DBRS Confirms Ratings for Société Générale, S.A. – Sr Long-Term Debt at AA (low); Negative Trend

DBRS, Inc. (DBRS) has today confirmed the Senior Unsecured Debt & Deposit rating of Société Générale, S.A. (SocGen, SG or the Group) at AA (low) with a Negative Trend. The Short-Term Debt & Deposit rating was confirmed at R-1 (middle) with a Stable Trend. At the same time, DBRS confirmed the Group’s intrinsic assessment (IA) of A (high).

DBRS notes that these ratings take into account SG’s systemic importance in France and DBRS’s expectation of some form of timely systemic support for SG in the event of a stress scenario, resulting in the Group’s designation as a systemically important bank (SIB) with an SA-2 support assessment. This designation results in a one-notch uplift from the IA of A (high) to the final rating of AA (low).

The Negative Trend reflects the downside risks of uneven economic recovery in CEE countries, but also political risk facing some of its foreign subsidiaries like Russia that could delay improvement in earnings, uncertainty regarding final regulatory requirements and outstanding litigations, as well as overall subdued client demand.

In confirming the IA of A (high), DBRS considers SocGen’s strengths that have enabled it to cope with the sustained crisis. The Group benefits from its strong position in retail banking in France, its focused strengths in corporate and investment banking, the scope of its international retail banking operations, and its diverse financial services businesses. In adjusting to the difficult market conditions and more demanding regulatory requirements, the Group has demonstrated its ability to cope with a challenging environment. In 2013, the Group further strengthened its capital cushion through retained earnings, disposal of legacy assets and reductions in RWA, and also further improved its funding structure. Continued progress with expense control, balance sheet management and franchise development are important to enhance the Group’s resiliency in this still uncertain environment.

Demonstrating the strength of the Group’s franchise and its underlying revenue generation capabilities, which are key factors for SG’s intrinsic strength, the Group has sustained its earnings, albeit with some volatility, during this prolonged crisis, even as it absorbed the drag of its legacy assets (2009-2012), the costs of its sovereign exposures (2011-2012), the sale of its struggling Greek subsidiary (2012), goodwill impairments (2012) and the deleveraging of its CIB (2012). SG further rationalized its organisation in 2013, and made progress in strengthening its risk profile. Indicative of this strength, Group net income, excluding the revaluation of the Group’s own financial liabilities, was EUR 3.3 billion in 2013, up from EUR 1.6 billion in 2012 and 2011. Excluding one-off items in each year, Group share of net income was EUR 3.9 billion in 2013, up 15% from EUR 3.3 billion in 2012. While underlying earnings improved, DBRS sees SG as still exposed to political risk in some of its foreign subsidiaries and regulatory uncertainties.

DBRS considers the Group’s strong position in retail banking in France as an important underpinning of its intrinsic strength. Delivering relatively stable earnings with a low cost of risk, the French Retail Banking (FRB), which operates primarily under the well-positioned brands of Société Générale, Crédit du Nord, and Boursorama typically generates about a third of the Group’s earnings. To improve its earnings, SG is making progress with its cost reduction program, which DBRS views as essential to sustain earnings in the current environment. Generally the second contributor to SG’s earnings, albeit with more volatility, is the Global Banking and Investor Solutions (GBIS). GBIS is another core component of SG’s universal banking franchise that has an extensive international presence in 31 countries. To economise on balance sheet usage and improve the risk profile of its capital markets activities, the Group is emphasizing flow business. In DRBS’s view, SG has worked to refocus the GBIS on its core strengths across its customer franchise and product capabilities to enhance returns and reduce earnings volatility.

DBRS views the SG’s International Banking and Financial Services (IBFS) as providing an important avenue for growth. However, International Banking activities’ current contribution to Group net income remains modest and it has contributed to earnings volatility. The diversified presence across various regions enhances earnings resiliency and leverages SG’s international capabilities in operating in countries that are at various stages of economic development and financial market sophistication including Central and Eastern Europe, Russia and North Africa. While manageable individually, these businesses can incur material losses, if a country suffers significant deterioration as occurred in Greece. DBRS sees SG’s Financial Services, i.e. Financial Services to corporates & Insurance, as enhancing the Group’s ability to meet certain product needs across the franchise and extend its geographic reach beyond its international retail banking subsidiaries. IBFS has particular strength in Vehicle Leasing and Fleet Finance, Equipment Finance, and Insurance. Across its operations, SG is seeking to enhance contribution of its businesses through more effective collaboration between business segments.

SG’s funding profile combines a sizeable, stable deposit base underpinned by its domestic retail banking franchises with significant usage of wholesale funding that is typical of universal banks with significant corporate and investment banking activities. DBRS views positively that SG has improved its liquidity position with a sizeable excess of stable funding and a maximum for short-term funding of 20% of its balance sheet, and now 10% by 2016. The Group is complying with impending short-term regulatory requirements with an LCR ratio above 100%. Appropriately, SG has put more emphasis on aligning its funding profile with the assets being funded and utilising incentives to drive more efficient use of the Group’s balance sheet and liquidity by its business units.

Also factored into the IA is SG’s risk profile, which combines the low risk portfolios in its domestic businesses with smaller but higher risk portfolios, principally in the international retail banking activities. The low risk portfolios, which comprise the majority of the credit exposures, are generally matched by low yields that provide limited cushions to absorb any spike in credit costs, though this is not currently anticipated in France. While higher yields are expected to compensate for the higher risk in the international retail businesses, DRBS also factors in the potential for rapid deterioration and unforeseen events, such as those related to Russia, which can cause credit deterioration to significantly exceed such earnings. Given the economic weakness and political uncertainty across its international retail operations, DBRS sees SG as focused on strengthening its risk position. While the cost of risk is highest in the international retail banking businesses, the Group’s overall doubtful loan ratio was contained at 6.6% as of end-1Q14 with a coverage ratio of 62% (excluding collateral). Exposures to legacy assets are less of a concern, as non-investment grade legacy assets were fully disposed in 2013. Market risk contributes only about 8.3% of regulatory risk weighted assets (RWA), as SG has scaled back its activities that incur market risk with its focus on flow business and less retention of risk. With experience gained from the market turmoil, DBRS views SG’s control of these risks across the Group as having been reinforced. The Group does not anticipate negative impacts from the asset quality review (AQR) and European Central Bank (ECB) stress test.

Given SG’s continued progress with strengthening its capital and streamlining its risk profile, DBRS views the Group’s capitalization levels as satisfactory. Under Basel 3, SG’s common equity tier 1 (CET) ratio was 10.1% at 1Q14, up from 10.0% at end-2013 – which was well above initial target of 9.5% by year-end 2013.

Ratings pressure could arise if SG were to have significant difficulties in managing expenses down and appropriately aligning its revenues, while reducing credit costs. If these difficulties were accompanied by deterioration in SG’s franchise that reduce its capacity to generate additional capital, this could lead to negative ratings pressure, especially if accompanied by material weaknesses in its international operations that impact its capitalisation. Alternatively, if SG continues to make progress in improving the efficiency of its businesses and strengthening underlying earnings, while further enhancing its credit and balance sheet profile, negative ratings pressure could be reduced. A return to a Stable trend could be foreseen, if this progress were accompanied by economic recovery and reduced regulatory uncertainty.

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 following: DBRS Criteria: Support Assessment for Banks and Banking Organisations and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include the DBRS rating of the Republic of France, company documents 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
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 26 July 2001
Most Recent Rating Update: 30 May 2013

For additional information on this rating, please refer to the linking document under Related Research.

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