Société Générale Société anonyme (GLE) Earnings Call Transcript & Summary

Good afternoon. I'm delighted to be joined today by Frédéric Oudéa, CEO of Société Générale; and William Kadouch-Chassaing, CFO. But before we go into our fireside chat, I will leave the floor to Frédéric for some introductory remarks.

Yes. Well, good afternoon, Giulia. I hope then you -- that can hear me. We are, of course, with very specific conditions, remote conditions for this presentation. Good afternoon to all. As we all know, we are living in unprecedented crisis, which is, of course, first, a health crisis. In that context, our duty is, first and foremost, to protect our teams and our clients. And as any bank, I guess, any company, we have organized in a very different way from an operational point of view, having a lot of people working from home. And dealing, of course, with the situation as well as possible, having in mind, two, our company, our clients. Beyond this health crisis, there are, of course, potential economic impacts and current repercussions on the financial markets. I think it's important to stress that, obviously, it's too early to assess all the consequences of this crisis. It will have an impact on the economy and probably the creditworthiness of some sectors. But I think, it's important to have in mind that step-by-step and maybe, of course, in a less coordinated way than we saw in 2008, 2009, there are measures, decisions, answers, which are provided by governments, central banks and supervisors. And I'm sure that we will answer a question on this. Just yesterday evening, as you know, our French President has announced a very strong support to the economy through different levers. But in particular, a guarantee scheme, which would be very significant with details in terms of implementation, which are just being finalized as we speak. But which will, of course, help the economy going forward in France and the sectors and the companies, and to limit the damage in the short as well as midterm. I'd like to highlight also that, of course, for a bank like Société Générale, it's clearly a very different situation than in 2008, 2009. We are entering this crisis, which might be much shorter, actually, in terms of impact than the previous one, with, as you know, a strong capital ratio, 12.7%, 12.8% pro forma, with also a very strong liquidity buffer and a very good credit portfolio. I will discuss that more in detail later on, but I think that we are very well armed to manage these issues. Let me just highlight that in our press release this morning. We mentioned that to date, of course, there are no operational or financial elements that will justify any specific communication from our group. Before I leave the floor to William, who will give us a few figures, and in particular, highlight what some of the supervisor decisions could mean. Let me just confirm as I'm told that we have sometimes some questions that the notice of our Annual General meeting, which is scheduled for May 19, this year, will be published tomorrow on Wednesday, March 18. And it includes all the resolutions, and in particular, the one proposing a cash dividend of EUR 2.2 per share for 2019. We will, obviously, update you in the coming days on the practicalities of the general assembly, the format it will take, how we'll organize the votes. This is also something -- although the organization of general assemblies is something being discussed with the government, which might take some legal framework to again guarantee, of course, that even an assembly without any people could be legally validated, but again, you will have all the details. And let me just remind you that last year, you were more than 70% expressing your votes by Internet and the decorum was reached by Internet. That's for my introductory remarks. Again, we'll come back, I'm sure, on many of these topics. But I would like to leave the floor immediately to William, who will just give us, again, some figures.

Thanks, Frédéric. Hello, Giulia. Hello, everyone. I hope you keep yourself and family safe. Maybe a few figures. With capital liquidity, credit risk and market risk, we provided you this morning a few slides echoing some of the data I will comment. But starting with capital, as Frédéric mentioned, we ended up the year of 2019 with a capital ratio, core Tier 1 ratio of 12.7%, actually 12.8% pro forma. Taking into consideration what has been already announced by the ECB last week, you should add approximately 100 basis point of buffer to that number to get to the MDA. So to be more precise, the announcement that we can fast-forward CRD5 implementation is worth, for Société Générale, 77 basis points, let's call it, 80 basis points roughly. In addition, should there be the canceling of the countercyclical buffers that are currently hitting our core Tier 1, this would be an additional 28 basis points. So in total, roughly 100 basis points. It means that fundamentally with what has been announced and what could be announced this week, and this would be operationalized very shortly as we understand from ECB and Banque de France, our buffer above MDA would move to 270 basis points to 380 basis points above MDA. In absolute term, this equates to approximately EUR 13 billion of core Tier 1 or owned funds, which is a significant number. In addition, you have seen that the ECB has announced that banks may be, in case of the very severe crisis, able to operate temporarily below the capital conservation buffer, which is 250 basis points. Let me stress that we do expect that buffer of 380 basis point above MDA is quite comfortable, without having to hit this capital conservation buffer. This is for capital. On liquidity. Just to remind you of some of the figures, we ended up the year with a liquidity buffer of EUR 190 billion. And we are, obviously, as we stated and as we speak, well above our LCR and NSFR targets, which are stressed targets as you know, which means that there is a buffer already in the ratio as we compute it. We have already achieved 40% of our vanilla long-term funding program as of date, including 56% of the senior nonpreferred program. In addition, I can stress that we are issuing structured notes in an order of magnitude that is very consistent with what we have seen through the year of 2019. So overall, the program has achieved close to 40% as of date, whether this is vanilla or structured product. What I want to stress is the fact that what has been announced by the various central banks, ECB, Fed, Bank of England, Bank of Japan is, obviously, very helpful or could prove very helpful to sustain the liquidity in the market. We observe okay condition for short-term funding. And obviously, with a combination of TLTRO in Europe as well as the latest decision by the Fed offering capacity to draw 80 -- on 84 days liquidity on the last, that will only help. And that's a major difference, we think, relative to 2008 and 2011 crisis. Turning to credit risk. We provided you also with a number of elements to gauge and assess our portfolio. Let me start reiterating that we ended up the year with 25 basis point of commercial cost of risk, which is roughly EUR 1.2 billion, EUR 1.3 billion pretax expense. Our latest EBA standout NPL ratio was 2.6%, one of the best in Europe, with a coverage ratio of 55%, also one of the best in Europe. We have diversified geographies and sectors. So just some case in points, Italy and Asia represent only respectively 2% and 1% and -- President -- Asia, China -- sorry, Mainland, 1% of our EADs. China, as a whole, is about 6%. And on sectors, we have no more sectors that represent more than 4%. Case in point, oil and gas, which I know raises a lot of questions these days given the price of -- the oil price represent around 2% of the total EAD -- EAD of 1 -- EUR 919 billion overall. We have very limited exposures to LBOs. And I will leave it to questions, but we are quite confident that we can manage the exposures through the sectors, given the rather conservative appetite we have overall, be it ratings of counterparties and structures. On market risk. To finish with the late -- with the last data point. Let me remind you of the fact that our market RWAs are in the range of EUR 14 billion to EUR 15 billion, have been sold during 2019. At the end of 2019, there were EUR 14.5 billion. This is consistently due to the fact that stability -- due to the fact that our VaR -- stressed VaR are generally below peers. We've done some adjustments also relative to Q4 2018 to tame that. We, obviously, would expect some movement in VaR, stressed VaR, as you see in the markets, but we think it is manageable.

Fantastic. Thank you very much, Frédéric and William for this introduction. So as you, of course, pointed out, the current market environment has changed dramatically over the past couple of weeks. So I want to discuss the coronavirus potential impact on SocGen straightaway. Are you perhaps seeing any early signals of potential impact coming from COVID-19? So for example, are you hearing of corporates starting to use up their credit lines? Or how has your dialogue with your clients changed on the back of the most recent developments?

Listen, I think it depends a lot, of course, of the clients, corporate, individual clients, self-employed professionals. And it depends a lot also on the geographies. You have a situation which varies. I would say, in France, as you know, we have a country, which is just entering into a more constrained confinement with some closures of restaurant, coffee shop, a lot of shops, which are not absolutely necessary. While in other countries, and I have in mind for example, Russia, where you have much less cases, they are closing their boundary to a certain number of people and travel are absolutely limited, but you have not seen so far the same measures. And let me, obviously, remind you that when I think about Western Europe, we don't have fundamentally any other presence in retail than in France. We don't have a presence in Italy. When you look at the kind of trends, I must say nothing to signal on the individual side, the people in the street. I think you will see a small self-employed professional now coming to us. It is just a start to secure their funding. And as I was mentioning, the government has just announced that there will be a very significant guarantee program. The magnitude is EUR 300 billion. So to give you an idea, this is more than in practice, the total amount of loans provided to SMEs in France, because this amount is below EUR 300 billion. Again, we are just discussing the final conditions. There will be -- it is likely that it will be 90% for most of the companies, maybe a little bit lower for the very large companies. Again, it's still something to finalize today. We have seen also some large corporates drawing on their committed lines. I must say in a kind of trying to secure their liquidity. And sometimes, if I may say, even with no real need. But I would say as a way to gain even more confidence, but again, in a relatively irrational way. So that's where we stand. As I said, it varies from one country to the other. But it is, at this stage, what we've seen. Of course, all our networks in France are getting organized to meet, when I say meet, to answer the phone most, obviously. And sometimes, of course, the branches remain open. But we encourage people to deal with these matters on the phone as much as possible via remote channels. And I think it's the case for basically the business community to ensure that we can put in place these new facilities with this guarantee of the government. That's what I would describe. Again, I was happy to answer more in detail, but that's the way I would describe the current situation.

Thank you. And if I can ask you perhaps a little bit more in detail. Investors are worried about the procyclicality of IFRS 9, but I understand that there might be some mitigants. For example, if you have a government guarantee or if you offer some moratorium on payments. So can you help us understand this point a little bit?

Yes. And perhaps William will complement on the refined technicalities of IFRS 9. But can I just, first of all, mention that it depends, of course, on your 1 year of scenario and what kind of expectation do you have? Here, I cannot give you much more detail. But our Chief Economist will release its new scenario in the very coming days. What I would say, it corresponds, at this stage, definitely, to the mild recession, if I may say, compared with 2009. So something relatively moderate for all the full year as we all know. An impact, yes, in the very few coming months. But on a full year basis, something which is moderate as a recession. That is something, which can play a role in IFRS 9 as it is taken into account in calculating the 1-year expected loss. Beyond, clearly, the fact that the loans will be guaranteed will be a clear mitigant, as I said, with up to 90% of the loans, the new loans, which will be, of course, guaranteed. And effectively, if it's just potentially a postponement of the reimbursement, but if the actual discount cash flows of the loan does not change materially, you will have effectively neither an impact on the NPL classification or on the provisioning. And I think that it's important to mention that, again, we will see, I think, a very, very different situations. It's not going to be homogenous from one sector to another and from one company to the other, including in certain common sectors depending on the starting point. William, would you like to add anything on that?

Not much to add. I mean, as you said, then there are 2 aspects. One is the passive downgrading, I mean, increase in provisioning stemming from potential downgrade and change in economic scenario. And there is more debate, as you pointed out, Giulia, as to whether we would qualify forbearance as a default. And when people may try to default, we clearly see that guarantees -- state guarantees, as you pointed out, and delayed payments would be helpful in this debate to avoid the people going into default. But this is a debate that people very pragmatically have today as to how we account for it. Most with the relevant accounting authorities as we speak and the prudential authorities. So I think people will be pragmatic. Without changing the rules, there are ways to cope with that.

Thank you very much. Remaining on the asset quality topic for a moment. Of course, another variable, which has moved a lot is the oil price. How is Société Générale risk managing that exposure to this commodity? And is there any impact that you expect that you can share?

Listen. First of all, as we all know, we know what has happened, which is probably a mix of geopolitical decisions. And on top of that, on the back of the scenario, which has changed dramatically. First thing, I think it's interesting to go back to what happened in 2016, the previous crisis, where we showed clearly for a given portfolio, the very limited impact of this previous crisis. Since that crisis, the portfolio has further evolved. And we have effectively drawn the lessons of the few, very few defaults we might have had at that point in time. The portfolio -- and William might give you, again, some figures for 2006 in terms of provisioning. We have a portfolio, which is very diverse. And I think you need to enter into more granularity than just looking at an overall portfolio. With a mix of upstreams, downstreams, a mix -- a significant portion when you look at the major oil producers of companies, which are investment grade. Even if you take the reserve-based lending portfolio in the U.S., which is something like $1.7 billion, you should not forget that a lot of these companies have hedges, which can be with maturities of 12 to 18 months. And that helps a lot in absorbing a shock, at least, relatively short-term shock. So I think we feel very confident that having drawn the lessons of what has happened in 2016, exiting certain names, structuring, again, the facility with this kind of hedging instruments and having a concentration on pretty large companies, the impact will be, at the end of the day, limited as well as it was in 2016. After, of course, then the question is what kind of price, how long the crisis might be, et cetera. But again, the 2016 scenario, I think, crisis gives you a hint as I've said, our -- of the potential impacts, which were at the end of the day pretty limited compared with the size of Société Générale, our overall exposure and cost of risk.

Perfect.

Next question, Giulia.

Yes. Yes. Yes. I will -- I got a question from the audience. So I'm going to go back quickly to the IFRS 9 point. Is there a chance in your understanding that a supervisor could ask banks to use the same macro inputs for the same economy in order to reduce the variability of models?

I have my doubt that a supervisor would impose, if you wish, a scenario and to a certain extent, which one. They might at least -- and again, here, we're talking about accounting more than prudential. But of course, they might look at the kind of scenario and try to encourage a limited divergence between the scenarios. But I don't think that you should -- at least, this is not something that we have been discussing. And you can imagine that at this point in time, we are in very close discussions with the authorities, the national ones, the SSM. But this is not something that we have so far discussed. And I have doubt that we will have that kind of discussion.

Understood. Perfect. So let's move on to then market volatility. Of course, investors are thinking about 2008, about even 1987. What impact does this type of volatility have on SocGen's CIB business?

Now they are, obviously, very different components in our CIB business, and you have financing and you have the capital markets. On the financing, beyond what we've been saying that some companies might draw certain committed lines, et cetera. Of course, for the time being, as we all know, certain markets are closed. I mean the senior bond market is relatively closed. You don't see a lot of M&A. There are, of course, still certain deals, which are actually being underwritten as syndicated, moving forward smoothly in certain sectors. I have in mind, for example, the telecom sector. So same thing. It's not black and white. But of course, for the coming weeks, we might expect a lower activity. At the same time, in a scenario where things are improving, I can imagine on the contrary, a flurry of transactions. A flurry transactions on the senior bond market as well as, I guess, on the M&A side because there might be opportunities for the company, which will, I'll say, pretty well to look at opportunities. On the capital markets, we are, of course, monitoring very strictly all our risk. It's a pretty volatile conditions as we've seen. Let me just highlight, again, as I said, that at this stage, to date, there's nothing, as we said, that will justify any specific communication. So we are managing our risk. We are pursuing the activity. William was mentioning the issuance of structured notes, that carries on. Of course, there's also a lot of volumes on the market. It goes up and downs. Volatility, the VIX is high. But again, it changes quite a lot. Even intraday as we've seen, there are big movements intraday, and we are concentrated on the management, of course, of our positions. And trying to accompany our clients also in this very turbulent environment.

Got it. So no headache from the derivative desk, so to put it?

I stick to the sentence that we've written, which is again no -- today, no specific communication is justified.

Perfect. Okay, very clear. And let's move to the U.S. The Fed has acted promptly, cap rates to 0, allowed for a lot of liquidity. What impact does this have on your dollar liquidity portfolio?

William will answer on the dollar. Can I say, for us, it's something -- again, we have a very limited exposure on the dollar, William will comment. Can I say, nevertheless, from a more bigger picture, I think it might be one of the big changes in the broad landscape of banking. The fact that at this stage, at least, we have probably the U.S. facing the same kind of interest rate environment than in Europe is obviously a big game changer. But if I may, it's less the case for us than for U.S. banks. And I must say, it will make, of course, as we have experienced, certain activities more difficult to manage, in particular, on the retail side. Can you perhaps, William, elaborate on the dollar funding and portfolio?

To shorten the long answer is that, obviously, what Fed -- the Fed is doing in association with the other central banks can only help release some tensions. To be clear and I'll come on numbers, there was still ample and there's still ample liquidity in the U.S. market, especially on the short-term markets being repos, commercial papers and the overnight liquidity. But there were some tensions in some indicators, especially on price. We have seen the OIS BOR (sic) [ LIBOR ] rates, for example, going up. Yesterday, the repo rates was on the rollercoaster and has come back to normal. So what Fed is doing will ease that early tensions. But it is to be said that on the liquidity side, we haven't incurred any issues. Now as far as Société Générale is concerned, to put it simply, 20% of the assets are dollar-denominated, 35% of the liabilities, which, obviously, is not a bad position to be in. What is really the area of focus is short-term liquidity. If you come back to some of the previous crisis, I mean, on the long term, actually, the duration of the dollar funding is longer than the average duration of our long-term fundings, 4.8 years relative to 4.3. So I wouldn't say it's an issue. On the short term, what is important to remind is the fact that we have 25% of our dollar funding only that comes from the U.S. We have a reliance on Money Market Fund, which by the way, are active and playing in the overnight market role today, which is very limited, EUR 5 billion to EUR 6 billion, depending on the time, which is very different to situations that we have encountered in the past. So I would say with what Fed is doing now with this window of -- excess of potential liquidity of up to 84 days, that's only improving the overall picture. But that would, obviously, lengthen a bit the duration of dollar we were able to raise in the past days at cheap price relative to what we have observed in the past days.

Thank you. And let's move now to the cost line. So it's very early days to discuss the impact on provisions. But most likely, we can say they will increase. Top line most likely come under pressure. So I guess, banks will turn to costs to defend the bottom line. Are there any measures that you're thinking about on the cost side beyond what, of course, you have already announced?

Questions we'll answer then. Let me just say on the broad picture for central banks. If to a certain extent, the policies has varied in terms of rates, clearly. And you have noticed the ECB decision to maintain its rate the last few days. There is a clear, in my view, coordination on the funding. And I think it's very important, again, to insist the central banks have provided the backstop for funding in whatever currency. Now to come to your point. First, let me say, there are costs which will disappear. It's obvious in this current situation, cost of travels, cost of consultants. I mean I think and I guess some of you are experiencing the same thing. Again, depending on which country you are based. But clearly, we are now, as I've said, thousands of people working from home, concentrating, of course, on the most urgent thing, the management of this situation with their clients, and there will be some costs which will disappear very clearly. Beyond, we will pursue our cost adjustments. Let me be clear, I don't think it's in this kind of situation that we are going to announce restructuring measures. Let's face it, there is a question of decency. And as I said, the priority in the next 2, 3 months is to manage the situation. But as you know, we had committed clearly on the cost line, and we will pursue this long-term trajectory to improve our cost-to-income ratio. I have always mentioned that 2019 is not the end of the story. We will pursue that. And I think that we will all have to draw the lessons of the post crisis. The world will be different afterwards. I mean, it's -- I tend to think that, yes, the impact of the crisis at the end of the day will be manageable because it might be for short term, strong negative impact. But then, a lot of sectors will recover. On our side, banks, we will have to look at all the consequences of that -- what will happen. The fact that governments will have spent a lot of money, that the situation will have changed, et cetera. I mean things is not going to go back to usual. And there will be, I think, further needs to adapt, adjust, size opportunities as well, of course, as draw certain lessons on certain activities. So I think it's too early to say, but this is at least the kind of approach I have. But it's not for today, it's just for tomorrow.

Excellent. Thank you. And I have a couple of questions coming through on capital. So you've been, of course, very clear on the dividend for 2019. And very clear on the MDA in the slide pack that you released this morning. But just thinking about what the ECB has announced on Thursday. So the possibility for banks to temporarily operate with lower capital. Now do you think -- so first of all, does this change anything about the way you manage your business at Société Générale? And then second, do you envisage banks using these additional capital leeway to cover perhaps losses in the credit risk book as the situation evolves?

Listen, I think, it's still a little bit difficult to quantify all the impact, the pluses and the minuses on the capital. And at this stage, we don't change at all the way we look at our capital management for this year. William will remind you our major guidelines. As I've said, you will have further drawings. You will have new loans with probably up to 90% guaranteed by the government, which will mean very limited cost in terms of risk-weighted assets. You might have certain downgrades. But may I say, on the other hand, it's also fair to say that the production on certain loans will not be very dynamic. Let's be realistic. I don't think that the French citizen will, particularly, spend or go to branches to borrow money on the mortgage. Let's face it. We are now confined for 2 weeks, 3 weeks, 4 weeks, who knows. So clearly, there will be also less consumption, if I may, less origination on other credits. I think today, it's a little bit difficult to see exactly where the balance will come. Can I say that even if the balance were to use more capital at some point in this crisis, the sum of all these elements, we have a lot of margin of maneuver. We entered, again, in this -- in crisis with a good buffer beyond even our 12% core Tier 1 ratio target. So perhaps, William, can you elaborate and give a little bit more figures?

The very point is a starting point effectively. We start with 270, actually 280 pro forma buffer above MDA. Let me remind you that what we want to have is 200 buffer above MDA in normal circumstances. We are adding to this 270, 280 basis point buffer, a good 100 basis point, which stems from what has been announced by ECB and confirmed. I talked to them yesterday. It's clearly that they will be operationalized in very shortly. So it's 380. In the severe stress we do for ourselves, we should be in the normal course of our business and projections. We drive our capital trajectory, so that we are above MDA at any point in time. So I don't have crystal ball about that specific crisis. But I don't think based on what I know now, that we would have to go as far as tapping into the capital conservation buffer. For others, I mean, I will not make any comment on peers, but I think you have to start with a starting point, which is, what is the ratio and make your own computation. But I think fundamentally, this 380 is consistent with a manageable buffer in a stressed scenario.

Great. Frédéric, William, thank you very much for taking the time and having answered my questions. And thank you, everyone, for listening.