SocGen: Q1 2020 Loss on COVID-19 Related Provisions and Sharp Drop in CIB

Société Générale S.A. (SG or the Group) reported a EUR 326 million net loss in Q1 2020 compared to a EUR 686 million net profit in Q1 2019. This was mainly driven by a loss in the Group's CIB business on the back of market turmoil as well as the substantial increase in the cost of risk resulting from the deterioration in economic conditions as a result of the Coronavirus Disease (COVID-19). This was only partially mitigated by resilient income in French Retail Banking (FRB), good levels of revenues in International Retail Banking (IRB) and cost control on the back of the Group's cost savings plan. DBRS Morningstar expects the COVID-19 crisis to continue to impact the Bank’s profitability and asset quality in coming quarters.

The crisis has affected the Bank's cost of risk, which increased almost threefold to EUR 820 million compared to EUR 264 million in Q1 2019, due to COVID-19 related provisions. The cost of risk at group level was 65 bps, incorporating the future deterioration in economic conditions. Within this, provisions driven by the Covid-19 pandemic were equivalent to 24 bps. The impact was particularly notable in Global Banking and Investor Solution (GBIS), with the cost of risk increasing to 87 bps compared to 10 bps in Q1 2019, on increased provisioning in sectors exposed to the coronavirus impact. DBRS Morningstar notes the Group has indicated an expected run rate of 70 bps for the cost of risk during the COVID-19 crisis and of 100 bps in the case of an extended health crisis scenario. SG´s NPL ratio stood at 3.1%, down 10 bps QoQ. Nonetheless, we expect to see asset quality deterioration in coming quarters.

The Group's revenues deteriorated by 16.5% year-on-year (YoY) to EUR 5.2 billion, reflecting a 27.3% drop in GBIS income, heavily affected by sharp drop in structured products revenues related to the collapse in the equity market. Revenues held up in FRB, driven by strong activity levels in the first two months of Q1 2020. IRB continued to perform well, with revenues up 1.6% YoY on good commercial activity and solid performance in insurance.

Operating expenses were down 2.3% YoY, thanks to the Group's cost discipline Nevertheless, the Group's cost-to-income ratio deteriorated to 90.5% from 77.4% in Q1 2019 and the Group has confirmed its target to decrease operating expenses for 2020 compared to 2019, excluding exceptional items. In addition, the Group will implement additional cost reduction measures this year of between EUR 600 million and EUR 700 million net of additional costs related to the management of COVID-19 crisis. Whilst we view as positive that expense control remains an important strategic priority for SG, we believe that further cost savings could prove challenging in the current environment.

The Bank reported a fully loaded CET1 ratio of 12.6% at end-March 2020, fairly stable quarter-on-quarter (QoQ), as the loss incurred in Q1 2020 was offset by the reversal of the 2019 dividend provisions. This provides the Bank with a buffer of around 350 bps for the Maximum Distributable Amount (MDA).

The full implications of the COVID-19 crisis for the medium to long-term will depend on the evolution of the outbreak, the length of the economic shutdown, as well as the transition phase of the recovery. DBRS Morningstar’s view is that the COVID-19 crisis will continue to impact SG's profitability and asset quality in coming quarters. Nevertheless, DBRS Morningstar also takes into account the Group's well-established and diversified franchise as one of Europe’s leading lenders, its robust funding and liquidity profile and strengthened capital base. In addition, the conservative and diversified risk profile of the Group could help mitigate the negative impact of this crisis on its credit fundamentals. We will continue to monitor the performance of SG during this period of stress.