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Fitch: Low Loan Impairment Charges Help SG's 4Q16
February 13, 2017 / 12:04 PM / in 8 months

Fitch: Low Loan Impairment Charges Help SG's 4Q16

(The following statement was released by the rating agency) LONDON, February 13 (Fitch) Improving macroeconomic conditions in some of SG's key international retail markets helped the bank generate adequate profitability in 4Q16, says Fitch Ratings. Overall, the bank generated an adequate 7.8% return on equity in 2016, excluding valuation of own debt. Reported net income in 4Q16 suffered from the non-recurring impact of DTA write-downs, a business sale and litigation provisions. SG continued rationalising its portfolio of businesses, as it announced the sale of its retail operations in Croatia and Georgia and the full control of Antarius's insurance, which up to now was a joint venture between SG's subsidiary Credit du Nord and Aviva. We understand from management the integration of Antarius will not have a material impact on the group's capital ratios. SG also signalled its intention to sell a stake of its vehicle leasing subsidiary ALD while retaining a controlling interest. Despite a EUR235 million loss on sale related to the Croatian subsidiary, SG expects a capital ratio benefit once the transaction closes in 2017. We expect SG to continue to concentrate on markets where it is able to compete effectively. Pre-tax profit in 4Q16 increased by 70% yoy to EUR1.2 billion, excluding debt valuation adjustments, provisions for home loan purchase schemes, and gains and losses on disposal. The improvement largely reflected 58% lower loan impairment charges, amid challenging revenue generation (1% higher yoy) and limited expense growth. The sharp reduction in loan impairment charges was broad-based across all business divisions, but was mainly driven by international retail banking, particularly in Russia and, to a lesser extent, Romania. Overall, the group's loan impairment charges for 2016 were equal to 37bp of gross loans, materially below SG's previous guidance of less than 50bp. French retail banking, which accounted for 32% of the group's 2016 pre-tax profit excluding the corporate centre, generated in 4Q16 EUR512 million pre-tax income, 4% higher yoy excluding a EUR87 million home loan purchase scheme provision release. The improvement was driven by a 13% fall in loan impairment charges, as a 4% reduction in operating expenses only partly mitigated a 4% revenue decline. The latter reflected the persistent negative impact of continued housing loan renegotiations in a low interest rate environment and low reinvestment yield, which we expect will continue well into 2017 and which is affecting the profitability of the entire domestic French banking sector. Net interest income in the domestic retail banking business fell 7% yoy and accounted for 59% of the division's revenues. Commission and fee income remained resilient and was 2% higher yoy as the bank increased the sale of fee-generating products to its retail customers. We expect cost control to continue playing a role in mitigating revenue pressure in the medium term, given the bank's plans to further invest in digitalisation while it transforms and reduces its branch network. The International Retail Banking and Financial Services (IBFS) was the single largest contributor to the group's revenue and pre-tax income improvement and accounted for 39% of group pre-tax income excluding the corporate centre in 4Q16. The division's pre-tax income rose 59% yoy to EUR703 million, reflecting lower loan impairment charges that almost halved yoy, as well as sound 7% revenue growth. Within international retail banking, the improvement in macroeconomic conditions in Russia and Romania led to a significant decline in loan impairment charges, which fell 42%. Within IBFS, financial services to corporates also saw positive results as pre-tax income grew 33% to EUR207 million, underpinned by strong revenue growth (10% at constant scope and exchange rates), operating expense and loan impairment charge reductions. Results benefitted from continued growth in equipment finance loans, as well as the integration of the Parcours Group in SG's fleet management business. Pre-tax income in SG's insurance business also rose 8%, bolstered by continued momentum in life insurance savings. The acquisition of the stake in Antarius will significantly expand the scope of the business, taking life insurance client assets to a pro-forma EUR112 billion (EUR98 billion at end-2016). Stronger client demand for structured products led to a 13% increase in equity trading revenues, which stood at EUR509 million and accounted for just under half of trading revenues in 4Q16. Revenues in fixed income sales and trading also rose 7% yoy in 4Q16, reflecting the favourable industry-wide macroeconomic trends in the quarter, particularly in rates, as well as higher activity in structured products. However, the improvement was far less than at many of SG's peers, and well below the revenue increase reported by the large US banks. Together, these improvements drove a 56% yoy pre-tax income improvement in Global Banking and Investor Solutions (GBIS), which also includes prime and securities services, as well as financing, advisory and asset and wealth management. Revenues in financing and advisory fell 6% yoy, reflecting lower corporate finance activity, but this was more than offset by a material fall in loan impairment charges compared with 4Q15, when the bank made provisions for some larger exposures and for its exposure to the oil and gas sector. Overall, pre-tax income more than doubled to EUR215 million in 4Q16. Asset and wealth management reported a EUR18 million pre-tax loss for the quarter, reflecting both the integration costs related to Kleinwort Benson and a sharp 10% revenue decline. We expect SG's wealth management revenues to remain under pressure in the medium term as clients' low-risk appetite results in asset allocation that is less remunerative for the bank. SG's fully-loaded Basel III CET1 ratio rose 10bp qoq to 11.5% at end-2016 as it reached the lower end of the bank's targeted 11.5%-12% medium-term target. The group's leverage ratio stood at 4.2% at end-2016, 20bp higher yoy, mainly reflecting capital accretion. SG added EUR150 million litigation provisions in 4Q16, taking total provisions to around EUR2 billion, suggesting further clarity in some of its pending legal cases, the most material of which relates to alleged violations of US embargoes, which could result in a material fine. As of end-2016, SG more than satisfied its 2019 loss-absorbing capacity requirements of 19.5% of risk-weighted assets and 6% of leverage exposure, but we expect the bank will continue improving its ratio as it progresses towards its 2021 goals. Contact: Christian Scarafia Senior Director +44 20 3530 1012 Fitch Ratings Limited 30 North Colonnade London E14 5GN Luis Garrido Analyst +44 20 3530 1631 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. Additional information is available at www.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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