SocGen's painful squeeze in French lending income to end early in Q4

Société Générale SA's prolonged and painful fall in lending income from its important French retail banking business is at an end, according to CFO Claire Dumas.

The French banking giant expects net interest income (NII), the difference between interest revenues and interest expenses, to increase in the fourth quarter. SocGen had previously forecast NII to pick up in the first half of 2024.

The Paris-based bank, which is more reliant on income from French retail banking than its listed peers, has experienced falls in French NII for three consecutive quarters. Banks in France are facing a variety of NII headwinds at a time when many other European banks are enjoying huge surges in revenues and profits from rising interest rates.

NII from French retail banking is forecast to experience a "slight increase" in the fourth quarter, Dumas said on an earnings call, and then "progressively improve" in subsequent periods.

Changing assumptions

The earlier improvement in SocGen's NII outlook has come due to a change in the bank's assumptions since its capital markets day in September. SocGen now expects the three-month Euribor rate to reach 3.8% at the end of 2023 and 2.6% at the end of 2024. Euribor, or the euro interbank offered rate, is the average rate at which a large panel of European banks borrow from each other.

The assumptions also include a freeze on the rate offered by regulatory savings accounts in France such as the Livret A, until January 2025 and no change in the European Central Bank's mandatory reserves requirement policy, which was reported to have been under review in recent months. Other inputs around loans and deposits outstanding and balance sheet sensitivity to changes in interest rates are included.

SocGen's French retail, private banking and insurance division generated €744 million in NII in the three months to the end of September, down 7.9% quarter over quarter and by more than 25% year over year.

The increase in French NII expected in the fourth quarter was not enough to prevent SocGen from further downgrading its full-year French NII forecast for 2023. The bank now expects French NII to fall by more than 20% in the year, compared to previous guidance of 20%.

SocGen expects French NII in 2024 to reach a level at least equal to 2022, when it made more than €4 billion from lending.

Headwinds

The bank's French lending income has suffered from hedges it placed on NII at the beginning of 2022, when interest rates were at record lows, to protect its net interest margin.

French banks have faced a range of pressures on NII in the past year as eurozone interest rates have risen. Deposit costs at the country's lenders have jumped due to increases in the rates of regulated savings schemes, and the country's usury rate regulation has also limited the pace at which banks can offer higher rates on new loans. The largely long-term fixed-rate profile of the banks' loan books has further prevented higher rates from passing on to borrowers.

The premature end to an ultra-cheap European Central Bank funding program, which had boosted eurozone lenders' NII by hundreds of millions of euros, has also hit the banks' NII.

Changes to the frequency at which the usury rate can increase in January and a freeze on the Livret A rate in July have given the banks some relief from the NII pressure. Still, a recent ECB decision to stop remunerating banks' minimum reserves has undone some of the benefits, Dumas said.

SocGen reported group net income of €295 million in the third quarter, down 79.5% year over year when adjusted for changes in group structure and at constant exchange rates.