19 Sep, 2023

SocGen targets €1.7B in annual savings by 2026 in new strategy

Société Générale SA plans to save €1.7 billion annually by 2026 as part of a new strategy.

The French banking giant hopes cutting the high costs that have weighed on the bank in recent years will help boost its share price to tangible book value ratio, which lags many of its European peers. SocGen is targeting a cost-to-income ratio a key measure of profitability of below 60% by 2026, CEO Slawomir Krupa said as he presented the strategy in London on Sept. 18.

SocGen had the second-highest cost-to-income ratio of Europe's 32 largest lenders by total assets at the end of June, according to S&P Global Market Intelligence data. The ratio stood at more than 70%, second only to Deutsche Bank AG's almost 76%.

"We are a high-cost producer and lowering our production cost is critical to enhance net value creation," said Krupa, who replaced Frédéric Oudéa as CEO in May.

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'A matter of culture'

Improved operational efficiency is one of the strategy's four pillars, alongside better management of capital, the streamlining of the bank's business portfolio and the maintenance of best-in-class risk management.

SocGen hopes cost reductions will help convert the bank's high gross margins into sustained profitability. The bank enjoys the third-highest gross margins calculated as net banking income as a percentage of risk-weighted assets among its European peers, according to its Investor Day presentation.

Part of SocGen's new approach will see the bank's businesses bear the costs for their own transformation programs and self-finance their cost growth.

"Efficiency is also a matter of culture," said Krupa.

The €1.7 billion in gross savings the bank is targeting for 2026 versus 2022 is a combination of existing cost-cutting projects and new initiatives. Around €700 million, or 40%, will come from fresh sources of savings.

Cutting IT

SocGen aims to make around €600 million of new savings from a reduction in information technology costs, said Krupa.

"Our diversified business mix and largely decentralized operating model led to a complex [IT] architecture, to fragmented infrastructure and to a wide library of applications," Krupa said. "With a €4.7 billion cash out spend in 2022, our technology is costly relative to its size and when compared to peers."

SocGen plans to simplify and standardize the tools and services used across the bank's IT to achieve the savings, Krupa added.

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The bulk of the €1.7 billion in savings will come from the lender's French retail banking business. SocGen recently completed a merger of its Societe Generale and Crédit du Nord banking networks in France.

Other key targets for 2026 are a 13% fully-loaded common equity Tier 1 capital ratio and a return on tangible equity of between 9% and 10%. The bank also aims to deliver an up to 2% compound annual growth rate in revenues from 2022 to 2026, and a 40% to 50% payout ratio on reported net income from 2023.

Investor confidence

SocGen hopes the new strategy can regain the confidence of investors who have yet to reward the bank for several years of relatively strong performance. The lender's share price has fallen more than 50% since 2010 while its tangible book value has increased by around 50% during the same period.

The bank's shares currently trade at 0.4x its tangible book value, while the average of a selection of European peers trades at 0.8x.

"Our goal is to deliver consistently a sustainable value creation to our shareholders and all our stakeholders," said Krupa. "And to deliver, we must be first rock-solid: more capital, less costs, best-in-class risk management, strong culture."