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

DBRS Ratings Limited (DBRS) has today confirmed Société Générale, S.A. (SG or the Group)’s Issuer and Senior Unsecured Debt & Deposits ratings 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 Intrinsic Assessment (IA) at A (high) following a detailed review of the Bank’s performance and outlook. The Long Term and Short Term Critical Obligations Ratings were confirmed at AA and R-1 (high), respectively, both with a Stable trend.

The ratings reflect SG’s strong and well diversified franchise, robust earnings generation capacity, conservative risk profile, strong funding and liquidity, and adequate and improving capitalisation. The confirmation reflects also SG’s ability to adapt its business model to the difficult regulatory and operating environment, as demonstrated by the refocusing of its businesses and cost savings programmes. While the risk profile is supported by de-risking efforts, strong diversification and low risk in some portfolios such as the domestic home loans, some of the emerging markets, such as Russia, are higher risk. SG has also a relatively large exposure to capital markets activities.

In DBRS’s opinion, SG has a strong franchise, underpinned by a leading market position in France, its home market, and a significant international presence. Reflective of a well-diversified business model, SG services its customers through three business divisions: French Retail Banking (FRB), International Retail Banking and Financial Services (IBFS) and Global Banking and Investor Solutions (GBIS). In recent years, FRB has been adding to the stability of SG’s earnings thanks to its strong positioning in the affluent retail segment in France and a low risk business model. Good commercial dynamics helped offset some of the margin pressure from low interest rates. IBFS division, which combines the international retail and specialised financial services, offers SG exposure to growth markets. GBIS contains the Group’s capital markets businesses - Global Markets, Investor Services, Financing and Advisory, Asset and Wealth management as well as Securities Services and Brokerage. GBIS has a strong expertise in structured products, equity derivatives, and exchange traded funds. Under the current strategy, GBIS is focused on minimising consumption of capital and liquidity as well as a tight control of risks.

SG’s earnings generation is robust, benefiting from a healthy underlying revenue capacity, underpinned by the Group’s strong and well-diversified franchise. Despite a challenging operating environment in the domestic market, SG’s earnings in 2016 remained relatively stable. Statutory net income group share was EUR 3.9 billion, representing a decline of 3% YoY. When adjusted for non-economic and one-off items, the group net income in 2016 was broadly flat, based on DBRS's estimate. SG’s resilient performance in 2016 was supported by healthy growth in IBFS’s insurance and corporate services. FRB experienced a moderate YoY decline in revenues as, in response to strong margin pressure from low rates, the Group stepped up its commercial activities, focused on synergies and fee–generating services. Operating expenses were generally stable as a decline in baseline costs was largely offset by expenses related to the implementation of cost savings plans. SG’s 2016 cost efficiency ratio was 66.5%, broadly in line with most domestic peers, however relatively high in an international context. In DBRS’s view, margin pressure in domestic retail operations is likely to continue in the near to medium term and the success of SG’s cost programmes, focused on the reduction of retail branches in France and cost cuts in GBIS will remain important from the point of view of earnings generation. In 2016, the Group’s cost of risk declined by 32% YoY, reflecting an improvement asset quality especially in the international and domestic retail operations.

In 1Q17 SG’s reported group net income declined by 19% YoY to EUR 747 million due to a significant EUR 350 million (after-tax) provision to settle a civil dispute with the Libyan Investment Authority (LIA). However, adjusted for this and other exceptionals, net income was EUR 1,083 million, up by a strong 73% YoY, benefitting from a rebound in GBIS’s earnings from 1Q16 lows, healthy revenue growth in IBFS, and a the continued decline in the Group cost of risk (when adjusted for the LIA dispute provision).

DBRS views SG’s risk profile as conservative, benefiting from strong diversification of SG’s operations. Credit risk represented 73% of the Group RWAs at end-2016. SG is also exposed to operational risk stemming from the Group’s diverse and complex operations, and market risk, mainly related to the capital markets activity under GBIS. FRB represented 39% of SG’s gross outstandings at end-1Q17. Slightly more than half of the FRB loan book are low-risk home loans, 6% are consumer loans and overdrafts, and 43% diverse business and institutional loans. IBFS outstandings (27% of gross outstandings), comprise predominantly loan books of SG’s international network banks in emerging markets. The IBFS book is generally higher risk than the domestic one, combining low risk markets such as Czech Republic with more risky ones. While Russia is a high risk country, especially in the current geopolitical context, DBRS notes that the exposure is limited to 2% of the Group total. GBIS outstandings (32%) are largely represented by lending provided by SG’s Financing & Advisory division, and related to specific areas of SG’s expertise, including trade and project finance or acquisition finance. SG strictly monitors the risk of its GBIS activities to make sure that the capital allocated to pure capital markets activities does not exceed 20% of the Group total. Overall, at the Group level, retail credit risk represented 20% of total exposure as opposed to 35% for corporates, with the reminder composed of sovereigns, bank, public sector and other portfolios. Within the retail exposures, slightly more than half were residential mortgages. DBRS positively views a strong diversification of SG’s corporate portfolio and views some of the corporate lending types, such as trade finance, as low risk. It also notes that in addition to its relatively high share of exposures, GBIS has a relatively high share in Group revenues (37% in 2016) and, despite its relatively low cost of risk, can contribute to potential earnings volatility at the Group level.

Several factors, including tightened origination standards, portfolio de-risking and very low interest rates contributed to a continuation of a positive asset quality trend over the past year. The Group non-performing loans ratio (excluding legacy assets) was 4.8% at end-1Q17, down from 5.0% at end-2016 and 5.3% at end-2015. The coverage ratio remained stable at 65% (excluding collateral). The cost of risk in 2016 was 36bps in FRB, 64bps in GBIS and 20bps in GBIS.

SG’s funding profile is strong, benefiting from a sizeable and stable customer deposit base, which represented 61% of the Group’s funded balance sheet at end-1Q17. The Group’s loan-to-deposit (LtD) ratio was a healthy 91.3% at end-1Q17, according to DBRS’s calculations. Customer loans represented 56% of funded assets at end-1Q17. An additional 29% of the funded balance sheet were client-related trading assets and securities, which together with central bank and interbank deposits (18%) represent an additional funding requirement. Wholesale funding, which has been significantly reduced in recent years, represented around 29% of the funded balance sheet at end-1Q17. Short-term funding was a low 7% of the funded balance sheet. The exposure to wholesale funding is mitigated by well diversified funding sources and strong liquidity. The unencumbered liquid asset buffer was EUR 157 billion, covering the Short Term wholesale funding by around 2.5x. The average LCR ratio during 1Q17 was at a comfortable 138%.

DBRS considers SG’s capital as solid. While capital ratios are below some of the Group’s international peers, DBRS positively notes SG’s strong underlying earnings generation, which has been positively contributing to the positive trend in capital in recent years. The end-1Q17 CRDIV fully loaded Common Equity Tier 1 (CET1) stood at 11.6%, improving from 11.5% at end-2016 and 10.9% at end-2015 and was comfortably above the regulatory capital requirements. The current CET1 ratio levels are within the management’s end-2018 target band of 11.5-12.0%. DBRS views positively that the Group intends to maintain a buffer of at least 100-150bps above the CET1 regulatory minima. SG’s end-1Q17 leverage ratio was 4.1% and the total capital ratio 17.8%. With the end-1Q17 TLAC at 21.5% of RWA, SG is already compliant with the 2019 FSB requirement of 19.5%. For 2017-2018 the Group envisages the issuance of TLAC-compliant senior non-preferred and subordinated debt without requiring senior preferred debt issuance

RATING DRIVERS

The rating could come under upward pressure in case of further derisking of its operations by SG, continued positive asset quality trends, and further strengthening of capital and funding, while at the same time maintaining strong franchise and earnings generation capacity.
The rating could come under downward pressure if SG were to significantly increase its risk profile, suffer from a deterioration of the franchise in some its key markets or experience a significant weakening of its capital buffer.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). 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 Financial and the Bank of France. DBRS considers the information available to it for the purposes of providing this rating to be 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

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

Lead Analyst: Tomasz Walkowicz, Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG

Initial Rating Date: 26 July 2001
Most Recent Rating Update: 7 March 2017

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