Société Générale SA's retail and trading revamps will cut costs, helping offset revenue pressure from long-term ultralow interest rates, but the French bank needs to ensure it does not lose its competitive edge against peers, according to analysts.
In December 2020 SocGen announced plans to merge its two French retail operations, and it has also been restructuring its flagship equity derivative products in its markets business to reduce risk. Both projects will trim costs: an estimated €450 million by 2022 or 2023 at global markets; and €350 million in 2024 and €450 million the following year, from 2019 levels, at the retail division.
The moves come as Europe's banks grapple with negative interest rates, fierce competition and tough regulation, compounded by the economic impact of the coronavirus pandemic.
Costs
"The cost line is probably the easiest line for them to address, especially in an environment where it looks like interest rates are going to be lower for longer, so you are not really going to get a boost from that side," Johann Scholtz, an analyst at research and investment management firm Morningstar, said in an interview.
SocGen's return on average equity, a key measure of profitability, was negative 7.09% in the second quarter of 2020 but rebounded to positive 6.04% in the third, although this was lower than the 6.12% recorded in the year-ago third quarter. French rival BNP Paribas SA's ROAE was 8.30% in the second quarter and 6.81% in the third.
BNP Paribas posted a 13.9% decline in fourth-quarter 2020 net profit, and the market will be closely watching SocGen's results Feb. 10. There have been concerns about a lack of a clear strategy.
SocGen's share price has fallen more than 40% over the last 12 months, far more than the S&P Europe BMI Banks Index's decline of roughly 20% over the same period. On Feb. 5 its shares traded at €17.09, far below where they were when the bank uncovered a €4.9 billion trading fraud committed by rogue trader Jérôme Kerviel on Jan. 24, 2008, when they closed at €67.73. In May 2007, before the financial crisis, they were trading at more than €150, according to S&P Capital IQ data.
In 2017, SocGen unveiled its 2020 strategic plan, including cost cuts at retail unit and a return on tangible equity target of 11.5%. In 2019, it revised the 2020 profit target and restructured its trading operations following market losses. It also sold off noncore assets to shore up its capital position and contended with legal action in the U.S. and France, with one case in the U.S. leading to the abrupt departure of the bank's deputy CEO in 2018. It reshuffled management in August 2020 following two consecutive quarterly losses, its second reshuffle in two years.
'Restructuring fatigue'
"There is almost a restructuring fatigue in the market," Scholtz said. "It becomes a bit repetitive."
But while it chips away at costs, SocGen's biggest challenge will be to preserve its franchise, he said.
SocGen has set itself apart as a leader in structured products, pre-packaged investments linked to an index or basket of securities. It had a 10% global market share between 2015 and 2018, and in 2019 this business accounted for 25% of its global market revenues.
The success of the products can depend on the performance of a stock market index, and the high-risk nature of the business has played against the bank in volatile markets. Its equity derivative products took a hit after the ECB recommended banks cancel dividends, causing the bank's market revenues to fall 80% year over year in the second quarter.
The bank now plans to offer less risky products, but it means it will lose €200 million to €250 million annually in global market revenues.
Scholtz said the bank may lose its competitive edge if it concentrates more on fixed-income or flow equity derivatives, which are exchange-traded futures and options as well as exchange-traded funds, and are much more liquid and less subject to risks from market fluctuations.
The margin on more vanilla products is much lower, and SocGen does not have the scale needed to compete effectively against "real global kind of flow monsters, the U.S. banks," he said.
Risk
While the move is positive because it does reduce risk, it also begs the question of whether the bank can remain a strong competitor with a smaller business presence, said Nicolas Hardy, executive director in the financial institutions team of Scope Ratings. "In a few segments, size is critical," he said.
As a result of the bank's restructuring programs, its earnings reports are peppered with cost-cutting measures, and it may be the only way for large groups like SocGen to improve.
"I get the investor fatigue of saying, 'okay, those banks are constantly restructuring, you have the retail restructuring, the CIB restructuring, the brand restructuring, digitization.' I get this, but on the other hand it is useful," Arnaud Journois, vice president of global financial institutions at DBRS Morningstar, said in an interview. "These are very large groups. Rome wasn't built in a day and they have to do these restructurings — and it takes a long time."
By announcing its retail merger a few months after a management reshuffle, the bank is attempting to demonstrate that changes at the top will bear fruit, Journois said.
Investors may have to wait a few years to see the results, but at least the lender is seeking solutions after a very challenging year, he said.
SocGen did not respond to comment for this article.
