Morningstar DBRS Confirms Société Générale’s Issuer Ratings at A (high), Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed the ratings of Société Générale, S.A. (SocGen or the Group), including the Long-Term Issuer Rating of A (high) and the Short-Term Issuer Rating of R-1 (middle). The trend on all ratings remains Stable. Morningstar DBRS has also maintained the Group’s Intrinsic Assessment at A (high) and the Support Assessment at SA3. A full list of rating actions is included at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The confirmation of SocGen’s ratings reflects the Group’s well-established and diversified franchise as one of Europe’s largest banking groups. It also considers that SocGen’s profitability metrics remain below peers, as the Group experiences pressure in French retail and has recorded a series of one-offs related to the reorganisation of its French networks and the integration of Leaseplan, after experiencing a process of risk reduction in CIB and the exit from Russia in 2022. Nevertheless, Morningstar DBRS also views that the outlook for profitability in 2024-2025 appears more positive, as net interest income should gradually benefit from a higher net interest margin (NIM) and significant cost synergies should materialise, enabling the Group to generate net earnings more aligned with its franchise potential. The ratings are underpinned by robust funding and liquidity metrics as well as SocGen’s strong capital base, with adequate buffers over regulatory requirements and solid total loss-absorbing capacity.

The rating action also reflects SocGen’s overall sound asset quality metrics, supported by the Group’s well diversified risk profile. While asset quality has not shown signs of deterioration so far, Morningstar DBRS expects geopolitical tensions, higher interest rates and inflation could progressively lead to a rise in defaults. Nevertheless, Morningstar DBRS also views SocGen’s solid asset quality metrics and overall risk profile to be key mitigating factors.

CREDIT RATING DRIVERS
An upgrade would occur from a sustained and significant improvement in core profitability metrics whilst maintaining solid capital ratios.

A downgrade would arise from a sustained decline in the Group’s profitability or a significant deterioration in its capital ratios. A simultaneous deterioration in the Group’s major international businesses would also lead to a downgrade, as it would reduce the benefit of international diversification.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Very Strong/Strong

SocGen’s ratings are underpinned by its well-established franchise as one of the largest banking groups in Europe with a strong market position in France, its home market. Reflecting a broad business mix and a significant international presence, the Group services its customers through three business divisions: French Retail, Private Banking and Insurances (FRPBI), International Retail, Mobility & Leasing Services (IRMLS) and Global Banking and Investor Solutions (GBIS). The Group has undertaken a series of steps to optimise its franchise, such as the merger of its French retail networks Société Générale France and Crédit du Nord, to rationalise its domestic footprint and significantly reduce costs. In addition, SocGen has continued to focus on GBIS’s restructuring plan, reducing risk weighted assets (RWAs) through a rebalancing of its business mix, a lower risk appetite, and operating cost optimisation. This restructuring has also been evidenced in asset and wealth management, with SocGen’s sale of Lyxor to Amundi, as well as the establishment of Bernstein in April 2024 focusing on research and cash actions. Following the Russian invasion of Ukraine, SocGen disposed of all its Russian operations in 2022.

Earnings Combined Building Block (BB) Assessment: Moderate

While profitability metrics remain below peers, SocGen reported EUR 2.5 billion net income in 2023 up from EUR 1.8 billion in 2022. Exceptional elements included a goodwill impairment (on Leaseplan), provisions for DTAs and disposals of legacy assets in 2023 as well as the impact in 2022 of the disposal of Rosbank and its Russian subsidiaries. Excluding these, and at constant exchange rates, net income was up 39.1% YoY. This was mainly driven by lower provisions which mitigated the drop of around 8% in revenues, mainly affected by the structural pressure on net interest income in French retail driven by specificities of the French market (lending prices cap and costs of regulated deposits), and moderate growth in operating expenses. Interest rates are expected to decrease whilst remaining high, which should support revenues, especially in French Retail. The CIB performance has stabilised overall, however was down in 2023 from a high base in 2022. As a result, Morningstar DBRS anticipates a slight rebound in operating efficiency from a high 73.8% in 2023, as revenue growth and some additional cost savings related to the headcount reduction in the bank’s headquarters announced by SocGen should help mitigate inflationary pressure on expenses, although likely lower in 2024 compared to 2023. The cost of risk will likely increase as a result of the current environment, although Morningstar DBRS considers SocGen has accumulated management overlays and benefit from a sound starting point in asset quality to absorb the impact.

Risk Combined Building Block (BB) Assessment: Strong/Good

Morningstar DBRS views SocGen’s risk profile as relatively conservative with some riskier components. Morningstar DBRS notes a lower than average exposure to the corporate and SME sectors compared to other European banking peers. Further to the equity derivatives loss in 2020, the Group has reorganised its capital markets activities. The Group has also disposed of Rosbank, its Russian retail and commercial ban. SocGen’s asset quality profile has thus far been resilient against the uncertain economic backdrop, affected by inflation and higher rates. Morningstar DBRS expects that SocGen´s asset quality will start to deteriorate during coming quarters given the continued challenging economic environment, characterised by tighter financial conditions and weaker economic dynamics. However, Morningstar DBRS views SocGen’s tightened origination standards, lower NPL base and good earnings generation capacity to be key mitigating factors, providing the Group with some flexibility to absorb potential deterioration in asset quality. The end-2023 share of non-performing loans (NPL) in gross outstandings (including exposures to Financial institutions) was 2.9%, fairly stable from end-2022. The Group’s overall coverage (excluding collateral) ratio lowered to 46% at end-2023 compared to 48% at end-2022).

Funding and Liquidity Combined Building Block (BB) Assessment: Strong

SocGen’s funding profile remains strong, with customer deposits representing the major part of the Group’s funding. The exposure to wholesale funding is mitigated by good access to the markets, well diversified funding sources and strong liquidity. The unencumbered liquid asset buffer was EUR 316 billion at end-2023, comfortably covering the Short-Term needs and representing more than 30% of the Group’s funded balance sheet. The LCR ratio was a comfortable 160% at end-2023 and the NSFR was also solid at 119%.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good

Morningstar DBRS views SocGen’s capital as good with overall sound underlying earnings generation capacity, even if not as strong as higher-rated peers. The Group’s capitalisation has remained fairly stable in recent years. SocGen reported a CET1 ratio of 13.1% as well as a total capital ratio of 18.2% at end-2023, slightly down from 13.5% and 19.4% at end-2022, mainly due to the Leaseplan acquisition. This provides the Group with an adequate cushion of around 340 bps over Maximum Distributable Amount (MDA). The leverage ratio was 4.3% at end-2023 compared to 4.4% at end-2022. SocGen has been actively building up its loss absorption capacity. At end-2023, the buffer of Senior Non-Preferred debt was equivalent to 9.3% of RWAs and the Group’s TLAC ratio was 28.3% (excluding Senior Preferred Debt), well above the 2023 requirements of 22.1%. The MREL ratio was also in excess of the 2023 requirements of 25.7% of RWAs.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/431522.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (15 April 2024) https://dbrs.morningstar.com/research/431155/global-methodology-for-rating-banks-and-banking-organisations. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors and Morningstar DBRS Global Corporate Criteria (15 April 2024) https://dbrs.morningstar.com/research/431186/morningstar-dbrs-global-corporate-criteria.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies

The sources of information used for this rating include Morningstar Inc. and Company Documents, SocGen Q4 2023 Presentation, SocGen Q4 2023 Excel File, SocGen Q4 2023 Press Release and SocGen 2024 Universal Registration Document. Morningstar DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

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

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS’ outlooks and ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://dbrs.morningstar.com/research/431523.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Arnaud Journois, Vice President, Credit Ratings – European Financial Institution Ratings
Rating Committee Chair: Vitaline Yeterian, Senior Vice President, Credit Ratings– European Financial Institution Ratings
Initial Rating Date: May 30, 2013
Last Rating Date: April 24, 2023

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