DBRS Confirms Société Générale, S.A. Senior Debt at A (high); Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed Société Générale, S.A. (SocGen, SG or the Group)’s Senior Unsecured Debt & Deposits rating at A (high) with a Stable trend. The Short-Term Debt & Deposits rating is also confirmed at R-1 (middle) with a Stable trend. DBRS has also maintained SG’s Intrinisic Assessment (IA) at A (high) following a detailed review of the Bank’s performance and outlook.

The confirmation reflects SG’s ability to adapt, adjusting to the difficult market conditions and more demanding regulatory requirements as well as 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.

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) division, 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 profitability, SG continues to make progress with its cost reduction programs, which DBRS views as essential to sustain earnings in the current environment, but it is also gaining market share in France in fee generating businesses, helping to offset the negative impact of the low interest rate environment. Generally the second largest contributor to SG’s earnings, albeit with more volatility, is the Global Banking and Investor Solutions (GBIS) division. GBIS is another core component of SG’s universal banking franchise. In DRBS’s view, SG has successfully worked to refocus GBIS on its core strengths across its customer franchise and product capabilities to enhance returns and reduce earnings volatility. However, the division’s results do remain subject to market volatility, in Equities in particular. DBRS views SG’s International Banking and Financial Services (IBFS) division as providing an important avenue for growth. In DBRS’s view, the diversified presence across various regions, the specialised services to corporates, as well as Insurance provide an increasingly important cushion, enhancing earnings resiliency as illustrated by the upward trend in CEE, Africa and ALD (car leasing and fleet management) that compensates for weaker markets such as Russia. SG’s exposure to Russia remains a concern, however, in DBRS’s view, it remains manageable given the active management of its operating costs and risk.

Demonstrating the strength of the Group’s franchise and its underlying revenue generation capabilities, SG generated net income group share of EUR 4.0 billion in 2015, well above the EUR 2.7 billion result in 2014. Adjusted for accounting volatility generated by the revaluation of the Group’s own financial liabilities, group net income was EUR 3.6 billion in 2015, up 29% from EUR 2.8 billion in 2014 (including the full write down of EUR 0.5 billion goodwill on Russia in 2014).

SG has also significantly improved its funding structure in recent years. 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. In particular, DBRS views positively that SG has improved its liquidity position with a sizeable excess of stable funding and a maximum limit for short-term funding of 10%. The Group’s LCR ratio is well above 100%.

SG’s risk profile combines the low risk portfolios in its domestic businesses with smaller but higher risk portfolios, principally in the international retail banking activities. The Group’s doubtful loan ratio was down to 5.1% at end-2015 from 5.6% as of end-2014 with the coverage ratio up to 63% (excluding collateral). Market risk contributes only about 5% of regulatory risk weighted assets (RWA). With experience gained from the market turmoil, DBRS views SG’s control of these risks across the Group as having been reinforced. SG stands at the lower end of the peer group with total litigation costs; at end-2015, total collective provisions for litigation totaled EUR 1.7 billion.

SG further strengthened its capital levels. The Group’s 1Q16 fully loaded Basel III Common Equity Tier 1 (CET1) ratio was 11.1%, up 105 basis points (bps) from end-2014 (mainly driven by internal capital generation but also non organic items), its leverage ratio was 4.0% (2016 target of 4.0-4.5%), and SG’s total capital ratio was 16.4%. This compares to the final TLAC requirement of 18%. DBRS noted that SG was planning to bolster regulatory capital with issuance of AT1 (about EUR 3bn) and T2 (about EUR 4-6bn) by 2017, and TLAC eligible instruments (about EUR 8bn) by 2019.

RATING DRIVERS
The rating could come under upward pressure if SG continues to reinforce its franchise, improve efficiency and significantly enhance its profitability, while making progress with strengthening its capital profile, as well as streamlining its risk profile.

The rating could come under downward pressure if SG were to have significant difficulties in managing volatile capital markets and some of its international operations to the extent that these would impact the Group’s financial profile and capitalisation, or if the Group were to significantly increase its risk profile.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (December 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016) and DBRS Criteria: Critical Obligations Rating (February 2016). These can be found can be found at: http://www.dbrs.com/about/methodologies

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

This rating included participation by the rated entity or any related third party. DBRS had access to accounts, management and other relevant internal documents for the rated entity or a related third party.

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

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Vitaline Yeterian
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: 26 July 2001
Most Recent Rating Update: 29 September 2015

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