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

Good morning. I am Jean-Francois Neuez, in charge of French and Italian banks coverage at Goldman Sachs. First of all, I'd like to welcome you all to another session of the 24th Goldman Sachs European Financials Conference. Our conference is known for changing venues every year. And in a sense, this year is no exception. It's our first-ever virtual conference. So today, I'm delighted to share this virtual meeting with William Kadouch-Chassaing, the CFO of Société Générale. William, many thanks from myself and also on behalf of our organization for making the time to participate once again to our conference. Last year, I had the pleasure to welcome you for the first time in your role of CFO on stage in Paris. I guess, this time, you had to travel even less if that was ever possible. I would say that that's probably the silver lining of this crisis.

Can I ask you before you make your introduction and talk about the key messages that you've been outlining recently, what did you discover about Société Générale through this very unique period? What would be your one key anecdote that you would like to share with us?

Well, first of all, thank you, Jean-Francois. Thank you for -- to you and the Goldman Sachs team for having us. And hello, everyone. I'm pleased to invite you in the boardroom of Société Générale. This time around, we have access directly to that forum where we discuss many topics. And maybe one thing I will recall, amongst many things, is the intensity of the -- and the quality of the dialogue with all the colleagues during that period of time. We're living through very difficult times, and it has facilitated many of the discussions we have. People have behaved with a high sense of responsibility and solidarity. And so it has, obviously, shortened many of the ego things. So that's the thing I would remember beyond the IT resilience, some of the client feedback we've got. People have put the ego on the side and got to the point.

Excellent. So William, yesterday, you had some new messages out for Société Générale, notably talking about some of the more recent development. What were the key highlights?

Well, we reiterated some of the things we had already said, but we're confirming and refining. And obviously, we shed some color on what's happening. So maybe 4 things. The first thing is reiterating the strength of the balance sheet, and I'm sure we'll come back on that -- to that. But both on the capital side and on the liquidity side, we're obviously -- we are happy to see that the liquidity ratios have even improved. If I think about the liquidity buffer, the capacity to tap into the market, we were able to issue very successfully a senior note refurb instruments this week and on top of what we had done in March. And obviously, on capital, we remain very happy to have strengthened the balance sheet in the course of 2019. So we start and confirm with good foot as far as the balance sheet strength is concerned. Second message I would like to do is on the cost of risk, and maybe we'll discuss it later. But we've refined some of the messages we had done -- made in -- as much, we are more able now to qualify the same economic scenario and the sanitary scenario that we live through. I mean most of the countries where we do operate are in the process of deconfining, which is very consistent with our central scenario. And so we reiterated the fact that we are confident that our cost of risk, although it will materially increase this year, should stay between 70 and 100 basis points. And we've some high degree of confidence on the fact that the economic scenario we have in mind, overall, taking into consideration other factors, is probably a good one as of now. The third message is on the capital. We also refined some of the element there, confirming that we would be at 200 to 250 basis points above MDA at the end of the year. But if you look at the charts we've provided yesterday in the presentation which is posted on the web, you can see that we think there is a bit more flexibility but not significant relative to what we had set. And maybe fourth message is on what we see now happening on the earnings. There's maybe 2 sequences. On Q2 particularly, we wanted to qualify what happened in April and May. And it is clear that there are a lot of go-backs, especially on the production side, both on the retail side and the CIB side, with still gradually improving market parameters but still some downside elements there. At the same time, a lot of positive vibes that we see with production resuming ever since we've got out of the deconfinement in many respects of our retail business and, as I said, a more positive stance in certain compartment of the market environment. So I'd say this gives us more confidence as to the outlook, and we wanted to make sure that people understand that, obviously, in Q2, we were in the very midst of the confinement and the very midst of the difficulties to produce in terms of volume term relative to the same period of last year.

Excellent. Okay. Very clear. So you touched on the point of asset quality in your guidance for, first off, this -- for this year as many banks, so you have volunteered your guidance. And this was established at 70 to 100 basis points depending on the economic scenario. Can you please flesh out some of the key moving parts underlying this view? And the reason why I'm making this is you can see where the shares are trading. Obviously, they bounced from the bottom, but they're still at an extremely low valuation. That's true of most of the banks in the sector. Valuations seem to suggest that investors expect significant dilution. Your guidance and that of many bank doesn't. How does this reconcile? And also, as we have now been through the full lockdown and through about 1 month of easing, how has the return to work felt from the perspective of your clients' cash flow and credit standing compared to what you had in mind when you issued that guidance, which was virtually a few days before 11th of May, meaning the beginning of the end of the lockdown?

Many aspects of your questions, obviously, Jean-Francois, so I'll try to pick each of them rapidly. The first element maybe to remember is what does the 70 to 100 basis points refer to in absolute term. We're talking about a hefty number, EUR 3.5 billion to EUR 5 billion to be compared with EUR 1.3 billion in terms of amount of the cost of risk of Société Générale in 2019. So at the bottom of the range, this is 2.7x the last year. This is an important element to keep in mind, and that's why it gives us some comfort that we are in the right ballpark. When you see the provision -- level of provisioning of most of the big banks in Europe, it's about -- it's between 2 and 3. And so we are very consistent with the industry. Some are lower, and maybe they'll have to increase their provisions. Hardly, we see European banks higher than that. So that's an important element to keep in mind. And obviously, this is based on various scenarios, which I'm sure we can comment. But that give us comfort that we are in the right ballpark. And again, as I said, the central economic scenario that we factor in our IFRS 9 provisioning, combined with other factors such as the government measures, moratoria or state-guaranteed schemes in each and every country where we operate as well as some parameters such as oil price, stock price and so forth, make us quite comfortable we are in the right ballpark. To your question on client, we do not observe as of yet a significant deterioration in the credit worthiness of our counterparties. There are some cases in some sectors, obviously, and that was the case in our Q1, where you see some Stage 3 impairments and provisions, which are associated with actual or highly likely defaults, some event of default, but not that much. So we're fundamentally talking about increasing the Stage 2 provisioning as per the economic scenario we have, particularly over the next 12 months. But it is clear that we don't see now in the client cash flow and the credit worthiness. Again, these are few exceptions sector-wise and company-by-company flow of defaults. What is important also to have in mind is on the liquidity side, which can be obviously a problem for some of the counterparties, we have seen a decrease -- gradual decrease in the requests for liquidity by clients made to us, either in the form of drawings or short-term working capital liquidities and so forth. That has largely stabilized, and you see many corporates being able to access the debt capital markets today. So right now, I don't think we are in a position to say that we see fundamentally a severe deterioration. We are more in a situation to say that based on the economic scenarios we have and a number of factors within our computation, we have to increase the provisions. It means that, potentially, going forward, we could see those provisions back in the numbers. But it also means that potentially some of the casualties will be seen only when we go out of some of the moratoria or credit guarantees.

That's true. That has been a very consistent message across the different banks, which are taking part in the conference this year, the delay and the end of the moratoria as a key element for fine-tuning of cost of risk. Now coming to the first line of defense, which is pre-provision profitability, maybe first with revenues. With the advent of COVID and the policy response, which implies a lot of new debt issued by the governments and very low interest rates for a long period of time, bank revenues could be seen as being under pressure going forward. But this being said, a lot of banks always say that the best business is written when the conditions are the toughest because banks tend to regain some pricing power. And I wanted to have your view from a bank which operates in very different markets with very different clients, diversified clients as to how your business is evolving. And how do you see the profitability of the new business, the normal loans versus the state-guaranteed loans, et cetera?

It is true that when you look at the net interest margin, as you referred particularly to that element of the P&L, I would say that what bites more is the volumes base. Especially on the retail side, there's a significant decrease in volumes year-on-year in Q2, as you would expect. Consumer lending, home loans, but also some account movements and all that obviously has decreased materially in Q2. And that's what is starting to rebound, as we said. So that loss in volumes, I mean, obviously, that will bite during the year. On the margin side, focusing on credit, which is your question, I'd say it's true that we have some positive elements of repricing in certain segments, particularly on structured finance. And particularly, we continue to see the trend that was pre-COVID that on home loans, for example, or corporate loans, we have midsized corporate loans, we had an improving front book margin. So too early to say that will last, but there is an element of that. Obviously, difficult to tell you what is the balance between the volume decrease and the improving margin. Now turning to deposits on top of the credit margin, which you referred to. I'd say that we have a significant increase in site deposits, both retail and corporate, as I'm sure you hear from a lot of people, at least in the Eurozone. Now having said that, apart from specific case where we operate such as the Czech Republic or Russia or Romania, where the headline rates have decreased as a response to the -- by the Central Bank was taking shape, we don't see much difference between our initial projections in the Eurozone and where the rates are. Even, I would say, if I take the 10-year OAT, for example, as is the case, that it is slightly better today than what I may have had in my projections at the start of the year.

Now turning to costs. SocGen has already committed to reduce the costs in absolute terms. That was before of COVID. Obviously, with the advent of COVID, you've also reiterated your ambition to reduce them even more, and that's a significant effort. This said, SocGen has always emphasized the progressive nature of these costs from a social perspective. As you enter the next business planning cycle, is this premise being rethought? And in particular, with the advent of COVID, again, many banks are learning new ways of doing business. What sustainable actions can be taken to enhance returns other than revenue base?

You're right to point out that we are very focused on that. I'm not sure I would necessarily concur with you in saying that we are progressive. In 2019, we've been able to decrease the cost base in absolute term by 1%. It sounds progressive, but as you know very well, the European banking sector that not that many banks will manage to decrease their cost base in absolute term. And we have committed ourselves, absent any COVID situation, to continue that path. What you've seen in Q1, minus 3.6% year-on-year in the underlying cost base, I'm talking specifically about CIB, minus 5%. I wouldn't say this is necessarily unambitious. The question now is what can we do more beyond that and what can you -- we do all the more taking into consideration the COVID situation. So what we've said is the first reaction is we will look at admin at an additional EUR 600 million, EUR 700 million net decrease in the cost base for 2020. A significant portion of that, we want to make permanent. A portion of that, obviously, is more linked to discretionary expenses of other remuneration that to the extent the context will improve may be -- may not be seen over time. But as we also said, we are working on structural cost decrease beyond 2020. Some of it was already talked about by us. We already talked about the fact that we will continue to get rid of the sub-profitability businesses. We will continue to work on automation, offshoring, streamlining of our back office across all functions, including IT. And obviously, on top of it, we're learning stuff that may be useful to speed that process on our side. Some of it are talked about by others as well. You know that on real estate, there are potential savings that can be generated if, to the extent, more people work -- start working remotely. But there are also case in points that we may be able to speed up the adjustment of our networks in all retail businesses, not only France, but also more emerging markets where we do operate. But we have seen that clients were very happy to deal remotely for daily banking. And obviously, on the automation that I was referring to, we have proven ourselves that we were able to operate all the key functions with almost 100% of the staff remotely, including finance, compliant risk. And that obviously bodes well when you have a clear plan of automation. It's too early to give an absolute number, but the direction of movement is quite clear. And we obviously have -- we will take into consideration HR issues. And we're also mindful of the fact that we want to do it properly in each and every country where we operate. But the sense of movement, again, is quite clear.

Absolutely. Okay. Great. Now switching tech and going from P&L to balance sheet. You talked about capital and the capital targets of the group in your introductory remarks, reiterating your targets which were laid out with the Q1 results. So SocGen has moved its capital target, as some other banks have, from an absolute level to an MDA-relative level. If you ask me my opinion, I think that's the right thing to do given that your minimum requirements are given and not different from a bank to another. This MDA level has fallen for a number of banks also due to recent regulation. Do you plan to keep this new level going forward? Or do you believe that this is a temporary drawdown and that's reverting to an absolute, for example, 12% for Tier 1 ratio is the ultimate goal in the long term? And also, if peers reverted to an absolute target, would you feel that it's also appropriate for you to do the same, meaning was your decision also predicated on an industry trend?

If I may recall what we've said, particularly at the end of the year, that has been largely the case during 2019. We always said that what we want to have is a significant buffer above MDA so that equity holders are comfortable we can distribute cash return to them, and bondholders, particularly hybrid coupons or beneficiaries, have no worries that -- about our Tier 1 and Tier 2 instruments. And we have been saying for some time now that the right level, the right ballpark for us was around 200 basis points above MDA, which equates roughly to EUR 7 billion capital cushion, which I think is fairly comfortable. Now if you look at it, what we are seeing now is, in fact, that, that has moved up from 200 to 250. So that the way I would interpret what we have said, we consider that in this context the above 200 is probably better than be around 200. And that's, for us, both in a Basel III environment and in the Basel IV environment. That's why I think the discussion about the absolute term doesn't make much sense to me. The question is having the absolute capital number before Basel IV so that we are able to fulfill that promise that we will run the company with a significant buffer of above 200 basis points in a Basel IV environment. And obviously, this is what we are working on, securing that there is no volatility in that ratio and that people will continue to be comfortable when we are able. As you know, this is not necessarily something we discuss solidly. When we are able, we can distribute a regular cash return, and there is no worries about the coupons. So people can communicate the way they wish. We will always do the 2, which is to save the buffer, which is the objective, the true objective, and then how much it translates into absolute terms given the MDA. Today, the MDA is 9.05%, which is to be compared with what we were expecting for the end of 2020 given the progressive increase of contracyclical buffers, which was 10.1%.

By the way, it's an important point that you're making also here with the reduction of MDA is that SocGen is one of the few banks for which this MDA reduction with Article 104A is effective to date in full because you have already all of the subordinated debt in issue for that to be completely effective from day 1. I think it's important. It's not true of all banks of your size in particular.

Thank you to highlight that. There are 2 elements, which are important and differentiate maybe our balance sheet relative to some others I think. One is the one you mentioned. We don't need to issue Tier 1 instruments. And should we do so, it would be only a pragmatic move because price is improving. But we don't need to issue capital instruments to fulfill the condition precedent for CRD5. And by the way, when and if it will be possible to come back to cash return, we already fulfill one important condition precedent, which is to be MREL-compliant. And there is no scenario under which we think would be reaching our MREL level over Tier 1 buffers.

Excellent. Well, you touched upon the cash return. It's almost as if the questions in advance. My next question was about dividend and, in particular, the regulatory headwinds. So they've been pushed back in time recently by the supervisors, regulators, et cetera. Some have been pushed back even further out than others. There will still be, nonetheless, at some point, a material amount of capital to retain to face the so-called Basel IV or finalization of Basel III. Obviously, profits are lower today, in particular, considering the new cost of risk guidance for a year or 2. And that's true of the whole industry. That is at the time when banks are asked to extend their balance sheet and support clients even more, as we've been able to see also in Q1. So how should we -- the investors, rather, people think about capital return policy going forward? Should it continue to be predicated on earnings as a payout ratio? Or should it be more, like U.S. banks be predicated on a certain amount of capital level being maintained? And secondly, would you, if you had to make a choice, trade off some business disposal to return to cash dividend faster? Or do you believe that at this stage, the SocGen's scope of operation is stabilized?

Very different questions. First of all, let me remember that we had moved to -- we have changed slightly the policy in terms of return before the prices unfold by saying that we would provision 50% of the underlying results, which is a protection for investors for some volatility or potential one-offs, including potential CTA to transform the group. That, we have not changed. And what we will do in the next quarters is do that type of provisioning, obviously, also factored in, in the core Tier 1 through the end of the year. I think the debate as to whether it should be based on only end capital I think is a bit premature to have. 2020, obviously, will be a difficult year for banks and for us in terms of profitability outlook, but it's 1 year. So the dividend policy, as you know, has to be looked through different ventures. And we're working on improving significantly that earnings picture from 2020 and the next years. There will be some element of decrease in cost of risk. There will be some element -- an important element of decrease in the OpEx. And obviously, we hope that we will be able to resume some revenue growth from where we are today, needless to say. So I think it's a bit premature to debate. Maybe I would shed some color as to how we think. I think we think differently on dividend relative to the way we think about the share buyback. Really on share buybacks, looking at the capital base, including, as I said, because this is an important supervisory requirement, the MREL and TLAC picture may be more relevant than looking at the dividends. Well, dividend, fundamentally and philosophically, if I may say so, linked to your earning generation in a given year. Now should we sell an asset with a large profit associated to it? Would there be a case that potentially we could distribute that cash to shareholders to the extent it will not be in the underlying results? Maybe, but we're not -- we're talking about CRA here, not about a matter of fact. As you can imagine, there is no M&A going on now. And as far as the M&A plan is concerned, which is -- was your last question, the M&A plan has been drafted because of fundamental, strategic reason because of the willingness to strengthen the balance sheet and the business profile not been designed to replace earnings for a dividend. So we will complete the plan that we had set for the equivalent of 20 basis points we had set. I'm not sure at this stage, we have necessarily the willingness to do more. And we have refined this business profile quite a lot. Let me stress that we have been doing probably much more transactions to reshape the balance sheet and the business profile than many others over -- in the course of the past 6 or 7 years.

Excellent. If I may ask you, obviously, it's very fresh, any views or any comments about the recent proposal of having further blanket delay of dividend that we've been coming -- that we've been seeing coming from the SRB recently?

Listen, we can't be pleased with the idea that we have no flexibility or we would be constrained in our ability to pay a dividend. Your banking analysts know that dividend discount model do matter, and they do matter for a reason. And so we just take into consideration what we are being told there and whatever we may think about that. So I won't comment more than that. We'll wait -- we know there is a debate going on, and we will wait until this debate materializes. What I would say is that our duty is to prepare ourselves for any scenario. If we are obliged to keep the capital on the balance sheet, it means that we will keep that capital so that we are able to increase the flexibility of the company, and we will not rush to spend that capital that we have done to shareholders otherwise. If we are able to distribute, that's the way we want to steer the capital base of this company so that there is no debate that we can do it when and if appropriate, pending the scenario, obviously, and the regulatory or necessary authorizations.

Excellent. William, I know that this year is a very busy year for Société Générale. I know you're preparing the next business cycle. We are probably going to hear a lot more from you between now and the end of the year or the early part of next year. I wanted to thank you again for taking part to this year's conference. This is the second time in a row. I know that you have a lot of things on your plate, and taking the time for us is very, very appreciated. This was the last question I had for you. So unless you have any concluding remark, again, thank you very much from my side, and good luck with all of the meetings that we've prepared for during this conference. And hopefully, we'll catch up very soon with your second quarter results at the latest.

No additional remark. I just want to thank you for your interest in our company as well as those who have made the effort to listen to us. Thank you very much. Have a good day.