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

Good afternoon, everyone, and thanks for joining us for a fireside chat with SocGen. But before I go into the -- into our session, can I ask investors please to answer a quick polling question, which should be coming up on the right side of your page. So what do you think is most important for SocGen share price rerating over the coming 12 months? And a, a rebound in revenues, especially in GBIS; b, asset quality, so cost of risk well below 2020 levels, which was 64 basis points and heading towards through the cycle; c, asset disposals; or d, macro, so reflation and steepening of the yield curve. And while I leave, if you want to investors -- for investors to answer, and I'm joined this afternoon by William Kadouch-Chassaing, CFO of SocGen. William, thank you very much for being with us from Paris.

Yes. Thank you for having me. I hope you're safe and healthy.

All good here in London. Thank you. So look, the answers that are coming back are quite split. So we have 70% of investors saying that the most important thing is the rebound in revenues, especially GBIS. And the second driver is macro, so reflation and steepening of the yield curve. So we will definitely touch upon these 2 points in our session.

But look, before going into the details of the business and their dynamics, William, can you maybe give us an overview of 2020 and how things are evolving at the moment year-to-date.

Thank you, Giulia. Thank you for having me. Thank you, everyone, for attending this call. To your question pertaining to 2020, I think there are 3 elements that I would stress. The first is the resilience of the business model overall. The second is the targets that we have met. And the third is the number of strategic initiatives we've launched, which we are confident will improve further the picture. If I come back to what I qualify as resilience, the way I see resilience is a bit threefold. We had a clear resilience on the commercial franchise front. We managed, case in point, to increase our market share in commercial lending in France, for example. And so we did in a few other countries with large cap in Europe. Second, we had a very strong operational resilience, be it IT, be it staff, be it regulatory projection. And third, we had performance which yielded a much lower net income in 2020 relative to 2019, but still an economic net income, which showed a fairly good resilience at EUR 1.4 billion economic net income. So that's the first important factor I would like to take stock upon. The second is on the targets. This is another year where we delivered all the targets we had set. You know that they were fairly ambitious, be it on costs, cost of risk as well as on capital. And across the board, we met all the targets. And the third is we've launched many initiatives. You know that we continued to have initiatives. On the French retail, we launched the merger of Crédit du Nord and Société Générale network. We launched further adjustment in CIB on top of what we already had announced, pertaining to the cost adjustment and what we have done in FIC. And we also announced a few initiatives on the growth side, pertaining to ALD, to Komercní banka, to Boursorama. So that's the way I look at 2020, a year that was mixed in terms of financial performance. I said it's resilient, but it was not satisfactory, of course, but with a clear improvement in the second half after a difficult first half and a number of investments we are making for the future. Now to your question on what is the situation now. Clearly, I don't have data points for all the businesses. As you know, we don't have a daily P&L for all the businesses. So I would focus on an area which is of strong interest for investors where we have a lot of questions by investors, by analysts, which is the area where we have a daily P&L, which is market operations and CIB as a whole. And there, I can confirm what we had said with Frederic at the end of the year, which is that so far, year-to-date, things hold well. We have a good start of the year. In some areas, there was even a strong start of the year compared with last year but also with historical levels. Of course, we still have 15 days to go. So I will be prudent in any assessment I would make. So that's the comment I would make. On the rest of the businesses, we obviously don't have the same visibility everywhere, but I would say that things are on the same vein of things we have seen in the improvement of Q3, Q4. One thing I would like to highlight is that on the basis of what we see, particularly on the cost of risk, what I've just said on some revenues areas, pertaining particularly to CIB, as I just highlighted, we are very confident with the guidance we've set of 2021 on each and every front, cost of risk, capital and the capacity to deliver positive jaws.

Great. That's a good start of our fireside chat. So if I can ask you a question then on a theme, which is clearly hot in terms of reflation and the sensitivity to higher interest rates. How sensitive is that -- is SocGen to a 100 basis point shift in the curve, for example?

So you know that the way we look at that and what we communicate to the market is usually based on a 10 basis point parallel move, but it's easy to multiply it by 10, so I will stick to my usual guidance, but you can deduct the outcome, if you wish to apply to 100 basis points easily. For a 10 basis point parallel move on the rate curve, positive or negative, we are in a band of EUR 60 million to EUR 70 million impact, positive or negative. There's a slight difference between the positive and the negative because of convexity-related impacts. So on the positive, which is your question, or parallel move, this should translate into a positive revenue of EUR 60 million in the first year and about EUR 180 million in the second year. This is not totally linear for different reasons. Now what is important is to stress the fact that it is a parallel impact or a parallel move. And as you know, this is not totally linear of the way it works. We are typically more sensitive to the short-term end of the curve than we are to the long-term end of the curve. So it is clear that the steepening is a positive for us. We clearly have a portion of our deposits, which are renewed every year. And if rates on the long term end of the curve do improve, that's beneficial for us. But it is clear that the main needle mover short term would be an increased rate in the lower term part of the curve. And that's where I would be slightly more cautious over the next at least 12 to 18 months.

Fair. And so then if we go to GBIS, which is clearly a division very much in focus. You have announced a redesigning of the activity following a tough 2020 impacted by high volatility. So how is this project going?

I think, Giulia, you're referring to the equities part and the equities business because, as you know, we have done a lot, which we have now totally finished on the fixed side in 2019, and the one that we had decided to adjust after poor H1, [ particularly Q1 ] 2020, is there is a structured part of the business, the equity structure. We are done with the restructuring, is the simple answer to your question. What -- restructuring is, by the way, probably another statement. What we have said is that we would reshuffle the risk appetite with some key implications on the businesses. In other words, we have decided that we wanted this business to be less impacted by a severe market dislocation. When you look at Société Générale market business, particularly the structured part of the business, which is more difficult to hedge because there's no immediate replication of this type of exposure, there is a case that overall through the noise, our market operations are not more volatile than the rest of the competition. In fact, they are less volatile. If you take a 10-year horizon, and you can take your own statistics, you'll find that we are less volatile. But there is a strong caveat. We've been much more impacted, more deeply impacted in some context of severe market dislocation. That happened in 2011. That happened clearly in the first half of 2020. And this is what we have to tackle. The consequence of it, as we announced, is that we had to reshuffle a few things. We had to reshuffle the consumption of what we call a stress risk appetite, which is exactly what I've just referred to, which is how much loss do you make in a certain context of severe dislocation. And in order to get where you want to go, we've divided by 2, that type of appetite. We adjusted the nominal amount over the course. We rebalanced the underlyings between multi-underlying which in and of itself are more complex than others towards mono-underlying. We changed the duration. We changed the payoffs, and we hedged -- we decided to hedge ourselves differently. What I can say is that having completed this work, we are very pleased to see that in Q4, we yet managed to get back to the sort of EUR 600 million mark for equities business revenues of Société Générale, EUR 600 million a quarter is our historical average for this type of business in the context where we've done this restructuring. Again, as you heard from me earlier, for the first -- year-to-date, we are quite confident that we can sustain that type of level. So this is a very important factor. We see things happening in the market, which potentially will help us. So far maybe it's too early to make -- to draw conclusions on that. But so far, we see that margins hold well, and to some extent, they improve. And that can be a function of the fact that the market is also changing, and some people are removing from this market. So we are not that many players capable to provide these type of products.

Yes. I was actually going to follow up with 2 questions. One, so you mentioned the EUR 600 million more or less type of mark. So is that what we should expect on average going forward? So the 2020 restructuring supposedly wouldn't have much impact on your historical average? Or should we expect something below that because you have exited parts of that business? That's one follow-up that I had. And the second follow-up, on what you just said. How are you seeing the competitive landscape evolving? Is someone exiting this business? How -- and how does that influence SocGen position?

Well, listen, you have always -- you have all when you do in your presentation with regards to market revenues going forward, but I think it's true that we consider that the type of quarterly revenues we were able to generate in markets in the second half of the year between EUR 1 billion and EUR 1.1 billion is something that is sustainable. Of course, as I said, market context can change. We consider that we are now better equipped to face severe dislocations. That doesn't mean that we will be immune in case of a severe dislocation. But as said before [indiscernible] probably where we are confident that we can come back. Now it's clear that -- I'm quite reassured with what I've seen in Q4 and what I see so far given the fact that, as you said, we went through a reshuffling of the risk appetite, again, had a limited impact to this EUR 600 million mark that we've just referred to so far. To your question, I think I've already partly answered it. It is clear that in this business, you need to have scale. You need to have innovation capability, to have strong IT tools and you need to have risk management capabilities that are not easy to replicate. So the structured equities business is, by definition, an area for few players. And we've seen people exiting from that. And at the same time, you know that we also consolidated other part of the business, more flow equities in nature, such has listed products. So this equals also your question. There are areas, which have existed. We acquired from Commerzbank, market making and ETF business. We acquired listed products to move warrants in Germany and France,. And potentially, we see other people considering -- concentrating on a few areas.

Perfect. And let me now move on to French retail. So there as well, you are -- you have announced quite material changes, especially December, with the merger between the SocGen network and Crédit du Nord. So how is that initiative progressing year-to-date?

All the foundation for the execution of the project as per the time schedule we have set are there. The teams has been nominated. They are already working on their respective work streams, whether this is client work stream, whether this is brand, the social part, the IT and, of course, the functions. I mean there are many areas where we will have to deal also with support. So we are now totally on track to execute the 3 key components, which are, number one, the legal merger. You know this takes 12 to 18 months. And remember, this is not just a merger between Crédit du Nord and Société Générale. We also have some affiliates, Crédit du Nord. Second, an IT merger, we have to merge the 2 core banking systems one into the other one. And third, obviously, negotiate and implement social components of the transaction or the combination, which is not only about reshuffling a portfolio of clients, not only taking stock of the consequences of resizing downwards the branch networks, but it's also about training, reskilling. And so it's a lot of work. So I think so far, all that I can say is that we are on track. But as you know as well, this is a project that we expect to deliver fully in 2024, 2025. So we'll have to make regular update to you and the market between now and then.

So then let's talk about French retail but a bit more short term. So in 2020, there has been an impressive growth in deposits to the point that loan-to-deposit ratio has dropped 7 percentage points. And the dream of any bank, I assume, is to shift part of these deposits into investment products so that you don't get negative on the liabilities side but you -- and on top, you also get the fees. So my question to you is, how is that going year-to-date? Meaning is the trend of excess deposit growth versus loan growth continuing? Or are you managing to shift part of that onto more productive uses?

Well, very important question, again, and there are 2 components in the answer. First is taking stock of what happened in 2020. You have 23% -- EUR 23 billion growth of site deposits for us, 2/3 of it pertains to corporates and 1/3 to retail. You see that on the corporate side, the decrease in the deposit collection which stems from the macro outlook, starting to see people redeeming their state guaranteed loan, exiting from moratoria, and many people basically grew their credit -- on their credit line or decided to go for such products because they were scared with the environment. They didn't need the cash. In fact, the net indebtedness of French corporate has increased very slightly, plus 0.8%. So that is something that will decrease over time with macro outlook improving. The part, which is the second part of the answer and the core of your question that we can work upon is on the retail side. Clearly, French -- the French have saved. They're savers as the Germans, the Italians and a lot of Continental Europeans, but they saved a lot. In 2020, the Banque de France estimated that the French saved EUR 120 billion more than they should have done in a normal year. And all that, you can find in mostly on our balance sheet where you have site deposits not only. So what we are doing now is trying to convert a portion of this into life insurance, into pension schemes, into term deposits. And things I can say is that it works reasonably well today. You've seen the increase in the unit-linked share within life insurance over time. What I see now is there's still a sustained level of unit linked in the portion of life insurance collected, but this is also combined with an increase in the collection. So we'll have to see how it sustains, but this is a case in point to you that there is potentially some upside also. You don't move people that swiftly and the amount, the outstanding is, obviously, very important to consider, it's not just a flow thing.

And if again, a follow-up. So we discussed deposits, lending. What about loan growth? Because 2020 showed an exceptional 12% at the system level loan growth on corporate, but banks didn't make much money out of it because you perceive the 0 from the PGE. So how is 2021 looking so far? Is loan growth still continuing robust? Or actually, we could see some redemptions coming through?

Well, you're right to point out that as far as loan growth is concerned, if you adjust for state guaranteed loans 2020, but our own figures, you'll find that you move to a -- an adjusted loan growth of 2.3% year-on-year. So it's lower than what we've seen in '18, '19 where we were -- we had a growth pace of about 6% per annum, depending upon the year, 6%, 7%. So there has been clearly a substitution effect in state guaranteed loans and more traditional investment loans. Now you know that state guaranteed loans goes with some constraints, particularly on dividends. You also know that some people were also concerned with the macro outlook. And so they may be -- they may have been a bit more cautious on the CapEx side. So we have some -- we are factoring some increase from 2020 loan production or investment loans for corporates. Same for professionals. We continue to see on the retail side a fairly good dynamic on the home loan, that associated with some improvement in the front book margin, which has been going on for some quarters now. There are areas where we still see the pace has been slower, which -- for example, consumer lending. Clearly, this is an area where I think we will have to wait until we clearly exit from confinement periods and nonstandard, the sanitary measures we consume and consider that it will take time.

Got it. Okay. And let's now talk about international retail, which is an area that often doesn't get enough attention in my opinion. So revenues there were down 3.5% year-on-year if we exclude the effects of disposals and FX. And that was mostly due to Czech Republic, Russia and Romania. So what is the outlook on -- in that division for 2021?

Better. But coming -- starting with 2020, you're right to point out that this business has shown good performance relatively both to the peers where it operates where the banks -- the respective banks we have operate and vis-à-vis the other businesses that we have in the portfolio. In fact, when you look at our economic profit, a lot is due to international retail and financial services on top of French retail. You know that the year was not that great for CIB. And when I look at the profitability of international retail, about 10%; financial services, about 20%. So that tells a lot about the capacity of these businesses to absorb shocks, including in areas where they had to cope with 2 issues of finance and lower rates. So from that perspective, and bearing in mind that in some areas, we had growth, Russia, plus 1%. Consumer lending in Western Europe was 1%. Africa -- sub-Saharan Africa plus 3%, offset by what you just said on Czech Republic, Romania. We see if the central macro scenario materializes, which is taking shape now, but with still some uncertainties, we should see a rebound in volumes. And clearly, on the rate side, there is potentially more upside going forward, maybe not as early as H1 2021, but there's certainly more upside on the rate side. I want to make sure that it is understood that despite the fact that the interest rate decreased in Central and Eastern Europe in '20 relative to '19, they're still in positive territories. This is a major difference. In these areas, when we collect the deposits, we will generate a profit on that deposit, not exactly what we have in the Eurozone. And dynamically, we obviously see flat to increasing rates with the pace, of course, of restoration of the rate curve, which will depend upon the area. You've heard some debates. I'm sure you've discussed that with some of my colleagues in the Czech Republic with the National Bank. We'll see how it develops.

Yes, yes. Indeed. That's probably the -- and the Central Bank is not going to hike first in Europe. So -- and then while we're staying on international retail, but maybe a little bit more strategic question. So are there any geographies or any businesses there that, you think, are in need of restructuring or accelerating change? And I'm thinking here about the comments that you and Frederic Oudea made on the Q4 call around business refinement.

It's a very interesting question as well because sometimes it -- this is our fault, our responsibility as management. We don't speak enough about the fact that these businesses go permanently under the review of what they can do better in terms of efficiency and also have a lot of digital investments that they have made and that they will continue to make. For example, Komercní banka is entering the process of reshaping its core banking system with a view to foster its digital sales, and they are already one of the best player in terms of share of digital sales as a portion of the total revenues relative to their peers. In Russia, we are already at a stage where we generate 40% of our sales online. And that is associated with some consequences, which you have -- you see elsewhere more in Western Europe, which is downsizing of the branch network and reduction of staff. Clearly, when you look at the cost base of Russia this year, minus 7%, you see the consequences of the resizing of the branch network and the social consequences of it. So what I want to make sure is understood is that for us, these businesses are not just growth businesses. They're also businesses that we adapt for the future and where sometimes we are more advanced, talking about digital sales, for example, than what we have in other overseas, other places, whether it is Société Générale or another competitor. So we will continue. As your question relates to, if I understand it correctly, to potential M&A. I think it's clear that we are pretty much at the end of the reshuffling program. Particularly in international retail, I think it's fair to say that we are done. We have done the adjustment we wanted to do pretty much here, and we are satisfied with the portfolio we have. We could consider consolidating some market positions associated with synergies, but I think we're pretty much done. Let me remind you that although we did our strategic disposal plan for strategic reason and not primarily capital reasons, the equivalent that we were looking at was 80 to 90 basis points. We've already completed close to 70 basis points. So anything we would do would be reasonably marginal and does not necessarily pertains to international retail.

Perfect. Very clear. Let's now move on to costs. So on group costs, the bank has committed to positive operating jaws at an underlying level for 2021. So can you get us a bit more around any initiatives on the cost side? We have heard a lot on the revenue side, especially at the beginning, but if you can tell us more on the cost side.

Well, on the cost side, listen, this is about executing what we have already said. You know that the plan is to decrease the cost base further in absolute terms from where we ended up in 2020 to a lower level by -- starting '22, '23. And we indicated that in '21, we allowed ourself for a slight increase because there is a variable portion of the cost save in 2020. And of course, if we expect some rebound in revenues, one should expect that this variable portion goes in sync with it. That combined with the positive jaws. So the initiatives, you know, this, what we talked about in French retail, EUR 450 million. That is what we had already announced a few quarters ago pertaining to capital markets. Remember that it comes on top of what we've already executed. CIB cost base decreased from EUR 7.3 billion to EUR 6.6 billion between 2018 and 2020. So what we're saying is that we will continue decreasing it. And we also have some initiatives from the support functions and the end of some remediations that should help executing that path of reduction by '22, '23. Some of it is overlapping, of course, because we bill all the costs of the support functions to the businesses, so some of it is additive. But that's a key initiative. So you see that there's a lot. It's about reshaping business model, reshaping the way we operate, particularly with more automation and everything that can be automated. Of course, we don't have time to discuss that in details, but we'll communicate to you and to the market in the next quarters and the next years on the milestones.

Great. And I would like to move now to asset quality. So cost of risk was 64 basis points in 2020, which was below the low end of the guidance, 70 to 100 basis points. So I'm interested to hear from you what are you seeing on the ground year-to-date and how quickly do you expect SocGen to be able to go back to the -- through this cycle level of cost of risk.

We don't see much happening. We have a lot of data. This is not what I'm referring to, but we don't see much in terms of increase in stage 3. So we continue to be operating in an environment, and I'm sure you've heard that from others as well, where, so far, it's fairly muted. Maybe there are some cases in some of the geographies for some counterparties. But generally speaking, I would say it's fairly muted year-to-date. So that's the first part of your question. And on that basis, we're confident that we will decrease -- we will be able to decrease the cost of risk in 2021 relative to '20. But we already said that we don't think we will go back to normal. Normalized cost of risk for us is more in the area of 30 to 40. If you want to be more accurate from a statistical standpoint, we would say 30, 35, but let's call it 30 to 40, EUR 1.5 billion to EUR 2 billion to be compared to the EUR 3.3 billion we had in 2020. And that we think will not happen before '22, at least. So -- and assuming a central scenario, of course. So that's all what I can tell. I mean it's never linear, but it will be between this EUR 3.3 billion and this normalized level in 2021. What is important is, now, we have more and more indication that we provisioned well in 2020. And I don't know about the sequence of events exactly where we continue, as I said, to see very little stage 3 abnormal situation. But at some point, it may happen. At least we have a comfort that we did provision well.

Excellent. I have a couple of questions on capital, and then I want to finish off on a question on valuation that is quite interesting, it came from the audience. But let's start with capital. So on CET1 if I start from 13.4% on December 2020, and then I remove the buyback, so 13.3%, and then I remove 28 basis points of IFRS 9 phasing and, let's say, 115 basis points of Basel IV, basically SocGen is at 11.9%, which is 3 percentage points above the MDA. So comfortable capital position. So going forward, how are you thinking about capital distribution and deployment, whether you are thinking about any potential distribution above 50% or any inorganic growth, any comment on capital, really?

Listen, what you're saying equals one major factor, which is that now we are in a situation where we have flexibility. In fact, we probably have reached a level where we have some flexibility, still being prudent to deploy some excess capital between organic growth in the businesses, potential some prudent move inorganically so they create a lot of value, and that is to be demonstrated in each and every case or -- and/or go beyond distribution policy. On the distribution, I want to be -- to remind every one of what we said, we will distribute EUR 0.55 a share cash dividend in May. We have already said that we would like to implement a share buyback of EUR 470 million at the end of the year should ECB lift the recommendation. That would cost 13 basis points, 1-3. So that doesn't change the picture. And then we have already said that for 2021, as early as Q1, we will resume a provisioning of a payout -- a cash payout equivalent to 50% of the underlying net income of which, in terms of distribution, a portion could be distributed via share buyback. Could we do higher? At this stage, too early to say. We consider that what we need to offer to shareholders is a regular increase in the distribution per share. And that will be made by the increase in earnings, first and foremost. Given the fact that we have flexibility, this is -- this remains an open debate, and of course, we will discuss it with our governance. And potentially, there is something that we could consider in due course. What I want to say is that should we, at some stage, do something higher than the payout we've announced, the preference would be to do that via share buyback given where we trade.

Perfect. And can I just confirm, in terms of consolidation in Europe, there is currently a big push from the ECB around merging banks given the oversupply in the market? Is this something that SocGen could see the bank taking part or you're already big enough and not really looking at opportunities?

We certainly will stick first to what we've said before. I mean it needs to create -- you need to be comforted that it creates value unambiguously. And for that, it means that you can generate synergies. That means that it depends upon the deal you're talking about. This is for cross-border mergers, which is, I guess, your question, if I understood correctly. We consider we are not there at the stage where we can say that there is such thing as a full-fledged banking union, nor is there a full-fledged functioning capital market union, it's not even the beginning of it so far. And so one has to be a little cautious. Can we make some strengthening of some businesses via acquisitions? Again, prudently, we could consider that. But again, we also learned our lesson. We want to be prudent, and so we won't spend capital just for the sake of it.

Got it. Perfect. Okay. So then to conclude, I will ask you questions that came from the audience. Why do you think the stock is so undervalued? And do you think actions currently in place will be enough to give markets answer or results improvement, which are necessary to rerate the stock?

Well, thank you for that question. I do think fundamentally that there is a disconnect between -- and I don't blame anyone for that because I think it's normal after the year that we have gone through, but I think there is a disconnect between market expectations, sell side and buy side, on the profitability we can deliver and the pace at which we can improve the return in the next 2, 3 years and what we have in mind. And so to reconcile the credibility to that profitability past improvement, I think, would be the key needle mover here. So that's why I'm pretty clear on the second part of your question, yes, we do think we have a very ambitious road map. Yes, we do think it is much of executing it well. It's about reducing costs, improving revenues, being disciplined on capital, getting back to return a normalizing cost of risk. I think this combination of things, which sounds basic as I express them, but they are the key needle movers are things we are focused on.

Perfect. So with that, William, thank you very much for joining us this afternoon and sharing your insights. And thanks for -- to all the investors for watching us.

Thank you, Giulia. Thank you, too, for your attention. Bye-bye.

Bye. Have a nice afternoon.