DBRS Maintains SG Intrinsic Assessment at A (high); Snr Rating Remains Under Review Neg.

DBRS Ratings Limited (DBRS) has today maintained Société Générale, S.A. (SocGen, SG or the Group)’s intrinsic assessment (IA) at A (high). The Group’s Senior Unsecured Debt & Deposit rating remains at AA (low) Under Review with Negative Implications (URN), with the URN reflecting the action taken on 20th May 2015 to review the systemic support assumptions of 38 European Banking Groups. The Short-Term Debt & Deposit rating remains R-1 (middle) with a Stable Trend.

DBRS has today maintained SG’s IA at A (high) following a detailed review of the Bank’s performance and outlook. The key remaining issues for the Group are the downside risks of ongoing headwinds in Russia that could delay improvement in earnings in its International Retail Banking division. In a context where uncertainty remains regarding final regulatory requirements, the introduction of additional capital buffers such as TLAC might also prove to be challenging.

In maintaining the Group’s IA at A (high), DBRS considers SocGen’s strengths that have enabled it to cope with the financial 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 adapt. At the same time, DBRS notes that the first quarter of 2015 confirmed the positive signs of economic recovery in France observed in 2014.

The Group maintained its strategy to keep its common equity tier 1 (CET 1) ratio above 10% in 2014, all the while investing in its franchise. But DBRS anticipates that SG will continue to strengthen its capital levels through earnings, given the pressure to build up capital levels ahead of future regulatory requirements and investor demands. SG also significantly improved its funding structure. But, continued progress with expense control remains important to enhance the Group’s resiliency.

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. Indicative of this strength, the Group generated net income of EUR 2.7 billion in 2014, up from EUR 2.2 billion in 2013. Adjusted for accounting volatility generated by the revaluation of the Group’s own financial liabilities, group net income was EUR 2.8 billion in 2014 (incl. the full write down of the goodwill of EUR 0.5 billion on Russia in 2014), down from EUR 3.2 billion in 2013, but well above EUR 1.6 billion in 2012 and 2011. Excluding the full write down of the goodwill on Russia in 2014, net income group share in 2014 was higher than 2013 on an underlying basis.

DBRS considers the Group’s strong position in retail banking in France as an important factor 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 FRB’s earnings, SG is making progress with its cost reduction program, which DBRS views as essential to sustain earnings in the current environment. Another contributor to SG’s earnings, albeit with more volatility, is the Global Banking and Investor Solutions (GBIS). GBIS is a core component of SG’s universal banking franchise. In DRBS’s view, SG has successfully 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 Group’s International Banking and Financial Services (IBFS) as providing an important avenue for growth. However, International Retail Banking (IRB) activities’ current contribution to Group net income remains modest and it has contributed to earnings volatility. In that regard, SG’s exposure to Russia is a concern, but remains manageable. In DBRS view, the Group’s diversified presence across various regions enhances earnings resiliency as illustrated by the upward trend in net income in CEE and Africa that compensates for increased costs in Russia. 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 to corporates and the Insurance business division, 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.

SG significantly improved its funding structure. DBRS views positively that SG has improved its liquidity position with a sizeable excess of stable funding and short-term funding below 10% of the funded balance-sheet at end-2014 (the funded balance-sheet gives a representation of the Group’s balance-sheet excluding the contribution of insurance subsidiaries and after netting derivatives, repurchase agreements and accruals). The Group is complying with impending short-term regulatory requirements with a liquidity coverage ratio (LCR) largely 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. While the cost of risk is highest in the international retail banking businesses, the Group’s doubtful loan ratio was down to 5.6% as of end-2014 with a coverage ratio of 61% (excluding collateral). Market risk contributes only about 6.8% 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. SG stands on the lower end of the peer group with total litigation costs still relatively low. At end-2014, total collective provision for litigation was at EUR 1.1 billion, including additional EUR -200 million in 4Q14.

DBRS considers SG regulatory capital level as solid. Under Basel 3, SG’s common equity tier 1 (CET) ratio was 10.1% at 1Q15, stable from end-2014 and 1Q14 - reflecting investments in the franchise (RWA growth, portfolio adjustments) as well as provision for disputes, prudential adjustment and also dividend provisions.

At the current rating level, further downward pressure on the IA is not expected, but could result from SG experiencing significant difficulties in managing some of its international operations to the extent that it would impact the Group’s capitalisation and financial profile. Upward pressure on the ratings could arise in the medium term, if SG successfully executes its costs reduction plan and strengthens its underlying earnings, while making progress with strengthening capital and streamlining its risk profile.

SG’s ratings remain Under Review with Negative Implications due to DBRS’s review of the systemic support assumptions for a number of European Banks initiated on 20th May 2015. The review reflects DBRS’s view that recent developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. Currently, SG has a support assessment of SA-2, which results in a one-notch uplift from SG’s IA of A (high) to the final rating of AA (low). During the review period, DBRS is considering whether to change the support designation of a number of European banks from SA-2 to SA-3, which is the category for banks in countries where DBRS has no expectation of systemic support or is not confident enough that timely systemic support would be forthcoming in times of need to add a notch for systemic support. Such a conclusion would lead to the removal of any uplift and a downgrade of the senior ratings for any affected banks. The review is expected to be completed in September.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
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Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Vitaline Vincent
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: 26 July 2001
Most Recent Rating Update: 20 May 2015

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