SocGen’s shares slump on quarterly results, profitability target in doubt

PARIS — Societe Generale, France’s second-largest bank by market value, posted fourth-quarter profit that missed analysts’ estimates as earnings at the investment bank dropped and it set aside provisions for potential legal costs.

Net income rose to €656 million (S$1.03 billion) from €549 million a year earlier, the Paris-based company said yesterday.

Earnings fell short of the €944 million average estimate of four analysts surveyed by Bloomberg, as a €400 million litigation charge offset a gain from the sale of a stake in asset manager Amundi.

Societe Generale, led by CEO Frederic Oudea, signalled the bank may have difficulty reaching its profitability target this year because of “headwinds” that include record-low interest rates and volatile financial markets.

While the lender announced a series of cost-cutting measures last year, it refrained from deeper investment-banking reductions such as those under way at Deutsche Bank and Credit Suisse Group.

“You have to worry that 2016 will be a weak year for Societe Generale and other banks,” said Mr Michael Seufert, an analyst at Norddeutsche Landesbank who has a neutral recommendation on the company’s shares. “There are so many factors weighing on them. Clients holding off investments is bad for banks as is the low interest rate environment in Europe.”

Societe Generale’s shares have lost about 36 per cent of their value this year.

While Societe Generale maintained its target for a 10 per cent return on equity, it said the goal is “unconfirmed” for this year. The measure of profitability was at 7.9 per cent in 2015.

Banks across Europe have been cutting costs, raising capital buffers and shrinking their securities businesses as volatile markets undermine revenue and regulators toughen scrutiny of riskier activities.

At Deutsche Bank, co-CEO John Cryan was forced to reassure investors and employees this week that the bank is “rock solid” as concern about capital and funds drove down the value of its stock and bonds.

Societe Generale deputy CEO Severin Cabannes said on Bloomberg Television that there is “absolutely no risk” the bank will fail to pay coupons to investors who are holding the bank’s additional Tier 1 debt.

‘CHALLENGING CONDITIONS’

“Our specificity at Societe Generale is the weight of our structured products, even in fixed-income markets,” said Mr Cabannes.

“In the second half of the year, the appetite of investors on structured products has been lower. It is linked to the instability of the markets and in general of the environment.”

The bank has lending exposure to the oil and gas industry of €23.5 billion, it said.

“Their amount of exposure to commodities seems to be higher than the other banks have reported, so the market will be worried about that,” said Mr Shailesh Raikundlia, an analyst at Haitong Securities UK in London with a buy rating on shares.

“BNP had a decent set of numbers, while at SocGen it suggests they have perhaps lent to less higher credit quality institutions.”

The investment-banking bonus pool for 2015 will decline on the back of weak market conditions and the costs of adapting the business, according to the deputy CEO.

He did not say how much variable pay would shrink.

Deutsche Bank, which runs Europe’s largest investment bank, and Credit Suisse both logged losses at their securities units in the fourth quarter.

At UBS Group, which overhauled its businesses in 2012 to focus on wealth management, the securities unit reported a profit drop of 63 per cent, while BNP Paribas said last week that it is looking to cut risk-weighted assets at the investment bank by €20 billion.

Societe Generale announced plans last year to adapt its businesses to increasing regulation and to clients’ migration to mobile banking.

The company committed to €850 million of additional cost reductions by next year, with 420 job cuts in France, partly at investment-banking support teams.

It decided to reduce the number of its French branches by 20 per cent through 2020 and sold its minority stake in asset manager Amundi to raise cash. BLOOMBERG