By Fabio Benedetti Valentini
Profit drops 28% amid bank’s $354 million of extra provisions
Structured products help trading arm outperform some rivals
Societe Generale SA’s continued struggle with litigation for past misconduct is overshadowing a jump in demand for structured products and a brighter picture for consumer banking in eastern Europe.
France’s third-largest bank said Wednesday that it increased legal provisions by 300 million euros ($354 million) for disputes that it didn’t specify. Societe Generale’s 963 million-euro settlement in May with the Libyan Investment Authority, already covered by the bank’s cash pile for legal provisions, led to accounting effects on revenue, taxes and provisions in the second quarter, but had a neutral effect on the bottom line and capital position.
French lenders’ prowess in derivatives, where SocGen Chief Executive Officer Frederic Oudea had a stint in his early years at the bank, has made them some of Europe’s best performers in recent years. While appetite for structured products helped the firm’s trading revenue drop less than many peers in deep overhaul mode, such as Deutsche Bank AG, SocGen is still dealing with the legacy of alleged past misconduct, including a U.S. probe into violations of trade sanctions.
“We have these litigations, we’ll try to put that behind us as quickly as possible,” Oudea said in an interview with Bloomberg Television. For now, “there is no significant development” on any outstanding legal cases, he said.
The higher legal charges helped push second-quarter net income down 28 percent to 1.06 billion euros, in line with the average estimate of six analysts compiled by Bloomberg. The stock declined as much as 4.3 percent to 48 euros and was trading down 3.3 percent to 48.5 euros as of 9:09 a.m. local time.
The bank’s common equity Tier 1 ratio, a measure of financial strength, rose to 11.7 percent at the end of June from 11.6 percent three months earlier, partly helped by the effects of the initial public offering of its car-leasing unit ALD SA.
Societe Generale slightly trailed expectations in equities and beat them in fixed income, the opposite pattern to BNP Paribas SA and HSBC Holdings Plc, two of the better performers this earnings season, which reported some of the smallest drops in trading revenue during a weak quarter across the securities industry.
“The economic perspectives are better, so I think we can still see activity on the corporate side” and “on the markets we have had very low volatility also because probably people were waiting for some elections,” Oudea said. Following elections in Europe, “things could potentially improve I guess with more flow and more volumes,” he said, without providing a specific revenue guidance.
SocGen’s equity-trading sales fell 3.3 percent to 549 million euros, compared with the 559 million-euro average analyst estimate surveyed by Bloomberg News. Revenue from buying and selling bonds, currencies, commodities and other debt products fell 6.8 percent to 586 million euros, above analysts’ estimates and a smaller drop than many rivals.
“Robust revenues on structured products” were offset by “soft cash and flow derivatives” in the equities business, Societe Generale said. Demand for structured products was also sustained in its fixed-income business, although rates activity dropped, it said.
Societe Generale’s profit rose 11 percent when stripping out all exceptional items, including gains from acquisitions and disposals.
Profit from international retail banking and financial services jumped 30 percent to 568 million euros as SocGen’s Russian business confirmed it’s profitable again, while net income from Romania more than doubled. In Russia, its biggest emerging market, net income reached 31 million euros in the second quarter as provisions were “substantially lower.”
Societe Generale’s shares have risen 7 percent this year, trailing BNP Paribas’s 10 percent gain and Credit Agricole SA’s 26 percent increase. Over the past 12 months, though, SocGen is up 70 percent, fifth-most in the Bloomberg Europe 500 Banks Index.
Under Oudea, who is working on unveiling new 2020 targets this November, Societe Generale gets about a third of its revenue from French retail banking, a third from financial services and international networks, and the rest from global banking and investor solutions, a business that includes trading as well as private banking and lending to large corporations.
At home in France, revenue keeps contracting because of record low interest rates. Income at SocGen’s French consumer-banking networks fell about 2 percent to 2.05 billion euros in the second quarter, as the unit’s profit slumped 11 percent.
— With assistance by Caroline Connan, and Chris Malpass