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Fitch: SocGen's 3Q17 Results Satisfactory Despite Trading Slump
November 6, 2017 / 5:37 PM / 15 days ago

Fitch: SocGen's 3Q17 Results Satisfactory Despite Trading Slump

(The following statement was released by the rating agency) LONDON, November 06 (Fitch) Societe Generale S.A.'s (SG; A/Stable/a) 3Q17 results were satisfactory, although revenue reflected low market volatility and client activity in capital markets, both across fixed income and equities, as well as persistent revenue pressure in French retail banking. This was partly offset by strong performance in international retail banking and insurance, Fitch Ratings says. Loan-loss provisions remained low and benefitted from loan-loss provision reversals in corporate banking and Romania. SG generated EUR1.5 billion in pre-tax profit in 3Q17, 22% lower yoy and adjusted for own credit and debt valuation adjustments, PEL/CEL (home loan purchase schemes) provisions, non-recurring gains on sale and a EUR88 million negative revenue impact from the adjustment of home-loan hedging costs in 3Q17. The results were also materially affected by a EUR300 million litigation charge, excluding which the bank would have generated a EUR1.8 billion pre-tax profit, 7% lower yoy on a comparable basis. In 3Q17, SG delivered a 6.6% return on equity excluding debt valuation adjustments, which was 310bp lower yoy, but in Fitch's view satisfactory given that it was significantly affected by higher litigation provisions. Low interest rates continued to affect net interest income in the bank's home loan business. French retail reported an 18% yoy fall in pre-tax profit (excluding PEL/CEL) to EUR446 million in 3Q17, reflecting pressure on revenue and a 2% increase in operating expenses, as the bank continued to invest in digitalisation while reducing branches. Higher-than-expected housing loan renegotiations and prepayments led the bank to book one-off negative revenue of EUR88 million related to its interest-rate hedges. SG guided that housing loan renegotiation rates had now normalised, at around 5% in 3Q17. We expect this to alleviate further pressure on net interest income, which is likely to reflect low margins. Housing loans grew moderately (2% higher yoy), but growth in loans to business customers, even excluding municipalities and local authorities, was below market growth. Higher fee income in the quarter only partly offset a 16% reduction in individual customers' net interest income. International Retail Banking and Financial Services (IBFS) performed strongly; pre-tax profit rose 14% yoy to EUR832 million and accounted for a high 49% of SG's operating divisions' pre-tax income in 3Q17. The improvement offset the decline in French retail banking's pre-tax profit and was sustained by sound revenue generation in international retail banking (3% higher yoy) and insurance (14% higher yoy). SG's international retail operations benefitted from strong macroeconomic environments, with strong GDP growth rates in the Czech Republic, Romania, and Russia, where inflation has stabilised. A pick-up in Russian retail loan growth underpinned a strong 16% yoy revenue increase at constant scope and exchange rates in the country, which generated EUR40 million in pre-tax profit compared with a EUR5 million pre-tax loss a year earlier. Higher life insurance assets under management and solid premium growth underpinned a 15% pre-tax profit increase in insurance. SG's Global Banking and Investor Solutions (GBIS) business saw a sharp 38% yoy pre-tax profit decline to EUR396 million, reflecting industry-wide revenue pressure on sales and trading revenue due to low client activity and market volatility, compared to a more active 3Q16. Fixed-income sales and trading revenue fell by 28% yoy, in line with Global Trading and Universal Banking peers, but the 26% yoy decline in equities trading revenue was more pronounced than peers. The bank attributed the underperformance in equities to its bias towards flow derivative products, which more directly depend on market activity. Revenue in financing and advisory was broadly unchanged yoy, as higher revenue, notably from securitisation and leveraged finance, offset a challenging quarter for natural resources. Pre-tax profit in wealth and asset management fell by 70% yoy to only EUR8 million, partly reflecting a 12% revenue decline and despite positive net new asset growth. SG's fully-loaded Basel III CET1 ratio remained unchanged at 11.7% at end-3Q17, as retained earnings net of dividend accrual were broadly offset by slightly higher risk-weighted assets and other effects. The fully-loaded Basel III Tier 1 leverage ratio edged up by 10bp qoq to 4.3%, primarily on seasonally lower leverage exposure. SG already complies with its 2019 total loss-absorbing capacity requirement of 19.5%, including the inclusion of up to 2.5% of RWAs in senior preferred debt. The bank disclosed that it expects a resolution of two of its most relevant litigation cases in the US, on interbank offered rates and the Libyan Investment Authority, could be possible within the next few weeks or months. Provisions for litigation and similar matters stood at EUR2.2 billion at end-3Q17. Contact: Christian Scarafia Senior Director +44 20 3530 1012 Fitch Ratings Limited 30 North Colonnade London E14 5GN Luis Garrido, CFA Associate Director +44 20 3530 1631 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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