3 2008 and an increase of 42% versus EUR 950 million in the prior year’s quarter.

Results in other businesses were more mixed. Financial Services reported net income of EUR 15 million in Q4 2008, a decline of 89% versus the prior quarter. Consumer credit was negatively affected by currency devaluation, and the operational vehicle leasing and fleet management business experienced slower growth due to the downturn in the second-hand auto market. Global Investment Management & Services disclosed a net loss of EUR 71 million versus net income of EUR 68 million in Q3 2008. The asset management unit continued to experience net asset outflows, and writedowns were taken in certain asset classes. Positively, the Group had solid performances in private banking, securities and services, brokerage and online banking despite volatile markets. Even with various writedowns, Corporate and Investment Banking (CIB) achieved positive net income of EUR 56 million in the quarter, following two consecutive quarterly losses. The Group’s earnings were helped by hedging, client-driven revenues and limited exposure to risk. Losses were recorded in the Corporate Centre, including writedowns on assets that have been permanently impaired.

Increased operating expenses and higher provisions affected earnings in the quarter. Operating expenses increased by 16% to EUR 4.0 billion in Q4 2008 versus EUR 3.4 billion in the year-ago quarter. The increase was a result of investments associated with organic growth and risk-control enhancements, mainly within CIB. SG’s cost-to-income ratio held steady at 72.2% in the quarter versus 72.4% in the prior quarter. Provisions increased to EUR 983 million in Q4 2008 from EUR 687 million in the prior quarter and EUR 301 million in Q4 2007, due to growth in consumer credit outstandings in emerging markets, counterparty defaults specifically related to financial institutions, commercial real estate and construction, additional provision allocations and the integration of the Russian bank ROSBANK.

DBRS sees positive development in the announced merger of the asset management operations of Crédit Agricole S.A. (Crédit Agricole) and SG if the combined operation can achieve the identified benefits. This step creates an entity with split ownership (70% Crédit Agricole, 30% SG) and approximately EUR 638 billion of assets under management. The new entity, which is expected to become operational in the second half of 2009, will realize cost synergies within three years and will be accretive to net earnings in year two of operation, excluding restructuring costs. DBRS sees various advantages: (1) strengthened asset-gathering and product capabilities; (2) large distribution network; (3) potential operational efficiency gains (target cost-to-income ratio of less than 50%); and (4) high level of diversification by product, geography and customer.

SG’s capital levels remain solid. The Group plans to participate in the second round of financing from the French government, which will provide SG with an additional EUR 1.7 billion of capital in 2009 in addition to the EUR 1.7 billion of deeply subordinated notes issued to the government in December 2008. For the second round of capital, the Group will have a choice between subordinated debt or preference shares without voting rights, with the latter counting toward core Tier 1 capital. At the end of 2008, the Group reported a Tier 1 capital ratio of 8.8%, which could rise to approximately 9.3% with the additional government capital, and a core Tier 1 capital ratio of 6.7%.

The Group’s positive earnings in 2008 demonstrate its robust, diverse business model and the strength of its core franchise, which has helped the Group cope with writedowns and losses in various stressed asset segments and the cost of deteriorating credit. SG has produced sound, recurring earnings in its retail franchise, underpinned by strong capital levels. While taking into account the French government’s provision of support, the Negative trend reflects the ongoing challenges the Group faces in the current environment of disrupted financial markets, increasing deterioration in credit quality and significant weakening across the global economy.

Notes:
This rating is based on public information.

The applicable methodology is Analytical Background and Methodology for European Bank Ratings, Second Edition, which can be found on our website under Methodologies.

This is a Corporate rating.