DBRS: SocGen’s 4Q13 Results Illustrate Franchise Strength and Earnings Diversity

Summary
•Reflecting SocGen’s franchise strengths and earnings diversity, group share of net income of EUR 322 million in 4Q13 is above net loss of EUR -471 million for 4Q12. For 2013, net income increased substantially, as SG generated EUR 2.2 billion, well above EUR 0.8 billion in 2012. Excluding one-off items, Group share of net income was EUR 3.9 billion in 2013, up 15% from EUR 3.3 billion in 2012.
•SocGen is keeping the cost of risk under control at 75bps for the year 2013; balance-sheet strengthened with 10.0% CRD4 Common Equity Tier 1 (CET1)
•DBRS rates Société Générale’s Senior Long-Term Debt & Deposits at AA (low) with a Negative trend.

From DBRS, Inc.’s (DBRS) perspective, the 4Q13 results of Société Générale’s (SocGen or the Group) demonstrate the Group’s fundamental credit strength underpinned by its franchise strengths and earnings diversity. SocGen has reorganized its business units into three pillars, with the objective of increasing the revenues from the synergies between the various business units within each segment. In 4Q13 as in 2013, each pillar generated relatively balanced revenues – contributing more or less a third to Group’s revenues.

The underlying strength of SocGen was evident in 2013. Excluding one-off items, Group share of net income was EUR 3.9 billion in 2013, up 15% from EUR 3.3 billion in 2012. One-timers included a substantial negative revaluation of the Group’s own debt of EUR -1.1 billion, as well as provisions for disputes, the Euribor settlement, legacy assets costs, but also positive capital gains.

French Retail Banking (FRB) continues to deliver consistent results supported by increased revenues that reflected good client activity. FRB continues to make progress on reducing costs. International Retail Banking and Financial Services (IRB&FS), which includes Consumer Finance and Insurance, also posted overall good performance. Diversity is also enhanced in SocGen’s IRB&FS business line where strong increase in Financial Services and Insurance compensated for the pressure on margin in International Retail Banking.

In Global Banking & Investor Solutions (GB&IS), SocGen demonstrated strength in focus areas, such as in Equity (flow equity derivatives, structured products, and cash equity), which almost doubled in revenues quarter-on-quarter (QoQ) and was up 33.5% from 2013. These strong results compensated for weaker performance in Fixed Income, Currencies and Commodities (FICC). Reflecting a difficult operating environment, revenues in FICC were down 39% QoQ and down 21% in 2013 versus 2012. As a result, overall GB&IS revenues in 4Q13 were flat QoQ. Illustrating the benefit of the strength and diversity of GB&IS, revenues have been stable for a three-year period.

The cost of risk jumped in 4Q13 in some areas due to deterioration in IRB and increased reserve coverage. Within the IRB, deterioration in Romania and Russia drove the cost of risk up to 204 bps in 4Q13 from 137 bps in 3Q13. But, overall in 2013, the cost of risk in IRB&FS is marginally down from 2012. The current pace of provisioning at Group level is manageable given that provisions absorbed a manageable 63% of income before provisions and taxes (IBPT) in 2013, marginally above 59% in 2012. DBRS does not view the 4Q13 level as setting a trend for 2014. Overall, SocGen kept the cost of risk stable at 75bps for 2013, largely unchanged from 2012. Also, the disposal of non-investment grade legacy assets was completed in 4Q13. Specific provision coverage increased to 76% from 72%, while the gross non-performing loans (NPL) ratio marginally increased to 6.0% from 5.7% over the year.

SocGen continues to strengthen its capital ratios. SG’s common tier 1 ratio reached 10.0% at 4Q13 under fully loaded Basel 3. Improved capitalization in 4Q13 was achieved mainly through internal capital generation, but also through disposals of legacy assets. SG’s fully loaded Basel III CRD4 leverage ratio is estimated at 3.5%.

DBRS rates Société Générale’s Senior Long-Term Debt & Deposits at AA (low) with a Negative trend.

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: Support Assessment for Banks and Banking Organisations. 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 rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Roger Lister
Approver: Alan G. Reid
Initial Rating Date: July 26, 2001
Most Recent Rating Update: May 30, 2013

For additional information on this rating, please refer to the linking document located at: http://www.dbrs.com/research/236983/banks-and-banking-organisations-linking-document.pdf

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.