DBRS: SG’s Quarterly Net Income Back to EUR 1 billion in 2Q14; Positive Trends Continue

• Group Net Income of EUR 1.0 billion in 2Q14, up 7.8% year-on-year (YoY), and 23% quarter-on-quarter (QoQ) excluding one-off goodwill write-down on Russia in 1Q14.
• While the French Retail Banking remains resilient, diversity in operations brought improved results YoY in International Retail Banking, despite the difficult environment in some countries, and Capital Markets rebounded.
• SG’s cost of risk continued to improve across business lines, but 2Q14 includes EUR 200 million additional provisions for litigation.
• DBRS rates Société Générale’s Senior Long-Term Debt & Deposits at AA (low) with a Negative trend.

Demonstrating continued improvement, Société Générale (SG or the Group) achieved quarterly Group Net Income of EUR 1.0 billion, a level that it had not delivered since mid-2010 and up 7.8% from EUR 955 billion in 2Q13. The combined one-off items were marginal in this quarter. This improvement resulted from a decrease in the cost of risk, as revenues were slightly down and the overall cost base up. At the same time, when adjusted for changes in Group structure and at constant exchange rate, revenues from the businesses were up 0.6%. SG generated gross operating income, or income before provisions and taxes (IBPT), of EUR 2.0 billion in 2Q14, down from EUR 2.3 billion in 2Q13. At EUR 752 million, however, provisions were down significantly from EUR 985 million YoY, and absorbed 38% of IBPT in 2Q14, below the 43% in 2013. DBRS notes that provisions in 2Q14 include an additional EUR 200 million put aside for litigation, raising total collective provisions for litigation to EUR 900 million.

Revenues in French Retail Banking (FRB) are expected to decrease up to 1% over the year, as demand remains weak. In this first pillar, which is a core component of the Group’s franchise, SG’s strategy is notably focused on improving efficiency. Illustrating progress being made, operating costs in France are down by 2.5% YoY. Net group income was up 2% YoY to EUR 336 million.

Overall revenues in IBFS grew by 2% when adjusted for the changes in Group structure and at constant exchange rates, generally reflecting good commercial momentum and improved economic environments. In International Retail Banking and Financial Services (IBFS), more difficult situations in Romania and Russia were supported by good performance in the Czech Republic and Africa, Asia, Mediterranean basin and Overseas business lines. Important complements to SG’s international retail operations and valuable sources of revenues, both Financial Services to corporates and Insurance reported positive momentum.

In Global Banking & Investor Services (GBIS), revenues rebounded in 2Q14, up 9.7% YoY. Global Markets revenues were up 6%, in part reflecting positive trends in Equities up 3%, and FICC up 9%. In Financing and Advisory, revenues were up 4% thanks to good performances in ECM and DCM. These results illustrate the strength and diversity of SG’s capital markets businesses. More broadly, revenues in other areas of GBIS were hindered by a challenging environment. In Securities Services & Brokerage, revenues more specifically suffered from SG’s transformation plan at Newedge.

Signs of improving asset quality were confirmed across the Group’s three pillars. In particular, the cost of risk was down in IBFS with a decrease reported in all regions. At Group level, the cost of risk was down to 57 basis points (bps) from 67 bps in 2Q13 and 89 bps in 4Q13. Including legacy assets, the non-performing loans (NPL) ratio of 6.5% and the coverage ratio of 62% were relatively stable. In Russia, the NPL ratio is 12%, with a coverage ratio of 75%. While the guidance on the Group’s cost of risk in Russia is increasing as the environment weakens, the target for IBFS overall for 2016 remains unchanged at 100 bps. The declining trend in Africa in 2Q14 is expected to continue. The Group’s outstanding legacy assets totaled EUR 5.2 billion, largely unchanged and no longer a drag on the P&L.

SG’s 2Q14 common tier 1 ratio was up to 10.2% under fully loaded Basel III; this was mostly due to retained earnings more than compensated for the integration of Newedge and Boursorama. SG’s fully loaded Basel III CRD4 leverage ratio is estimated at 3.6%. The Group’s MLT funding programme is now 80% completed.

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.