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

[Audio Gap] From European banks team; [ Sharath Ramantan ] from the team also with me. And here with us today, Mr. Philippe Heim, Deputy CEO in charge of the supervision of International Retail Banking activities, Financial Services and Insurance. Mr. Heim, I will leave the floor to you for introductory remarks. We'll then try to address certain key issues through a Q&A. Mr. Heim, please.

Yes. Good morning, everybody. Mr. Heim speaking from Paris, and it's a pleasure to be with you through this Webex conference and to make an update on SocGen. I hope you are well today. In fact, maybe as an introduction, I would just remind you of a few elements that are, for me, very, very important. So you know that it's fair to say that we have a difficult Q1, but it was specifically in certain activities. We have the opportunity. We, SocGen, we have a diversified business model around 3 pillars, 1 in French retail, 1 in emerging markets and financial services and 1 more broadly in CIB. What I need to highlight immediately is the strength of our balance sheet, both in terms of capital and also in liquidity. We ended up Q1 with a core Tier 1 ratio at 12.6%. We have a rock-solid balance sheet in terms of liquidity. I'm sure we have questions around market activities, what happened in Q1. And I will -- maybe I would respond to your question regarding the topic. If you go straight to the point, we have a specific, let's say, situation regarding structured products in our market activities. But apart from that, we have a very resilient performance in retail globally, in France, abroad in financial services and also in financing activities, structured financing activities and GBIS. So what I would suggest is that we keep this session as informal and participative as possible. And maybe we could start this session with a fireside with Kazim and then open the question to the participants. So the floor is yours, Kazim.

Oh, thank you, Mr. Heim. Perhaps we should first start with the COVID-19 impact and the asset quality outlook. So you have already given usual color during first quarter on cost of risk. You booked 35 basis points, which roughly half of this is related to the COVID-19 effect. And you also guided us for the full year cost of risk like -- or cost of risk of 72 to 100 basis points. So can you please provide some color on how did you arrive at these figures and perhaps the sensitivities around the macro variables? And perhaps, again, if you could elaborate more on the kind of impact the government guarantee schemes and payment moratorium had on your outlook assessment, please, sir.

Yes. Thank you, Kazim, for these question. So maybe let me first give you some color regarding, let's say, the cost of risk in Q1. So those 65 basis points. Around, let's say, 1/3 of this is related to COVID-19 through 2 main impacts. We have the deterioration of some counterparties and let's say, a shift from Stage 1 to Stage 2 or from Stage 2 to Stage 3. We have also decided for conservatism to book some overlay on more volatile sectors. And then we have 2 fraud-related one-off [indiscernible]. So all in all, so if you put everything together, so we end up at 65 basis points. But if you not collate the COVID-19 effect, we'd have landed at 32 basis points. So this is for Q1. Then the point is what is the outlook for the full year. We had indicated that the cost of risk could land, depending on the scenario, at 70, so 7-0, basis points. It is our base COVID scenario. With a recession in Eurozone, so the GDP down by roughly 7%. It's close to IMF forecast. So it is based on the scenario of 8 weeks of confinement and gradual de-confinement. Let me here say that in practice, it's what we see. So the confinement has started in Europe end of April and 11th of May for France. The second scenario, so the protracted, let's say, crisis would lead to 100 basis points of cost of risk. So in a situation of prolonged confinement of 1 quarter and a decline of Eurozone GDP by roughly 13%. So this is, let's say, what we see for the full year. So a base case scenario at 70 bps and in a protracted case at 100 basis points. Regarding now the state aid guaranteed and the credit holiday setup that banks have decided to implement in France. Regarding, let's say, the moratorium, it's -- as we speak, it represents EUR 1.8 billion of deferred reimbursements with -- on a 6-month moratorium basis. And regarding the state aid guaranteed scheme, so what we call the [Foreign Language] Prêt Garanti par l'Etat, we have received EUR 17.5 billion of request, in fact representing roughly 70,005. And as we speak, 60,000 has been approved roughly for EUR 11 billion of loans disbursed at the 19th of May. So on this scheme, as you can imagine, we've got the guarantee from the state ranging from 10% to 13%. And so this is a well-protected, let's say, system. If we enlarge the view, and I'm sure you have questions regarding our exposure at default, let me remind you some important elements regarding our well-diversified book. Oil and gas represents 2.2% of our exposure at default. So roughly, in absolute terms, EUR 22 billion. This exposure is diversified, secured and are mostly investment-grade counterparties. Shipping is less than 1% of our group overall exposure at default. Aircraft, 0.5%. We have limited appetite for LBOs with a book below EUR 5 billion. And then if we broaden the perspective, SMEs represent 15% of our AID and emerging countries less than 11%. So all in all, we have a very sound portfolio of activities and a very sound, let's say, loan portfolio. And we are able, let's say, to estimate that, and I repeat myself, in the base case scenario, a cost of risk of 70 basis points for the full year.

Okay. Yes, maybe still quite premature, but is there any preliminary talks on how do we see cost of risk beyond 2020, let's say, 2021? Will it stay elevated for another year? Or whatever we can get from you, of course, at this stage.

We have not indicated guidance for 2021. What we said already to the market is that we consider that the cost of risk will go down slightly next year but will remain high. And regarding specifically to the state-guaranteed loan, we have to be aware that those, let's say, state-guaranteed schemes that we see in France, but we have also with the same, let's say, the same kind in Germany, Italy, Czech Republic and Russia, those state-guaranteed scheme will delay some, let's say, of the consequences of the crisis not only, let's say, in 2020. So we expect any issues on those loans, let's say, not to be seen before end of this year and maybe beginning of next year.

Okay. Yes, moving on to the capital outlook and payout policies. Obviously, the bank has made tremendous work on capital with management delivering on the main elements of the capital earlier than expected. So CET1 ratio now stands at 12.6%. But what surprised us, of course, in the call that we had last time is that you guided for this ratio to drop to 11 to 11.5x. While we understand the conservatism here, a drop of like 120 to 170 basis points from current levels, that sound a bit conservative to us. So could you please elaborate the moving parts behind this assessment perhaps particularly in terms of further risk-weighted asset inflation? And were there any dividend payout assumptions you factored in, et cetera, in that sense?

Yes. I can maybe -- thank you very much, Kazim. And so maybe to try to understand, so 2 elements. So we had indicated 3 data points. So we have indicated, first that we'll try to protect our P&L and the group net results by amplifying our cost saving plan. So we have disclosed an additional effort of roughly EUR 600 million to EUR 700 million. We discussed this already, I think, in the previous question. So in terms of cost of risk, we -- our base case in the cost of risk, that's roughly 70 basis points. And then regarding the capital, the last data point, in fact, we have shifted more or less our approach. So it's not CET1 in absolute terms. So we tend to favor, let's say, a buffer above the MDA. So we have indicated a buffer of between 200 and 250 basis points above MDA. So what could lead -- so your question is what could lead to a decrease of our capital buffer. Currently, we have a MiFID buffer of 270 basis points. So down the road, we can here leading to a buffer of between 200 and 250. First, we have the TRIM impact, and we had given an indication at least of 50 basis points of regulatory impact of those reviews conducted by ECB. We anticipate down the road, let's say, that with current volatility, we don't see market risk-weighted assets going down. Regarding credit risk-weighted assets, it's fair to anticipate a rating migration, drawdowns on FCs and so on. And maybe there is a slight element of conservatism. We have not included in this trajectory more M&A or securitization. That's why we stand with this, let's say, trajectory of a buffer between 200 and 250 basis points, which is consistent with the 2 scenarios we have articulated for the cost of risk for this year.

I think this doesn't also factors in the software regulation, positive money. I mean you guided us that this would add on like 30 basis points on top of the CET1 ratio. If you look on an opposite -- from an opposite picture to the above question, what is a blue sky scenario that you see in terms of capital levels? So 30 basis points may come from the software regulation. Is there anything else that we should factor in for CET1 ratio assumptions here that hasn't been -- yes.

No. You're right. So I mean, we have not integrated some tailwinds or some positive, let's say, developments coming from Frankfurt, coming from Brussels, on specific topics. And one topic, out of which you mentioned the deduction of software, it could represent for us 30 basis points. There is this discussion around extending the impact of the benefit of the SME discount, which represent for us 10 basis points. There is a similar initiative to favor infrastructure, but here it's pretty small, around 2 basis points. And the idea also to have the benefit of phasing. So it would be temporary, but the effect could represent 6 basis points. So if you add all those bits and pieces, it could be roughly 48 basis points.

Okay. Perfect. Moving on to the International Retail Banking and Financial Services. Well, yes, International Retail Banking has been one of the highest profitability drivers of the group. '19 return on normative equity was 18%. In first quarter, it was 15%. But in this difficult market environment, do you see the attractiveness of having a presence in emerging market trading? And perhaps the second point to ask or highlight, what is the outlook for your Russian operations in this environment where oil came down significantly, ruble depreciated? And then I think they are one of the most vulnerable to all these COVID-19 cases. And then maybe lastly, how committed U.S.A. to this geography?

Yes. So many thanks for these questions. So IBFS, so the international footprint, plus the Financial Services to Corporates represents a major, let's say, a contributor to the group net results. So let me -- let's remind you that last year, we posted for 2019 a contribution of roughly EUR 2 billion, a return of 17.6%. In Q1, of course, we will begin to have the first effect of the crisis. We have a group net income of -- as posted in our quarterly results of EUR 265 million, a return of 15%. I would say that the benefit of, let's say, of this footprint of retail banks is to have the benefit of a very diversified exposure mitigating the effect of the crisis. So we see dynamic growth across regions, and it is, let's say, illustrated by the strong growth we see in Russia. And I will come back in a minute to Russia. So roughly 8% loan growth. In Czech Republic, the loan growth is roughly 6%. If you go back -- go south to Romania, NII growth stands at 5.7%. We have also a network of consumer finance banks in Germany, in France and Italy with an increase of revenues of roughly 6%. The dynamic also was very positive in Africa, a loan growth of 6%. So we have the benefit of this very diversified set of banks, and this is important for us. And maybe I will elaborate later on regarding insurance and [ IND in mobility ]. Regarding Russia, so Russia is a very important piece of our network. And maybe let me highlight the fact that I had the opportunity to experience over the past 12 years in different position, Head of Strategy, CFO and now responsible for the international network, of 3 crises in Russia. And let me tell you that Russia is far better positioned now than it was, let's say, 5 years ago. The country benefits from a massive reserve of ForEx, let's say, currencies. The country has no public debt. The country has a possibility to, let's say, to weather, let's say, the effect of the crisis with the use of the budget policy. And we have seen that during the last episode of sharp decline of oil price, it went pretty well for the country. So we have a bank now, Rosbank, which has been completely, let's say, reshuffled, transformed over the past 5 years. We have merged our various retail entities, so in mortgage and so DeltaCredit and Rosbank. We have, through this platform, a nice market share on car loans, roughly 12%, also on mortgage. As I indicated, the platform has been completely transformed. We have seen in the crisis, let's say, a gradual and a more extensive usage of digital tools, and Rosbank is today at the forefront of the group in terms of digital intensity. So as we speak, end of April, 40% of the daily banking products were distributed online, and we have doubled this percentage as compared to end of December. So all in all, so we are committed to Russia, a country with a massive potential, a country in which we have a large history. Of course, the acquisition of Rosbank was finalized in 2008, but the whole history of SocGen in Russia started in the 19th century, and this is a part of our history. And this is an important component of our equity story.

Okay. And very quickly on the Insurance segment. Obviously, the revenues were more resilient versus many of your peers in the first quarter who had to take quite high mark-to-market losses in the quarter. Can you explain the reasons behind this? And perhaps, what would be a sustainable level of return on normative equity for the Insurance and Financial Services segments that you see in near and midterm perspective?

Very good questions. So yes, I'm not in a position to comment, let's say, what happened, let's say, in the accounts of my competitors, no? But let me tell you that first of all, the benefits and let's say, the inner strengths of the bank insurance model because we have the opportunity to distribute our insurance products to our various retail networks not just in France but in 10 countries abroad, and the system is very efficient. So in total, talking -- let's say, mentioning just the life business, we manage EUR 125 billion of AUM. And regarding P&C, it is activity where we are growing pretty fast. This is a story mainly in France where, very simply, we try to increase the equipment rates of our clients. Between the products, we are between 10% to 20% while the best competitor stands at 50%. So it's true that this business has delivered a return of roughly 20% in Q1. We are confident on the prospects, on the inner strengths of this business. And this is, let's say, business, by nature, providing a lot of synergies, let's say, to our setup.

Okay. [ Sharath ], do we have any questions to the -- to Philippe?

No, Kazim. Nothing as yet.

Okay. Do you -- okay. Shall we continue with profit and investment banking division, please?

Yes. Maybe I can take over. Good day to you, Philippe, and thank you again for taking out time from your busy schedule to attend our session. So I have a couple of questions on your corporate investment bank. So of course, we all know that SocGen was not alone in suffering significant losses in its equity trading business. So most of the French banks did take a bit of a hit. Now this kind of paints a kind of a contrasting picture versus the other U.S. or European banks where they posted robust growth. So of course, we do understand the unprecedented nature of events, the cancellation of dividends and so on. But generally, any lessons that you feel you could take away from this episode? And has it any kind of impacted your hedging strategies in your equity business? And lastly, have you seen any impact on your -- from the client side on the appetite for structured products in this environment? It would be great if you could elaborate.

Yes. So it's -- thank you very much. So it's fair to say that -- I mean, French banks in Q1 have been, let's say, singled out in very specific moments and very specific context. So let me highlight that all in all, if we try to distinguish what happened in Q1 in market activities, we have to distinguish between flows, financing and investing products. So I would say that everything went pretty okay, okay, fine and sometimes pretty well in flow activities, in financing activities as well, and it was consistent with what we have seen in The Street in the U.S. on those activities. What was more difficult was on, let's say, on the investing part. So regarding structured products and specifically in equity because we, let's say, we suffered from a severe market dislocation in -- during -- in March, so it was an episode of extreme volatility associated with strong correlation. And as you know, it's -- as we have a pretty large book of auto calls, it impacted our trading revenues, and it required an increase -- let's say, increased hedging costs to manage the position. So we have -- it is illustrated by the increase we have to book in our reserves. On the top of, let's say, this episode of dislocation, as we have disclosed it, we suffered also from the collapse in the dividend policy. Some dividends were announced, confirmed and then, let's say, canceled in March, and the impact for us was EUR 200 million. It's a fact also that this is more, let's say, more limited from 1 counterpart default, roughly EUR 55 million. Let me highlight that for flow, let's say, the activity was pretty good, including also financing activities. So down the road, it's too early to, let's say, to say -- let's say we are working on the topic. Let me highlight that over the past 18 months, we have already worked substantially on the rebalancing of our market activities, restructuring the FICC business. And let's say, this restructuring has shown to be productive because we had a pretty good Q1 in FICC, plus 32%. And the idea in equity was to complement, let's say, the structured product activity, which was geared towards complex products with a more, let's say, a more vanilla one with the acquisitions of EMC from Commerzbank, where we try to, let's say, to integrate, let's say, more simple, less volatile products to our sets of, let's say, activities.

Okay. So you briefly touched upon the topic of EMC. Like, you did come out with a recent press release about the -- much of the integration having been completed. But we do understand that you have already taken the bulk of the capital impact on EMC, but the P&L impact is yet to flow, and it's more -- it's been negligible to low. So if you could comment on the P&L evolution, contribution from EMC businesses going forward, that would be of great help for us.

Yes. Indeed, we have finalized, let's say, on May 14, let's say, the integration of EMC business, so a company we bought -- so a set of activities we bought from Commerzbank in 2018 and a business around exchange trading products, investment solutions. So with -- let's say, with this acquisition, now we will have leading positions in Germany, Austria, France, Italy, Spain and Portugal and strong presence also in Netherlands, in Switzerland, in the Nordics. So it will be a way to strengthen materially our offer of flow investment products. So as indicated before, a strong step in rebalancing our portfolio and to reduce the weight of complex products. Regarding specifically your question on what would be the full P&L impact, we stick to what we have initially indicated. So we expect a GOI benefit of roughly more than EUR 50 million for 2021 and 2022.

Okay. This is definitely useful color. And finally, on the -- you did touch upon SocGen having a strong momentum in FICC in 1Q. So if you could briefly comment on how have you seen the markets perform within FICC and whether your equity franchise, has it recovered in Q2. Anything that can be of use to us, especially on the trading business in Q2, would be of help.

Yes. So in fact, it was a very good Q1 for FICC. We were up by 32% versus last year. So a very good Q1. So how to, let's say, to explain, let's say, this performance. So everything around flow and hedging activities overperformed over the period. So we have a strong performance on rates and FX products. As you can imagine, in this context of a very volatile environment, we've got a strong demand from our corporate clients. Financing activities overperformed as well with a high level of volumes. And on the contrary, on investment solutions, so in structured products with FICC underlying, we had, let's say, lower performance, especially exotic credits in the U.S. So in a nutshell, what we can say for FICC.

And I think in the interest of time, maybe we can just go to one last question. Maybe I can ask you, in the current COVID environment, how do you see the competitive landscape, especially given the context that many of the foreign banks have kind of a necessity to support their own geographies? More so in that context, how do you see the competitive landscape in Europe? And any opportunities that you see for SocGen?

I think -- I mean, what I see across the board, if I try to -- maybe to map what we see in terms of opportunities, broadly speaking, in Europe, Western Europe and Eastern Europe broadly speaking. I think the context will be very supportive on the corporate segment. I think that the wholesale activity across the board will be very active. We will -- I think it's -- I mean, I have not a crystal ball, but I think that due to the crisis on retail activities, it's fair to say that we will see the concentration of the effects of the crisis in Q2 and a slow recovery. And I think what would be very interesting would be from this crisis, an acceleration in, let's say, in the usage of digital technologies. So it will be a -- let's say, it will act -- this crisis will act as an accelerator in the rollout of new digital tools. It's pretty impressive. I can give you, for example, what we did in France, let's say, with the wireless, let's say, card. So it's possible with a credit card, let's say, just with contactless card to pay up to EUR 30. And with the crisis, let's say, the banking association decided to put the selling at EUR 50. And we have seen an immediate impact in acceleration of the usage of the credit card. So it's just a very simple, but very illustrative, let's say, proof that this crisis will have, let's say, long-lasting effects in the relation between banks and customers. So it would be very interesting. And of course, one last element, of course, the effect of the crisis on the cost of risk, is then we discuss this at length. And down the road, I think that it's very important to have diversified business models. Operating in different activities and different geographies, it is an element of resilience for the banking sector.

So indeed, interesting times ahead. So thank you again, Philippe, for your time and sharing your thoughts. So we wish you the very best. And thank you for all the analysts and investors who have participated in the call. So stay safe and goodbye for now.

Thank you very much.

Thank you. Bye.

Thank you.