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

Great. So it's our pleasure to welcome William Kadouch-Chassaing, Deputy General Manager, Head of Finance at Société Générale, who joined the bank in 2007 before becoming Deputy CFO and Head of Group Strategy in 2013. Then CFO in May of last year and to his current role in August this year. Good morning -- sorry, good afternoon, William.

Hello.

And thank you for joining us at the conference again. So just before we get started, if I could just ask the audience to please do you remember to answer the 6 questions in our poll that they should see in the tab on the left and we can go through those answers together if we have time at the end. And similarly, you can use that tab to send through your own questions, and we can go through those later time permitting. So William, starting just with asset quality and provisioning, could you give us your updated thoughts on where we stand now that the crisis has progressed, the economies are reopening? In particular, what do you think is to the risk to the outlook for loan losses into 2020? Yourself along with most banks calling for a significant decline, are you still comfortable with that? Then beyond that, excluding the more obvious areas, such as tourism and aviation, are there any other areas that you'd like to highlight that are concerning you more recently? In particular, what do you see as the risk to consumer credit as real unemployment starts to pick up? It's smaller for you compared to some of your peers, but it's still a meaningful contributor to both impairments and earnings.

Hello, Omar. Hello, everyone. Thanks for the invitation. I am very glad to have the opportunity to be talking to you today and answering to your questions. Obviously, this is, again, a remote format. At some point, I hope that we will have the opportunity to meet physically in one-on-one, so -- in conference. But it does seem that we have moved digital, all of us, more efficiently as we thought initially, so -- in the end, that works. And I do hope that everyone stay safe and is safe today. As for your question -- before I go into the very question of cost of risk and asset quality, maybe I'd like to give a perspective as to where we stand because it ties very much into the question in terms of cost of risk and what do we see. Clearly, in Q2, we had a severe impact on revenues, particularly in retail in Q2 with some -- we still see some impact on markets after a very severe impact that we had incurred in Q1 in markets. I have to say that what we had said at the time of our Q2 results, which is that in May -- ever since May 2020, we were seeing either rebound or normalization in the production or the parameters overall, that stays true. And so far, we see through the production data or market parameters overall that, that trend of improvement ever since continues to materialize. This is a very important element, obviously, as you think about cost of risk. And so going specifically to cost of risk, what we also said, which you hinted that we were confident that we may have seen the peak in terms of provisioning in H1 that we were expecting that there would be less provisioning in H2, particularly pertaining to Stage 1 and Stage 2 provisioning, that probably 2021 would be lower than 2020, although not back to normal level. And that we were expecting that the cost of risk overall for 2020 would be at the bottom end of the stated range of 70 to 100 basis points. That all remains true. We are quite confident that there should be less provisioning in H2. We're very confident that we should be at the bottom end of the range. And as far as 2021 is concerned, there is no reason based on the scenarios we have and the scenarios we see that are now published by public authorities, being the ECB or the Banque de France, as the case in point, to change that. If anything, the scenarios that have been published recently by ECB and Banque de France are slightly better as far as the 2020 outlook is concerned. As far as '21 is concerned, we were already a bit more conservative than the average of consensus, and certainly for France. So I wouldn't say that there is a major difference, if anything, we remain slightly more conservative. So when you look at the way we provision and the way we've computed the scenarios to get there, we're quite confident that so far we are in the right ballpark. Again, our methodology is based on weighting of different scenarios, including more severe scenarios on the central case. I just said the central case is sort of validated right now by what we're seeing and others doing in terms of forecast. And so that's what I would say in terms of trend. Clearly, there is no reason for us to change the idea that things should gradually improve with the balance between Stage 1 and Stage 2 and Stage 3, which will change over time, of course. Now with regards to asset quality, in and of itself, there are many questions in your questions on various areas. So let me start saying that our cost of risk of a reasonably long-term period has consistently been lower than the average of European banks. And so is the level of NPLs based on the ABM methodology. And the same is true for provisioning of NPLs with probably at the higher end. So I feel quite that we're starting with something that reflects overall fairly good quality in terms of assets we have on the portfolio relative to most of the peers. There are, of course, differences depending upon the exposure that everyone has. But I'd say we start off with that. And then when you look at asset quality fundamentally, our exposure to SME credit is 5% of the total exposure at default. We've very little exposure to some of the emerging economies that are -- have been more severely impacted are the PIIGS -- so-called PIIGS economy. We have 63% of the portfolio, which is investment grade. So all that give us some comfort. We have low exposure to LBOs as we said. Now going on to the very specifics, and I'll finish on that. Yes, some sectors obviously do suffer more than others. You mentioned some, including, of course, tourism, including transportation, car manufacturing is -- obviously, faces the most difficult situation than precrisis. I don't think that what we're seeing now is an expansion towards more sectors that would be affected. If anything, based on what we know today, I would say that it is pretty clear that the crisis, as it unfolds now, is very much focused on some sectors, which would be severely affected; with the others, we do okay; some would do good. So I don't think we are in the mindset of expanding the array of sectors that would be affected beyond what we have already said, and that is when -- sometimes, you have good surprises. For example, in shipping, it's actually faring better. Is it because our exposure in terms of portfolio was more geared towards investment-grade companies and the type of structures were slightly more conservative? Difficult to say. But maybe there is a case that effectively we had over -- there was the idea that shipping would be more affected than it is actually. On consumer credit, we said we are small. We are not that small. We have EUR 46 billion outstanding in consumer credit in Europe. I think we are #4 or #5 because we have, as you know, EUR 20 billion in the banks and the rest is specialty finance, the size of it you have to combine. Globally, I'd say that we expect an increase in the cost of risk. But we don't expect a massive deterioration, and that's probably due to the structure of the exposure. There, remember, especially in specialty consumer credit, we are massively geared towards car finance, used cars, and we don't do very limited when we do it. We don't do prime or sub-prime. So I think historically and statistically, that has resisted quite well. And what we can see now is that the CCs embedded in the numbers that we see. So an impact depending upon the regions, obviously, Italy or Russia, probably more affected than, let's say, Germany. But overall, we think we have a slightly different exposure in consumer credit.

Great. Then shifting a bit to CIB. Having announced the restructuring of the equity derivatives business, if you could just highlight what the likely restructuring expense associated to this might be? I'm feeling lucky, so I'll ask you that. And then more broadly, how do you reassure investors that the execution risk on this restructuring is low and that there won't be a broader impact on the business you want to maintain? Similarly, historically, the structured products business has been the jewel in the crown of CIB for as long as I can remember with double-digit returns. So what would you say to those who highlight that maybe this is a bit of an overreaction to short-term volatility and unprecedented environment with the mass dividend cuts that we saw in particular.

Maybe I'll start with the second part of your question on the confidence we have to be able to execute without damaging the franchise. I think one has to look at what we have done already to be able to gauge what could result from the recent decisions. Remember, in 2019, early 2019, we said we wanted to restructure some of the activities, particularly in the market side on the fixed side. So we exited from principal commodities. We reduced some desk on the fixed side, particularly in areas where we were not operating at scale, and there is no reason that we would ever be able to have a double-digit or anything like a satisfactory profitability. We reduced the number of relationship on the clearing side because we were not satisfied with the profitability there. Exited greatly from some of the less profitable FICC prime brokerage and so forth. On top of it, we also adjusted some of the relationship on the CIB side. And by that, I mean, corporate relationship with sometimes Tier 2, Tier 3 clients, reduce the commercial lending to be very focused. And that's how we managed to reduce also addition -- on top of the market RWA, also credit RWAs. And finally, we decided to cut cost. We announced an important EUR 500 million cost cut, said that we would reduce the cost base of CIB towards 6.8% from 7.3% in 2018. Now what -- where do we stand? We are very confident that we should even beat the 6.8%. And when you look at the franchises, in 2019 and 2020, there is a case in point that those which have been restructured or adjusted or fine-tuned in 2019 actually have performed in line with market, sometimes better, sometimes slightly less. And by that, I mean, FIC franchise, cash equity and structured finance, CIB this year. I think when you look at market share, when you look at the growth relative to market, there is a clear case in point that you can restructure without harming your franchises if you do it right. So that is what makes us confident that we can get to the next stage, which is dealing probably with sort of a last-mile of restructuring on the market side, dealing with restructured products on the equity and credit side. But before I comment on that, let me also remember you that we did not only adjusted downwards the franchise to be more focused, profitable franchise and leaner. We also did some investment. You may remember that 3 years ago, we decided to reshuffle the transaction banking activities, it is a CFO-down business. That has been a huge success. In fact, we managed to grow with a large corporate on the transaction banking, double-digit in '18 and '19. And so far, of course, you have to take into consideration the Q2 impact of COVID. But overall, I mean, that remains a nicely profitable franchise. We invested in Commerzbank listed products, ETF market making. And that is a success story so far. I mean the integration during the COVID period was done successfully on the IT side and the portfolio transition side. But also when I look at the performance of listed products, both in France and Germany, that has been a fairly good acquisition to make so far. So it has to be done in the context when we -- what we do in structured product on the equity side has to be understood in the context of what we have already achieved on both sides, beefing up some franchises, restructuring to grow some of the franchises; on the contrary, reducing to be more focused on the franchises. Structured products on the equity and credit side. What we have said is, number one, particularly on the equity side, we consider we want to continue being a leader. There is no point -- there's no story for us that we want to exit from that area. So it's fine-tuning. It's not -- it's tuning, it's not restructuring, it's not exiting. And when you look at that, it is very clear that we do agree with you, through the cycle, this is a nicely yielding business; through the cycle, this is also a business where we have been able to manage risk; and finally, this is a business where we have decent market share, competitive advantage, innovative skills, leading edge, just in Europe probably 15% market share, globally 8%, 9%, depending upon the year. That's the differentiating thing. So this is to your question, we don't overreact because we've decided that we want to keep there. But, and this is a very important, number two, we have come to the conclusion that market dislocation events have happened and will or may happen more frequently in the next decade than they had happened in the decade before the big financial crisis. And because the type of exposure we get by serving our clients through these products, it's an exposure that you can't hedge perfectly because of the very nature of the underlying. Because if you can hedge them, you only can hedge them at high cost in certain market configurations, we've decided that we didn't want to keep the business as is. We wanted to reduce the potential volatility on our earnings, of these market shocks, which again may happen more frequently. And that's why we've decided to reduce the risk profile by changing some of the underlying, maybe less multi-underlying for the auto calls; and more mono-underlying, change the type of payoffs, change maybe the way we split the margin between us and clients, et cetera. That's what we're doing. It will have some impact on the revenues. But again, to be seen in the order of magnitude of the whole business of -- that we have on the market side, we're talking about only a portion of our market operation. And finally, yes, we want to add another layer of cost cutting. Because to your point, we want to make sure that on a sustainable basis, this CIB is for us or has to be associated with a return, which is double-digit as opposed to single digit.

Yes. And on that note, actually, maybe more broadly, you're targeting EUR 16.5 billion of expenses, which is significantly lower than what the market thinks you could do. Can you walk us through the moving parts and, in particular, what do you see is sustainable beyond 2020, i.e., not just COVID-related savings on travel and marketing, et cetera? I know we'll get the detail at your strategic presentation for future years, but I'm more interested in where you see the opportunities for savings. Since you've already, as you've said, achieved a lot historically. I know that you personally have kept a close eye on support functions, group support functions, for example. Is that still an area that you're exploring as a source of savings?

As you know, we are -- we have embarked into a pay -- a path of reducing cost in absolute terms. And that we've started in '19. We had announced that we would reduce cost pre-COVID in 2020. So it's not just a COVID reaction, if I may say so. And we also have confirmed that this will go beyond 2020, up until we are confident that the breakeven point for this company, the cost base of this company is consistent with what we think should be an acceptable return on the long-term capacity to have some shocks in various configuration of macroeconomic or market-wise and where we are more comparable in cost income with a pack of best peers. So that's what we do. And it's not just about COVID. To your point, I was smiling because you referred to discretionary expenses such as travel, such as events, I mean that's in total, a good EUR 300 million in 2019 out of a cost base of EUR 17.4 billion. So cut it by 100%, which obviously we do not. And I would still not go to EUR 16.5 billion, starting with EUR 17.4 billion. So let me remember you that we had -- we have the full benefit of plans we had already announced. And this is a tie to your previous question on execution capacity. Within that, you have the full benefit of the execution of the first layer of the adjustment of the cost base of CIB, which we had announced and that's obviously an element that you should not forget about. We have the full benefit of other adjustment we had announced in 2019. The reshuffling of the holding structure of our international retail banking after we had exited from many geographies. We had announced the mutualization of a lot of back-office functions, for example, in Africa, with 2 hubs, Casablanca and Douala. We had announced a further cost-cutting in the headquarter function of the retail banking operation in France. So that's part of things which we have not only announced, but executed in '19 and which -- where we see the benefit fully in 2020. On top of it, we have added some measures on the additional cost cuts in the context of COVID. But the bulk of what we've announced is sustainable cost reduction based on plans we have already executed. On functions, particularly, we're very focused on that. The reason being that we, as others, have seen over years, a strong increase of 2 types of transversal costs. One is all the transversal functions associated with remediations, risk, compliance, finance, legal, and that at some point, something where you can see the benefit of plateauing on the remediation and potentially an exit from some in the latter years, but also some clear efficiency you can make. So to give you an example, on the finance side, the cost of finance for CIB has been reduced between '18 and what I expect to be the number at the end of '20 or will have been reduced at the end of '20 by 14%. And that's pure efficiency. So big announcement that we do, it's efficiency on reporting because of automation, because of off-shoring on valuation of instruments, it is renouncement, I mean all these type of levers that you can imagine. So we have already executed part of it, and we continue. This is part of the continuous efforts to make our functions more efficiencies -- more efficient on top of potential cost of remediation coming down in the next years after clearly 1/3. The second part of where we are focusing our time. A lot is IT spend. IT spend have been increasing between 4% and 5% per annum over the past years. A lot of -- because we have invested in the digital transformation of the bank, and as I said, some remediations, doesn't mean that we can't be more efficient, particularly on the run cost going forward. And so we are very focused on these type of initiatives. When it is time and when we are done enough with how we can articulate them to the market, we'll be happy to share.

That's okay. And then on capital, you're at 12.5% CET1. You've got a bit more coming -- some more benefit coming from disposals and some regulatory changes around software amortization and things like that. So could you walk us through the moving parts of why you still foresee yourself only ending the year at around -- at the top end of your 11.5% to 12% range. Is there some conservatism embedded within that target? I know that there's TRIM to come, but it still seems quite conservative. Then do you have a bit more visibility on -- the question we were all asking ourselves earlier this year, which is the scale of potential risk-weighted asset inflation from credit migration. It doesn't really seem to be coming through yet. Then beyond that, of course, once the ECB recommendation lapses on capital return next year, would you then target going back to a kind of buyback dividend payout structure as you've announced at the end of last year.