December 13, 2016 / 9:59 PM / 8 months ago

Fitch Affirms Societe Generale at 'A'; Outlook Stable

(The following statement was released by the rating agency) LONDON, December 13 (Fitch) Fitch Ratings has affirmed Societe Generale's (SG) Long-Term Issuer Default Rating (IDR) at 'A', Short-Term IDR at 'F1' and Viability Rating (VR) at 'a'. The bank's debt ratings have also been affirmed. In addition, Fitch has assigned SG a Derivative Counterparty Rating (DCR) of 'A(dcr)' as part of its roll-out of DCRs to significant derivative counterparties in western Europe and the US. DCRs are issuer ratings and express Fitch's view of banks' relative vulnerability to default under derivative contracts with third-party, non-government counterparties. A full list of rating actions is available at the end of this rating action commentary. The rating actions have been taken in conjunction with Fitch's periodic review of the Global Trading and Universal Banks (GTUBs), which comprise 12 large and globally active banking groups. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT SG's IDRs, VR and senior debt ratings reflect the bank's sound company profile underpinned by selected franchise strengths across a diverse range of products and geographies. These include a multi-channel presence in domestic retail operations, largely focusing on more affluent urban areas, as well as international retail banking and financial services to corporates. SG's sound corporate franchise in the eurozone also benefits its securities business, where the bank has leading positions in euro-denominated debt capital markets and equity derivatives. The ratings also factor in the bank's asset quality, which despite gradual improvements remains weaker than French and GTUB peers'. At end-2Q16, gross impaired loans stood at 6% of gross loans. Despite adequate coverage at 63%, unreserved impaired loans stood at over 20% of Fitch Core Capital, which exposes the bank's capital to the realisation of collateral, often in the form real estate. SG's stock of impaired loans partly reflects slower write-off practices in France, as the bank typically aims to fully resolve problem loans, of which it has has a sound track record. We expect the pressure on French retail's net interest margins to continue, given prolonged low interest rates and limited pricing flexibility on the liability side due to the regulated nature of many savings schemes. At the same time, investments in digitalisation and branch rationalisation, which should improve operating efficiency in the longer-term, will likely limit cost flexibility in the short-term. At end-9M16, the bank contained operating expense growth at below 1%. Cost management and developing fee income will be key to offsetting revenue pressure in France. SG's diversified franchise, in our view, enables the bank to generate resilient and sustainable earnings, as demonstrated in 3Q16 when a sharp pick-up in profitability in Global Banking and Investor Solutions (GBIS), and falling loan impairment charges (LICs) in international retail helped to sustain sound performance amid domestic revenue pressure. However, our ratings also take into account earnings volatility introduced by the GBIS division, which includes sales, trading, prime and securities services, and accounted for 37% of SG's risk-weighted assets (RWAs) at end-3Q16. Improving credit conditions domestically and the bank's focus on higher-quality borrowers in higher-risk markets, including in Russia, should help LICs remain within the bank's updated guidance of below 50bp of gross loans for 2016. Continued risk reduction in international retail banking will be important to underpinning the group's profitability, which was demonstrated in 9M16, when operating income in International Retail Banking and Financial Services (IRBFS) rose 28% yoy to EUR1.8bn, largely reflecting materially lower LICs. This also underpins our view that SG's presence in higher-risk jurisdictions is mitigated by a generally cautious approach and a track record of limited losses to date. Capital and leverage ratios are at the lower end of GTUB peers', but this is more than offset by SG's strong internal capital generation versus peers. The bank's fully-loaded CET1 ratio increased 50bp to 11.4% in 9M16, and its fully-loaded Basel III leverage ratio stood at 4.1% at end-3Q16. The ECB notified the bank of its 2017 capital requirements pursuant to the Supervisory Review Evaluation Process (SREP), which will by 1 January 2019 stand at a 9.5% CET1 ratio, including a 1.5% Pillar 2 requirement component, an 11% Tier 1 capital ratio and a 13% total capital ratio. SG's fully-loaded total capital ratio was at end-3Q16 just 40bp below the bank's 2017 target of 18%, and we expect the bank to reach its targeted 2019 19.5% total loss-absorbing capacity (TLAC) requirements by issuing senior non-preferred debt, which would in a resolution be bailed in ahead of other senior creditors. The Stable Outlook reflects our expectation that the bank will continue generating sound profitability while progressing towards its capital targets and gradually improving its asset quality metrics. SUPPORT RATING AND SUPPORT RATING FLOOR SG's Support Rating and Support Rating Floor reflect Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the French sovereign in the event that the group becomes non-viable. In Fitch's view, the EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) provide a framework for resolving banks that is likely to require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support. DERIVATIVE COUNTERPARTY RATING Fitch assigned a DCR to SG for its material derivatives counterparty activity. The DCR is at the same level as SG's Long-Term IDR because derivative counterparties in France have no definitive preferential status over other senior obligations in a resolution scenario. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid securities issued by SG are all notched down from its VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Subordinated lower Tier 2 debt is rated one notch below the VR for loss severity, reflecting below-average recoveries. Legacy Tier 1 securities are rated four notches below the VR, comprising two notches for higher-than-average loss severity, and two further notches for non-performance risk due to partly discretionary coupon omission. Basel III-compliant additional Tier 1 instruments are rated five notches below the VR. The issues are notched down twice for loss severity, reflecting poor recoveries as the instruments can be written down well ahead of resolution. In addition, they are notched down three times for very high non-performance risk due to fully discretionary coupon omission. SUBSIDIARY AND AFFILIATED COMPANY The Long- and Short-Term IDRs and Support Rating of SG's French specialist car financing subsidiary Compagnie Generale de Location d'Equipement are based on institutional support from SG. The subsidiary is rated under Fitch's Global Non-Bank Financial Institutions Criteria. Compagnie Generale de Location d'Equipements' Long-and Short-Term IDRs are equalised with those of SG and the subsidiary's Outlooks are the same as the parent's. This is because we view this entity as a core subsidiary given its importance to and integration with its parent. Societe Generale Acceptance N.V., SG Option Europe and SG Structured Products Inc. are SG's wholly owned financing subsidiaries, whose debt ratings are aligned with those of SG based on Fitch's view of an extremely high probability of support, if required. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT SG's IDRs, VR and senior debt ratings are primarily sensitive to structural deterioration in earnings that would jeopardise the bank's currently strong internal capital generation, or from failure to reduce the stock of unreserved impaired loans. Although currently not expected, outsized losses resulting from legal or misconduct cases that would materially dent capital would also be rating-negative. Upside to the ratings is currently limited and would require a material improvement in asset quality while maintaining sustainable earnings, sound capitalisation and an unchanged risk appetite. SG's senior debt that will become senior preferred, if legislation passed in France in November 2016 comes into force, could be upgraded to one notch above the bank's Long-Term IDR once the buffer of qualifying junior debt and senior non-preferred debt is together sufficient to protect senior preferred creditors from default in case of failure. SG's qualifying junior debt buffer includes additional Tier 1 and Tier 2 instruments and stood at 7.1% of RWAs at end-3Q16, suggesting that upside for the bank's existing senior debt could materialise in 2017 given current issuance plans. We would consider an upgrade of the then senior preferred debt when the buffer of qualifying junior debt and senior non-preferred debt exceeds 8%-9%, provided that this buffer is sustainable. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of SG's Support Rating and upward revision to its Support Rating Floor would be contingent on a positive change in the sovereign's propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view. DERIVATIVE COUNTERPARTY RATING SG's DCR is currently aligned with the bank's Long-Term IDR and is therefore primarily sensitive to changes to the Long-Term IDR. Under new French legislation, derivative counterparties will rank pari-passu with senior preferred creditors. This means that the DCR will likely be upgraded if the bank's senior preferred debt rating is upgraded. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital ratings are primarily sensitive to a change in SG's VR. The securities' ratings are also sensitive to a change in their notching, which could arise if Fitch changes its assessment of the probability of their non-performance relative to the risk captured in the respective issuers' VRs. This may reflect a change in capital management in the group or an unexpected shift in regulatory buffer requirements, for example. The ratings are also sensitive to a change in Fitch's assessment of each instrument's loss severity, which could reflect a change in the expected treatment of liability classes during a resolution. SUBSIDIARY AND AFFILIATED COMPANY The ratings of Compagnie Generale de Location d'Equipements are sensitive to changes in SG's IDRs and could also be sensitive to changes in the subsidiary's strategic importance to the rest of the group. Societe Generale Acceptance N.V.'s, SG Option Europe's and SG Structured Products Inc.'s ratings are sensitive to the same factors that might drive a change in SG's IDR. The rating actions are as follows: Societe Generale Long-Term IDR: affirmed at 'A'; Outlook Stable Short-Term IDR: affirmed at 'F1' Viability Rating: affirmed at 'a' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Derivative Counterparty Rating: assigned at 'A(dcr)' Commercial paper: affirmed at 'F1' Long-term debt: affirmed at 'A' Short-term debt: affirmed at 'F1' Market-linked securities: affirmed at 'Aemr' Lower Tier 2 notes: affirmed at 'A-' Hybrid capital instruments: affirmed at 'BBB-' Additional Tier 1 capital: affirmed at 'BB+' Societe Generale Acceptance N.V. Market-linked guaranteed notes: affirmed at 'Aemr' Senior guaranteed notes: affirmed at 'A' Short-term guaranteed notes: affirmed at 'F1' SG Option Europe Senior notes: affirmed at 'A'/'F1' SG Structured Products Inc. Senior guaranteed notes: affirmed at 'A' Compagnie Generale de Location d'Equipements Long-Term IDR: affirmed at 'A'; Outlook Stable Short-Term IDR: affirmed at 'F1' Support Rating: affirmed at '1' Certificate of deposit programme: affirmed at 'F1' Contact: Primary Analyst Christian Scarafia Senior Director +44 20 3530 1012 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Luis Garrido Analyst +44 20 3530 1631 Committee Chairperson Gordon Scott Managing Director +44 20 3530 1075 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. 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