DBRS Maintains SocGen (Canada) Ratings After Société Générale’s Q3 Results, ST Ratings R-1 (middle)

DBRS has today commented on the Q3 2009 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 Société Générale (Canada) (SocGen Canada) or for Société Générale (Canada Branch) (SocGen Canada Branch), which have Short-Term Instruments ratings of R-1 (middle) with a Stable trend. The short-term ratings for SocGen Canada and SocGen Canada Branch are underpinned by the strength of the Group’s well-entrenched domestic banking franchise in France, its growing international footprint in retail financial services and wealth management, and its solid position in corporate banking and capital markets.

SG generated solid results in the third quarter indicative of the Group’s resilient franchise and diverse business model. Helped by improved revenues in Corporate and Investment Banking (CIB) and the strength of its retail franchise, SG illustrated its ability to rebound from lower levels of profitability in the second half of 2008 and Q1 2009. Net income increased by 37.9% quarter-over-quarter while more than doubling versus the year-ago quarter. Operating income was driven by sustaining strong net banking income (NBI) and controlling costs, allowing the Group to continue to generate the underlying earnings to cope with still elevated credit costs, write-downs and other charges. In DBRS’s view, SG is demonstrating its ability to generate sustainable earnings in a difficult operating environment. Given the strength and diversity of its franchise, DBRS expects that the Group should be able to continue generating solid results on a quarterly basis going forward, as it is able to cope with the declining costs of the financial market disruption and the ongoing credit costs of the economic downturn that has persisted for the past two years.

The Group’s strength in the capital markets was evident in the results for CIB, which generated revenues of EUR 1.8 billion in the quarter, up 37% on a linked quarter basis and 2.7x the level in Q3 2008, with year-over-year increases across its various businesses. Revenues were negatively affected by marks on CDS, tightening of spreads on SG’s own liabilities, and asset impairments and write-downs, all of which DBRS views as one-time items. Excluding these one-time items, NBI would have been EUR 2.5 billion in the quarter. Equities were particularly strong, as new client-driven structured products businesses rebounded and the Group maintained its leading position in the equity derivatives market. Following record first half revenues for Fixed Income, Currencies, and Commodities (FICC), SG experienced a decline in NBI in 3Q as spreads normalized, though still wider than pre-crisis levels. DBRS views positively that 86% of revenues were client-driven, demonstrating the strength of the customer base and implying controlled risk-taking with the Group’s own capital. CIB’s expenses decreased by 9% on a linked quarter basis, helping to boost gross operating income or income before provisions and taxes (IBPT), in the quarter. Provisions more than doubled in the quarter, but the main driver of the increase was EUR 334 million in portfolio-based provisions for securities that were reclassified to loans and receivables from the trading book in October 2008.

Showing the resiliency of the Group’s retail franchise, which DBRS sees as a key underpinning of the SG’s strength, the French Networks (FN) and International Retail Banking (IRB) were important contributors to SG’s net income for the quarter. The French Networks reported NBI of EUR 1.8 billion and IRB generated NBI of EUR 1.2 billion for the quarter, each compared well with the historic quarterly run rate of approximately the same level. The FN saw an increase in household demand and property investment, while lending to businesses was stable. The franchise strength was evident with 48,700 new individual customers in Q3 2009 taking personal current accounts to approximately 6.4 million. The FN also saw a rebound in life insurance products, experiencing an inflow of EUR 2.0 billion in the quarter. To further strengthen its domestic retail banking businesses, the Group announced in October that it has agreed to enter into discussions with Dexia to purchase Dexia’s 20% interest in Crédit du Nord. Within IRB, the Group has focused on realigning its operating platforms to cope with a more challenging environment in certain geographies through the closure of branches, most of which were in Russia, and headcount reduction. The sharp deterioration in Russia and Eastern Europe caused provisioning to remain elevated, absorbing approximately 66% of gross operating income. Even so, the IRB remained profitable with net income of EUR 108 million in the quarter.

Results in Financial Services (FS) and Global Investment Management & Services (GIMS) were mixed. FS experienced another quarter with lower activity and was particularly affected by a slowdown in consumer credit, as new business was down 16.6% year-over-year. Equipment finance also experienced a weakening in activity with new financing down 19% year-over-year. Even with lower activity levels, FS generated modestly positive net income in the quarter. Within GIMS, the asset management unit continued to experience net asset outflows (EUR 1.6 billion in Q3 2009), offset by continued strength in private banking which experienced EUR 1.2 billion of net asset inflows in the quarter. Overall assets under management grew to EUR 347.8 billion. DBRS will look to the merger of a good part of SG’s traditional asset management businesses with Crédit Agricole to provide strengthened asset-gathering, broader product capabilities and a much enlarged distribution network to the Group, as well as halt the continuing net asset outflows.

Indicative of the challenges that DBRS sees the environment still posing for the Group, provisions remain elevated at EUR 1.5 billion on a consolidated basis, or 73% of gross operating income or IBPT. Still weakening credit quality was indicated by the increase in doubtful loans to EUR 19.5 billion and increased doubtful loan ratio to 4.7%, up 50 basis points (bps) on a linked quarter basis. SG added to reserves so that the coverage ratio remained constant at 61% quarter-over-quarter.

SG’s capital levels remain solid. The Group raised its Tier 1 capital ratio to 10.4% at 30 September 2009, up 90 bps from 30 June 2009, bolstered by reductions in risk-weighted assets. SG continued de-risking the balance sheet in the quarter, including the sale of EUR 1.7 billion of illiquid assets in the quarter. On a pro-forma basis, which includes recent capital increase of EUR 4.8 billion, reimbursement of the French state, issuance of additional subordinated notes and the anticipated purchase of Dexia’s 20% stake in Crédit du Nord, SG’s Tier 1 capital ratio stood at 10.8%. Core capital, which excludes hybrid securities, stood at 7.9% as of 30 September 2009 and 8.6% on a pro-forma basis.

Notes:
All figures are in Euros unless otherwise noted.

This rating is based on public information.

The applicable methodologies are Analytical Background and Methodology for European Bank Ratings, Second Edition, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.