SocGen reorg illuminates core strengths; Ratings Unchanged at AA (low) Neg. following 3Q13 Results

DBRS, Inc. (DBRS) has today commented that its ratings of Société Générale (SocGen or the Group) remain unchanged following its 3Q13 results. DBRS rates SocGen’s Senior Long-Term Debt & Deposits at AA (low) and its Short-Term Debt & Deposits at R-1 (middle). All long-term ratings have a Negative trend.

Reporting under its new structure, SocGen generated relatively balanced and stable results across its three segments so far in 2013. With gross operating income of EUR 6.1 billion in 9M13, the unchanged segment is the French Networks, which again delivered consistent results that are a crucial underpinning for the resiliency of SocGen’s earnings. Progress towards a lower cost-to-income ratio is important for this segment given its stable revenues. Its second segment newly combines International Banking and Financial Services which includes Consumer Finance and Insurance and together generated gross operating income of EUR 6.0 billion in 9M13, lower than the previous period as Central Eastern European countries revenues declined. The Group also posted a good performance in its third segment, Global Banking and Investor Solutions, which has generated EUR 6.7 billion in 9M13, reflecting the strength in its Corporate and Investment Banking activities. Adding to its capabilities here, SocGen’s Newedge announcement reflects the Group’s drive to provide an integrated client offering from execution to post trade services. In 3Q13, negative non-economic one-timers amounted to EUR -442 million, including the impact of the negative revaluation of the Group’s own debt for EUR – 146 million, compared to one-off items of EUR 764 million in 3Q12. Excluding one-off items in each quarter, Group share of net income was EUR 976 million in 3Q13, up 14.3% from EUR 854 million in 3Q12. While SocGen continues to wind down its legacy assets, the burden of past actions continues, as SocGen provisioned EUR 200 million for disputes.

Net banking income of the Group (NBI or net revenues) was EUR 5.7 billion in 3Q13, up from EUR 5.4 billion in 3Q12, but down from EUR 6.2 billion in 2Q13. In 3Q13, the Group overall reduced its operating costs by 0.9% in line with the Group’s initiated plan to improve operating efficiency across all business lines. SG’s cost reduction programme aims to stabilize the cost base by 2015. That said, the cost-to-income ratio varies considerably across segments, which reflects the mix of activities by segment. In the French Network (FN), where the goal is to reach a cost-to-income of 60% in the coming years, the expense ratio was 63.5% in 3Q13, below 62.6% in 3Q12. While operating expenses in Corporate and Investment Banking (CIB) increased at a higher pace than revenues, its efficiency ratio of 62.3% compares well with peers. Costs in International Retail Banking appear under control, with the expense ratio maintained at 60.4% in 3Q13 from 58.6% in 3Q12 and 59.5% in 3Q11, in a context of inflation in Russia. DBRS perceives efficiency gains as an important avenue for generating more net income.

With higher revenues and costs relatively flat, SG generated gross operating income, or income before provisions and taxes (IBPT), of EUR 1.8 billion in 3Q13, up from EUR 1.4 billion in 3Q12. So far in 2013, SG is generating quarterly IBPT in its operating business lines at about the same pace as in 2012. Provisions have been increasing marginally each quarter in 2013 to EUR 1.1 billion in 3Q13 due primarily to provisions for disputes, but still only absorbed 61% of IBPT in 3Q13, slightly above the 59% it has been averaging. Given SG’s improved revenues, DBRS views the 3Q13 level as manageable. While at a higher level in its French Retail business line than peers, partly reflecting a different portfolio mix, SocGen is keeping the cost of risk under control. While non-investment grade legacy assets have been reduced down to about EUR 1 billion at 3Q13, the trend for the Group’s provisioning as compared to 3Q12 was stable. Excluding CIB legacy assets, doubtful loans were stable vs. 3Q12 at 4.4% at end-September 2013 with a coverage ratio of 72%.

Reflecting the Group’s efforts on its liquidity and funding profile, SG had EUR 137 billion in its available liquid asset buffer at the end of 3Q13. This includes EUR 58 billion of net available central bank deposits. This buffer covers 129% of short-term needs compared to 136% at 2Q13 and only 101% at end-2012. SG now has a policy of keeping usage of liquid funding to under 20% of the balance-sheet, with this funding fully dedicated to ST assets. Demonstrating access to medium and long-term debt markets, SG has completed EUR 23.4 billion as of 28 October 2013 going above the EUR 18-20 billion initially targeted for 2013. This was done through a variety of sources, including a car loan securitization in Germany. At end-September 2013, 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 70 billion. The Group improved its loan to deposit ratio to 110% at end-3Q13 vs. 121% at year-end 2011. SocGen has been compliant with the liquidity coverage ratio (LCR) ratio for three quarters in a row under current assumptions and as estimated by SocGen.

DBRS views positively SocGen’s continued strengthening of its capital base and adding to its buffer over regulatory minimums. SG’s common tier 1 ratio reached 9.9% at 3Q13 under fully loaded Basel 3, up 50bps from 2Q13. Improved capitalization in 3Q13 was achieved mainly through internal capital generation (22 bps in 3Q13) and further disposal of legacy assets (22 bps). Even with the increased requirements of Basel III, discussions of regulatory requirements on capitalization remain on a more demanding trajectory, which could keep pressure on SocGen to further enhance its capitalization through retained earnings and other actions. The Group’s fully loaded Basel III leverage ratio is estimated at 3.3% at 3Q13, calculated on total Tier 1 capital (CRD4, as applied by SocGen including Danish compromise for insurance), putting it above the 3.0% regulatory target for 1 January 2018.

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

[Amended on June 25, 2014 to remove unnecessary disclosures.]