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

Yes, hello. Thanks, Tarik. Good afternoon to all of you. And first of all, I hope everybody is fine and sorry not to be able to meet physically, but we'll do that as efficiently as possible through these digital channels. Yes, let me just present briefly and 2 messages: first one, which is to confirm everything that we've said beginning of August regarding the outlook for the second semester. We have an additional 2 months behind us, and that's the first part of my presentation. And second, I would like to elaborate on something we've announced yesterday, the launch of a study to create a new bank in France in French retail banking, combining the 2 existing networks, Crédit du Nord and Société Générale. Let's turn first to my first slide, Page 3. We confirm the recovery. What does that mean? Of course, there are still uncertainties regarding the economic outlook. We have a better picture for 2020. You know that in France, for example, we are in line now probably around a minus 8.5% GDP drop, recovery in 2021, of course, but we keep a scenario where effectively, it is in 2022 that we will find again the same level of GDP as in 2019 in most developed economies. But beyond the uncertainty of a potential second wave and, of course, the government, which want to avoid second general lockdown, what we saw so far is again a recovery of the economies in most sectors. Of course, certain sectors remain heavily impacted by the constraints in terms of mobility, travel, et cetera. Overall, things have improved since the beginning of the end of the lockdown. That translates in revenues. What does that mean? Revenues, of course, will remain below 2019. It's not a normal level of activity, but nevertheless, better than in the first half, and in particular in our equity business, where we did not of course experience the same dislocations and impacts than in the first half. Let me just remind you that we have a strategy to -- regarding our investment solutions, maintain the inventory. So we carry on putting limits on the new production, but nevertheless, we will have a much better, balanced breakdown of revenues between fixed and equity in the third quarter. If I turn now to Slide 4. Discipline on cost remain. We confirm our target, EUR 16.5 billion for this year to be compared with EUR 17.4 billion last year, minus EUR 900 million. I guess according to at least our figures, the consensus is a bit higher than that. It means that probably, as we want to remain disciplined in the second half, there might be some margin going forward in terms of underlying net profit. Happy to comment more in detail on what we want to do beyond 2020. Slide 5. We again confirm also the cost of risk for 2020. Let me remind you that we had, beginning of the confinement, a range between 70 basis points and 100 basis points. First half, 81 basis points of cost of risk, out of which 33 basis points related to S1 and S2, which means non-incurred loss. We confirm -- and we have the third quarter more or less behind us but -- that we will be converging at the low end of that range. So 70 basis points in billions of euro or roughly EUR 3.7 billion, EUR 3.8 billion. Happy to answer your question there but nothing different to be expected. We think we have fundamentally a sound portfolio and that, of course, help us to navigate this uncertain time. Slide 6, next slide, the capital. We also, same thing, confirm that we will end at the high end of the range. We gained a range of 11.5% to 12% core Tier 1 ratio, including all the regulatory impacts, the TRIM impact. Clearly, the potential decrease means that there is not less revenues, not less capital in the bank. The number of billions can probably even improve, but it means that again, we have more density on the risk-weighted assets with the same level of risk. Happy to elaborate on this. Let me just remind you that we are not factoring certain potential tailwinds. As you know, we, the French banks, won in front of the European court against a decision of the Central -- European Central Bank to take into account in the calculation what is related to potential call on the single resolution fund. That's a potential plus 10% -- basis point. If, in particular, the ECB does not appeal to the Supreme Court in Europe, we have also, perhaps, compared with what is at stake in our trajectory regarding IT systems, software, a little bit more depending on the final decisions of the EBA. But again, we keep that in mind, very important message, and I'm sure we might comment on this. We managed our capital ratio at year-end to be able to resume dividend payment as soon as the SSM, hopefully, open the possibility. And in our case, beyond paying 50% of our underlying profit of 2020, let me just remind you, we don't take exceptional in the calculation. But nevertheless, we can do more than that. And that's the way we compute and prepare for our dividend capital calculation. Now moving to, if I may, the second part, the business adjustment, Slide 7. We have done a lot in the previous years: refocus the international retail, which is a growth engine for us. Second, in insurance and financial services, we want to carry on investing businesses which are actually faring pretty well in the crisis. GBIS, we have already explained what we want to do on this component of the market, happy to come back to that. And of course, we will come back to the market with a new deputy general manager who will take the responsibility of the business 1st of January. He will explain beyond the capital markets what we want to achieve. And in the French retail, let me say that we are closing a first transformation phase. In the last 5 years, we did a lot in our French networks: closing branches, specializing front office and back office teams, digitalizing and creating a more modular architecture of our IT system, cutting jobs, making efficiency gains. We are entering into a second phase. I will come back to that in a minute. And I'd like, of course, to highlight also that Boursorama is currently, of course, carrying very well and taking advantage, actually, of course, of the new trend with the crisis. But again, we are entering into a new phase of the French retail for the next 3 years. Let me just remind you, our French retail, when you look at the figures, beyond Boursorama, will represent, in 2021, 3 million clients, which is a pure online bank. We have 2 networks: Société Générale, one brand, one bank; Crédit du Nord, network of regional banks and 2.4 million clients. When you add the 2, 10 million clients with pretty complementary expertise, Société Générale, very good in large banks -- in large companies, sorry, wealthy individual, the private banking, well-developed; Crédit du Nord being more specialized in certain professionals and midsize companies. Very few overlap in terms of clients, but as you can see, also a different organization. What we decided when we prepare -- we start -- we have started preparing the next piece. I put in place a new team, which has started to work. And we want, of course, to act as quickly as possible, it's to say. French retail, as we know, challenges will remain: acceleration of the evolution of the client needs, more digital usage; low rates for what, forever or at least for long with the crisis and the accumulation of debt; pressure on commissions potentially with more difficult political and social economic environment, it is something we take into account; and the new competition, whether it's from existing players or also from newcomers. We have explored all the avenues. Should we pursue what we did, 2 networks -- and that is 2 networks. Isn't there a limit of that strategy when you think about further branch reduction, in particular for Crédit du Nord? At what time the brand can exist still? Or can we think differently? We still have branches in Crédit du Nord and Société Générale, which are facing each other in certain large cities, while we might have to cut looking at each network in smaller cities where we could keep one branch. When we think about the IT systems, we have one IT team, one infrastructure. We have already built synergies, but shouldn't we go further there? Can we afford to invest enough in both systems? The answer that we give is no. And at the end of the day, to have the full power of the -- this business, we think we have to build something different, which will again take advantage of the expertise of the 2 banks. We have started the process. We talk about study. We decided to have a 2-step process. Why? We want to build that with our teams. You can't do that maintaining the confidentiality, obviously, without the risk of a leak. So we felt it's much better to announce where we want to go and then come back to you, to our staff, before year-end, having the management teams, all people on board, to refine the model, to give you more flesh on what it means financially. What I can just say is that as a proxy of the synergies, you can effectively take what we see typically for domestic consolidation in Europe, something like 35% of the cost base of the smaller bank. The smaller bank is Crédit du Nord, EUR 1.3 billion of cost. That gives you an order of magnitude that will be refined in the coming weeks. The second thing that I would like to say is that we have also explored nonorganic option. And here, you can probably see what I mean. And I think, again, it was not the best option. We decided to go for what is today the best option, which is effectively a major evolution, the merger of the 2 networks. It's the best option at the right moment, and happy to further elaborate on that. Last slide, and it's about the new management team. What we do in the French retail is a reflection of our full and unique objective. I put in place a team which is dedicated to execution, action. What does that mean? Build the midterm prospective for the bank but not wait for maybe a moment in the first half where we would put everything together, nonfinancial objectives as well as financial targets. The strategy of the bank cannot just be around financial. It's around, for example, corporate and social responsibility. We know that. It's at the heart of our strategy. But what we wanted to do, to clearly, as soon as possible, correct the perception of this bank, which, in terms of valuation makes no sense for me, is to already give to you some key building blocks without waiting. The French bank -- the French retail bank is one of them. There will be further announcement before maybe completing the picture, and this new team is already fully in action, fully operational, has been designed in terms of organization to deliver, and I think it's a first strong signal that we sent to you with further to come. That's what I wanted to say as an introduction. And now, Tarik, I'm very happy to answer questions.

Thank you, Frédéric. As always, very focused, a clear presentation. We have 20 minutes for questions. So let's try to take topic one by one. So first of all, let's talk on the French retail since we're there. And I remember, Frédéric, we had many discussions asking you why [ numbers ], Crédit du Nord with SG network and maybe there's Bank of Boursorama as well. And you -- always your answer was there is a franchise value in keeping Crédit du Nord. It's local. We have a lot of corporates [ will keep us actually ] very comfortable with the service and so on. So is now having this extra EUR 400 million, EUR 500 million cost savings in probably 2, 3 years? I mean can you shed some light on implementation time frame, maybe, if you wish? Is that really a trade-off for potentially losing some of these valuable loyal clients for these savings because there's no choice given the negative rates and so on? Maybe just to understand what is shift in strategy.

Listen, first of all, let me just again highlight that we would not have been able to do such a merger and at the same time did everything that we had to do in the different networks, in their organizations again and having a first step of rationalization. And we are capitalizing in this capacity today, in our view, to execute with limited risk on the fact that we build also a single IT team. There are already in utilization, et cetera. So the magnitude of what is there to do is probably lower. And as you said, at the end of the day, the problem is do you think that in the current environment, with again the constraints on investment capacity, could we have maintained, for Crédit du Nord in particular, the capacity to be relevant with our clients, with again newcomers, as we know, on self-employed professionals, new people providing new services and with this inability to consider another option. And again, you know this inorganic option, I have had this in mind for some time, not just -- given the fact that it was behind us, not practical, I think -- and at a time where all the teams, the 2 teams, know and are realistic about what is at stake going forward, I think it was the right moment to share that question. And effectively, a key element of success is, of course, to have the teams on board, the management teams on board, the ones which will talk to the clients. I think it's the right moment. We cannot exclude certain client attrition. But may I say, if we are agile in the brand, in the organization, which will be original, which will be inspired by Crédit du Nord, with all the teams understanding that they have to change, I think we can limit the negative impact while benefiting, obviously, of a significant amount of synergy with limited risk, as I've said, because these banks know each other for 23 years. The head of Crédit du Nord comes from Société Générale. The deputy is someone who has an experience with Société Générale. It should function.

So currently, the 2 systems that you have additionally, are they on the same mainframe? Or are you on the same systems? How much of IT is shared at the moment? And how much is...

Yes, yes. Listen, same IT team, same infrastructure. I mean when you talk about servers, cloud, same team as well. Some mutualization has happened because you know what we have done. And again, it was feasible. Going back to the IT. So if you wish, what we have done with our SG IT system is to do that, to put in place a much more modular architecture, which has enabled us then to share certain apps and also certain core factories, payment, custody, et cetera. So all that is already done. But what we have not done is fully harmonize the processes, the model of data, et cetera, and that's where there is more synergies to merge the 2 systems, get -- I mean have really -- avoid creating a new system, which would be very long and very expensive, take the IT system of Société Générale, enrich potentially of some applications which are related to the specific model of Crédit du Nord and makes sense for the 2 banks, and then expect the benefit of adding just 1 system in which we further invest.

So if I'll just point, you will transfer the Crédit du Nord clients to the SG network in batches, right?

Yes, yes, yes. Perhaps just to elaborate on that. It's not one migration. We will have probably, at this stage and it can be refined, 3 migration by batch, effectively.

And in terms of time frame, do you have already a preliminary idea of how long it could take?

Listen, no, it's a little bit premature. We have to run different elements, the social negotiations which, in France, takes some time, the legal process, and then, of course, the IT migration. We will give this kind of detail before the end of the year. I'm coming back to you.

Okay. But if we think further, I mean you take Boursorama, which is a very successful brand and growing very fast. At this pace, probably Boursorama number of clients will outpace those of SG and Crédit du Nord together. I know it's not the same mix but...

Not yet.

It's not the same revenues per client, that's for sure. But -- I mean can you -- since you're already engaging into probably multiyear projects, which will add a lot of your time and energy, we don't think about integrating this digital capacity of Boursorama as well into the whole system because, to that question, you're already telling me, no, Boursorama has value as well and very well-known brand. So what's your take on that?

Yes. Listen, really, we believe that maintaining Boursorama on its own at this stage is the best option. As you said, Boursorama, it's today a very well recognized brand, #1 online bank in France, very high level of satisfaction, 3 million clients -- today, 2.4 million, 2.5 million; 3 million clients in 2021 and obviously more. Before 10 million, it will take some time, but -- and it's just individual clients. But certainly, 4 million, 4 million plus, it's something we can target. We think it's better to preserve today that capacity to grow as quickly as possible and again concentrate on dealing as efficiently as possible on the merger. In 3, 4 years' time, we will see where we stand. We will see where our client stands. But I think at this stage, to limit the execution risk and avoid putting too much burden on the 2 different projects, it's better to [ hear on this ].

Very good. Let's move to other front, which is another front where you are very busy. It's GBIS and Global Markets to be more specific. Last year, you have done lots of work on the fixed income and you told us, this time, we have the right size, right business, growth will start. And early this year, there were issues with derivatives on dividend. And instead of having the idea to think, okay, that's something that no one could expect that, that an announced dividend gets canceled, an indication of your equity ratings product, you took the stance saying that it is structural unless you renew structurally this business, which, for you, is kind of your draw, your strength, your franchise. I just want to understand why you put yourself between structural thinking rather than saying that was an accident, things will recover and we move on. Because now the worry from the market is that you might start to damage the whole franchise and get it probably [ with such scale ] at least on the equity side.

Listen, that's not our feeling. And I think that what we've said is again with the impact on the share price, by the way. Can we say it's just an accident? I'm not so sure. We wanted to say we draw the lessons of the crisis and we find a way precisely to preserve the franchise while at the same time changing, if I may say, the risk/reward. The plan that we have tailored is to maintain the same amount in terms of billions of euros of products, so to remain a key player but transform the range of products. And we've experienced this dividend issue. But also, as we've said, the correlation parameters were more complex to manage in such a dislocation. So the idea is to say let's change the range of products, have more -- you know these products. They deliver yields, capital guarantee. Our clients have been absolutely happy. But again, they can also probably accept products with a slightly lower yield in a world of 0 rates anyway and having us taking less risk. So we have already designed new products where effectively, that we don't have this dividend risk. And second, we will go probably for more single-asset products than products with correlation. We put some pressure on the production because we don't want at this stage to increase the inventory. So we play on the maturity of the products, of the inventories. But we are -- take it -- we are careful to preserve the franchise. We are careful with our core clients to concentrate our resources. So I think let's wait at least. You should see in the third quarter that already there is positive signs even if, as I've said, the constraints are still there on the new production.

Could you maybe give us quickly how you shaped these products especially on the [ differences ] to make them less volatile? How the redesign of these products would be -- are you reviewing the underlying or...

Yes, it's really about that, as I've said, a multi-asset underlying product which, without entering into the complexity, can mean you play as you wish the potential decorrelation to structure the option, which is embedded in the product, will have more single assets. And as I've said, in the design, we have also started to sell 1.5 years ago, projects where there is not again this dividend risk to hedge, which might mean giving a little bit less yield again in the pricing for the client but still with a reasonable offering compared with a euro-denominated insurance product at 0.5% of what are the kinds of asset management product with, of course, the volatility and the absence of a capital protection.