DBRS Comments on Société Générale’s 3Q12 Results; SocGen (Canada) ST Ratings at R-1 (mid), Stable

DBRS, Inc. (DBRS) has today commented that its ratings of Société Générale (Canada) (SocGen Canada) and Société Générale (Canada Branch) (SocGen Canada Branch) remain unchanged following the 3Q12 results of the parent, Société Générale (SG or the Group). These entities have a Short-Term Instruments rating of R-1 (middle) with a Stable trend.

Overall, good performances in the businesses were more than offset by one-time items. Results held up well in the French Network (FN) with its still low cost of risk, as well as in Specialised Financial Services & Insurance (SFSI), and in Global Investment Management & Services (GIMS). At the same time, the Group witnessed a pick-up in Corporate and Investment Banking (CIB) and improved profitability in International Retail Banking (IRB). Nonetheless, the overall result for this quarter was weak, reflecting various exceptional one-off items booked in the Corporate Center (C/C). As a result, Group share of net income was just EUR 85 million in 3Q12, below EUR 622 million in 3Q11, and EUR 433 million in 2Q12.

In 3Q12, negative one-off items amounted to EUR 771 million, including impact of announced sales (of which EUR -130 million for Geniki, its Greek subsidiary, and EUR 92 million for TCW, SG’s U.S. Asset Manager), legacy asset costs (EUR -82 million), impact of core deleveraging (EUR -58 million), and the negative revaluation of the Group’s own debt (EUR -389 million). Excluding one-off items in each quarter, Group share of net income was EUR 856 million, up from EUR 793 million in 2Q12, and stable year-over-year (YoY) before financial liabilities and CDS mark-to-market.

Net banking income of the Group (NBI or net revenues) was EUR 5.4 billion in 3Q12, down 17% from 3Q11, and down 14% from 2Q12, mostly penalized by the Group’s own debt revaluation. In 3Q12, the Group reduced its operating costs by 0.9% relative to 3Q11 in line with the Group’s initiated plan to improve operating efficiency across all business lines. In the French Network (FN), the expense ratio was stable at 62.6% in 3Q12 vs. 3Q11. The Group’s Convergence program (IT platform) was designed to gradually adjust operating costs. In CIB, excluding bonuses, operating expenses were down by 13% YoY. Including bonuses, while operating expenses in CIB increased by 3.7% YoY, they remained stable quarter-over-quarter (QoQ). Costs in IRB appear under control, with the expense ratio down to 59% in 3Q12 from 61% in 2Q12 and 60% in 3Q11, in a context of inflation in certain countries. Given SG’s flat outlook for both segments, DBRS perceives efficiency gains as an important avenue for generating more net income from these businesses.

With lower revenues and slightly reduced costs, SG generated gross operating income, or income before provisions and taxes (IBPT), of EUR 1.4 billion in 3Q12, well below EUR 2.5 billion in 3Q11 and EUR 2.3 billion in 2Q12. Nonetheless, this level was sufficient to absorb lower provisioning of EUR 0.9 billion in 3Q12 vs. EUR 1.2 billion in 3Q11, albeit about stable vs. EUR 0.8 billion in 2Q12. Provisions absorbed 63% of IBPT in 3Q12, up from 48% of IBPT in 3Q11, and 36.0% of IBPT in 2Q12. Given SG’s stable or improved revenues in its operating divisions and the impact of the one-timers, DBRS views the 3Q12 level as manageable.

The Group’s retail banking operations are important components of its franchise that contribute to the resiliency of its overall results. In 3Q12, the FN generated 32% of net revenues (total does not include C/C), while the IRB generated 20% of net revenues. In the FN in 3Q12, activity levels continued to be good, with strength shown by the growth in loans (up 3.2% vs. 3Q11) and deposits (up 5.6% vs. 3Q11). At the same time, SG reduced its loan-to-deposit ratio in the FN to 123% from 125% in 2Q12, and 127% in 2011. Against a backdrop of a slowing economy, FN generated NBI of EUR 2.0 billion in 3Q12, stable from 2Q12, and down only 1.2% vs. 3Q11. Within IRB, the Czech Republic and Mediterranean Basin achieved relatively stable performance in 3Q12 relative to 3Q11. In Russia, with high inflation and low spreads, operating in the region is likely to remain a challenge. Romania remained weak in 3Q12, while Sub-Sahara Africa, French territories and others slowed compared to 3Q11. Continuing to adjust to the environment, SG recently announced it was close to an agreement to sell its Egyptian subsidiary. Nonetheless, NBI in IRB was up 1.7% to EUR 1.2 billion in 3Q12 YoY. As a result, IRB’s Group net income improved to EUR 112 million, higher than EUR 90 million in 3Q11, and also EUR 85 million in 2Q12 excluding exceptional impairments. The emerging markets remain an important component of SG’s strategy and DBRS views its well-diversified presence across various regions as enhancing earnings resiliency over time.

CIB delivered improved results in 3Q12 relative to 2Q12 and 3Q11, when the Group was focused on adjusting CIB’s profile and delivering more stable performance. CIB generated higher NBI of EUR 1.6 billion in 3Q12, significantly up from 2Q12, and 3Q11 (respectively +34.0%, and +35.5%) but below EUR 1.9 billion posted in 1Q12. In DBRS’s views, CIB continues to be an important, but uneven, contributor to the Group that has added volatility to the Group’s results in recent years. While results carry the burden of legacy assets albeit diminishing, CIB reports positive net revenues in its core business, offsetting the costs associated with the strategic sale of loans and disposals of part of the Group’s legacy assets. In 3Q12, CIB generated 26% of the Group’s net revenues vs. 21% in 2Q12 as in 3Q11.

Contributing to the resiliency of SG’s earnings, Specialised Financial Services & Insurance (SFSI) posted another good quarter with sustained performance in Insurance and other SFS lines combined with relatively credit costs that were stable vs. 2Q12 and down by -5.8% from 3Q11. While SFSI generated NBI of EUR 0.9.billion in 3Q12, up 2.2% from 3Q11, its net income increased to EUR 179 million in 3Q12 relative to net losses of EUR 53 million in 3Q11, when goodwill impairment negatively impacted the quarter. The Global Investment Management & Services (GIMS) segment makes a smaller, but important contribution to net income. Its net revenues totaled EUR 0.5 billion in 3Q12 relatively stable from 3Q11. GIMS generated EUR 63 million Group share of net income, as compared to EUR 60 million in 3Q11. SFSI overall generated 14% and GIMS generated 8% of the Group’s net revenues in 3Q12. Net revenues included in the Corporate Center (C/C) can distort the perspective on the share by business over time; C/C registered negative revenues of EUR 0.9 billion in 3Q12 reflecting mostly the negative revaluation of the Group’s own financial liabilities but also costs of systemic bank levies, as well as announced exits of Geniki and TCW.

Overall the trend was stable for the Group’s provisioning as compared to 3Q11 and 2Q12. Positive trends were evident in the cost of risk throughout 2011 and in 9M12 for the French Network, and SFSI. They improved in IRB in 3Q12, but deteriorated within CIB. In IRB, while Greece is less of an area of concern as Geniki exits the perimeter, “Other CEE” stabilized, which represents 26% of total provisioning in IRB in 3Q12, stable from 2Q12 excluding Greece. Romania and Russia, however, remain under pressure. The EUR 100 million provisions in Romania were up from EUR 66 million in 3Q11 and EUR 86 million provisions in 2Q12 and represent 33% of total provisioning in IRB. In Russia, the EUR 37 million in provisions were up from EUR 17 million in 3Q11, but down from EUR 75 million in 2Q12 that was impacted by a one-off. North Africa improved with provisioning now lower than gross operating income in 3Q12 vs. 2Q12. Excluding Geniki and TCW, doubtful loans were down to 4.4% at end-September 2012 with a coverage ratio of 71%, from 4.7% at end-June 2012, including Geniki and TCW and excluding legacy assets, with a coverage of 71%. While, in DBRS’s view, the Group faces economic weakness and political uncertainty stemming from the Euro Area, Central and Eastern Europe, Russia and North Africa through its international retail network, it is keeping the cost of risk under control.

DBRS views positively that the Group improved its liquidity position in 3Q12 relative to 4Q11. As of September 2012, SG had EUR 142 billion in its available liquid asset buffer, which includes EUR 69 billion of Central Bank eligible assets and EUR 73 billion of net available Central Bank deposits, relative to EUR 69 billion in short-term funding and EUR 73 billion in interbank funding (covering 100% of short-term (ST) needs). By comparison, the Group had an unencumbered liquid asset buffer of EUR 84 billion at year-end 2011, which included EUR 58 billion of central bank eligible assets and EUR 26 billion of net available central bank deposits, compared to EUR 46 billion in short-term funding and EUR 69 billion in interbank funding (covering about 73% of ST needs). Out of EUR 15-20 billion refinancing needs of medium and long-term debt initially targeted for 2012, EUR 20.1 billion were completed at end-October 2012. Issuances in 2012 reflected a diverse mix of funding sources, including senior public issues (31%), structured private placements (33%), vanilla private placements (12%), but also securitisation (6%), and secured funding (18%). At end-September 2012, long-term funding sources (including equity, customer deposits, and MLT debt) exceeded long-term assets (including customer loans, securities and other long-term assets) by EUR 67 billion. Long-term funding maturities in 2013 are about EUR 23 billion. The Group’s loan to deposit ratio improved to 113% at end-3Q12 vs. 114% at end 2Q12, and 121% at year-end 2011. Positively, reflecting an increased self-funding in its subsidiaries, IRB’s loan-to-deposit ratio reached 101% at end-September 2012.

DBRS maintains its view that the Group has the ability to adjust to the evolving environment as illustrated by its steadily strengthened capital levels. SG’s core capital ratio was 10.3% at 3Q12, up 40bps from 9.9% at 2Q12, and up 130 bps from 9.0% at end-2011 under Basel 2.5. Improved capitalization in 3Q12 was achieved mainly through internal capital generation (16 bps in 3Q12), further disposal of legacy assets and the Group’s deleveraging (18 bps in 3Q12).

Notes:
All figures are in Euros (EUR) unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents, the European Banking Authority, and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This commentary was disclosed to the issuer and no amendments were made following that disclosure.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Roger Lister
Approver: Alan G. Reid
Initial Rating Date: 11 October 2006
Most Recent Rating Update: 15 December 2011

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