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

With no further to do, I just would like to give you an opportunity to introduce the introductory remarks that you had planned for us, and then we will jump straight to questions. William, please go ahead. Thank you very much for having joined the conference again this year, and I hope that we will have a fruitful session. Please go ahead.

Thank you very much, Jean-Francois. Good morning to all. I will make a few remarks by way of introduction. And then I'm sure you have plenty of questions, Jean-Francois, so I'll be short. I would just like to stress a few things. First of all, after 2020 year, which was quite extraordinary, as you know, for us, as for many others, we see a clear improvement in the performance. We had actually 3 quarters in a row where we did see a clear rebound in the earnings on the back of 3 factors. Better revenues, I think this should continue. So we got a structurally lower breakeven point, which we benefit from, having worked a lot on the cost. And a [ fast track on burdens ] towards through-the-cycle cost of risk. Sure, there could be questions, so in the investor's mind we thought we got, but this is clearly what we see now. The second point I would like to stress as far as Société Générale is concerned is that we think we have set a number of strategic directions, which are clear for most of the core businesses, retail CIB and the growth engines such as mobility with ALD, Internet retail, commercial bank. And we announced a number of strategic plans with ambitions in revenues and costs. And you know also on Boursorama, we've been announcing a number of targets, which are very important for us. Now what we see is the capacity to grow from where we are. We are done with the refocusing plan of Société Générale. And with the selective investments in some growth areas, we could see, combined with more favorable environment -- macro environment and market environment capacity to grow. The third point and last point I would like to make is that we have now a strong balance sheet. Actually, compares well to peers, which gives us the flexibility to do 3 things: of course, invest where we would like to in terms of business; second, absorb the regulatory headwinds; and third, of course, commit to a regular and increasing cash distribution to our shareholders. And that's the flexibility, of course, that we intend to keep. We will be back to the market and to investors at the end of 2021 with our views on sustainability and what it entails for us in terms of business and risk management. And of course, probably in the first half of 2022, we'll be able to tell you mid-term perspective on the trajectory. But again, we've said a lot. So hopefully, that's clear. Thank you for your attention.

Absolutely. It was -- it's been very clear, and the French in particular, for the French business as well as for the CIB business. And actually, on the French business, one of the key themes that we've been talking about with the many banks that have presented already at the conference this year has been the trend of transformation in retail businesses. Frederic was the one who highlighted, in fact, at the CIB Investor Day, have recently that he viewed the retail business as facing a much longer disruption or transformation than the CIB business itself. You have this new plan about French retail. Do you see the next few years, the transformation that will take place as well as the cost reduction, as taking you to a new steady state? And from there, we kind of get to the normal place where you want to be? Or do you see a much longer journey of transformation, maybe even go much closer to a full digitization of your retail banking offering?

Well, thanks for that question. It's obviously a very complex subject matter because there is many moving parts. But maybe let me first reiterate that what we are trying to do in French retail is not just a question of digitizing for the sake of cutting costs. There is a commercial ambition as well as a cost ambition. The first thing on the commercial ambition is pretty clear, we want to increase the client base to 15 million individual clients. Where we are now, at the end of 2020, we were 12.5 million. We combined the whole brands of Société Générale, Crédit du Nord and Boursorama. And then we are on the right track. When you take some statistics, this is an echo to your point on digitization because a lot of it is linked to Boursorama. Today, 1 out of 5 person aged between 25 and 35 years, opens an account -- that opens a bank account opens it with a Société Générale company. So it's 20% market share of this new commerce into banking, which is of course, punching above our weight in terms of market share. It tells you a lot that if you have the proper digital experience, you can talk and be attractive to a client base, particularly the young client base in a very efficient way. So we have this ambition to increase, of course, the number of clients. By the same token, we want to reinforce our leadership in key areas, which may be less affected by new entrants and digital competition, i.e., corporates, professionals and patrimonial clients, which are the core of our traditional client base, and they continue to grow. I'll come back to that. Of course, part of this in our strategy, is a proper balance between human touch and digital. And so at the same time, we want to increase client satisfaction and expertise, but we also want to be digital everywhere it makes sense. There are some client segments for which it makes sense to be 100% digital. We mentioned the young population and increasingly becomes a mass market trend. There are products for which we can sell 100% digital. And then, of course, there are operations for which you have to be digitalized, not only from an efficiency standpoint in terms of cost, but also from an efficiency standpoint in terms of client delivery, time to market and so forth. So that's what we want to achieve in that balance. Of course, I believe that will lead to some cost cut. We have announced EUR 450 million reduction in the cost base between '19 and '25. They will start -- the cost reduction will start effectively from 2023. We may come back on that -- to that. On your question regarding the branch. Yes, we think there will be branches still in 2025. But we have a successful experience of reducing the number of branches, yet developing our business commercially. We've cut the number of branches in France between 2015 and 2020 by 20%. And we intend to cut a further 30%. We're probably the most aggressive bank that you would find in this very market, in France, in terms of branch cutting. And of course, we benefit from the fact that we are more European, so it's easier. And when I look at Société Générale and Crédit du Nord networks, one has to take stock of the fact that 60% of the branches of Crédit du Nord and Société Générale are distanced by less than 1 kilometer. So if you assume that going forward, people looking for expertise and human touch,won't do that every day because they will have the digital for basic services and self-autonomous service, you can reshape quite efficiently your branch network. Now where does it leave us in 2025? There will be 1,500 branches with different formats. Again, human touch can be done in a branch, can be done in [ lab ], can be done with no matter advisers who can go directly to the client. Possibly, we could go further down. But it will all depend upon client behaviors at the time as well as the share of online sales. So it's too early to say, but possibly one could imagine that we could go further down. We don't think that, except for some segment of individual clients, which are becoming more and more mass market, such as the clients banking with Boursorama, we will be 100% digital, to your question. And again, it's not driven by cost, it's driven by service.

Okay. So broadening out to your retail presence outside of France, you touched upon commercial before. These are your growth engines, so in terms of additional retail, so to speak. You touched on Boursorama and the digitization, and you have a unique advantage with Boursorama in France. You're saying it yourself, your client conquest is much greater, thanks to it. I was wondering, in France you operate a model where you are multiple brands and you let your brands compete. Do you think it would be worth, or possible, to apply this and branch out Boursorama in the other countries and also prepare that to the same digitization trends as now taking place in France to essentially apply what you're doing in France more broadly across your footprint?

Well, in fact, the journey has started. So to your question, the answer is definitely yes on the adaptation of the networks we have on the ground and further digital experience for clients, further digital investments. I come back after the question as to whether Boursorama could go beyond its home territory in France. But that journey has started. Depending on the geography, you would find different type of clients' behavior. You know that we are in Central Europe, with Czech Republic, Romania, Russia, and we are in Africa. So if I take Africa, no people are moving fast directly to a mobile banking interface. So the question is, is more bank penetration than digital penetration because when people start to bank, they will start banking with wireless and mobile. Russia is a very advanced market as far as digital is concerned. And then you have Czech Republic, more similar to France, and Romania probably a bit less mature. But in every market, we see and we have seen, particularly in 2020, the surge in online banking consumption. In fact, we had anticipated a lot of it. We have started the journey of reducing the branch network in sync with further digital offering in 2017, 2018. In the past 3 years, in Russia, we've cut a number of branches by 50%. It's roughly 40% in the Czech Republic, roughly 30% in Romania. So you see that it's not -- going forward, it's something that has already started. In Russia, we have already 45% of the sales, which are done online for a number of products, particularly consumer lending, but also mortgages straight through in a seamless process. This is the highest proportion of digital sales we had in the group, apart of course from trading in retail. And that's clearly something that we'll continue. In the Czech Republic, we are revamping totally the core banking system for it to a lower 24/7 touch with the clients and of course, this increase in the digital consumption as well as opening via API to a Bank as a Service model. So that's the type of things we have already engaged and we are into. Romania is a bit behind, as I said, but this is a market factor. Also, we see the surge in the number of mobile connection via the app in Romania as well. One more on Boursorama. The key focus on Boursorama is that they achieved their goals in France. We have the opportunity to be -- to continue being the leader in terms of online bank in France. We have roughly 30% market share, both in stocks and client acquisition every quarter. That's obviously much higher than the market share we have in the brick-and-mortar formats for retail clients. We intend to keep that pace. So they are -- they have to deliver the strategy of 4.5 million clients by 2025. They're ahead of schedule, but it means that they have to stay focused on their delivery. Having said that, we know that and we see that in France. This is a very scalable IT platform, and their processes are extremely efficient, both front and back. So there is a capacity to replicate that will be fairly easy outside of France with some adjustments and some investments. So nothing is forbidden in terms of ambition, but right now the focus is clearly that they deliver the growth that they can deliver in their home country.

Okay. Very clear. One last thing on the retail footprint, something that really caught my eye at the time because it's very depreciated. So obviously, in its history, SocGen disposed of its traditional asset management business, then of its Amundi stake. That was a while back now. You have opened your network to -- in the open architecture model to offer more savings product, more varied savings products to your essentially -- back on your clients, I guess, which is where the profitability resides. It's a very differentiated product. Then, it reminds me when I used to cover the Swiss private banks of Julius Baer back in 2009, and that was a great success. What is the early experience? It's not something which is often offered to your average French client. What's the response been so far? And what are the early signs of success or otherwise?

Very positive so far. But it's, of course -- and I will come back on some statistics. Of course, there's always multi-factor behind the stat. But so far, the response of clients was competitive as we can see, and qualitative is positive. Maybe it's worth coming back to the rationale of why we are doing that at Société Générale. It's not just because we've decided in 2010 to combine our asset management with what has become now Amundi, that we have come to the conclusion that we should be the first to offer open architecture to basic retail clients in a mature country, particularly in France, is because we have a view that we can do more with -- given the base of clients we have. In fact, we are one of the most patrimonial-oriented bank that you can find in the market. We have more than EUR 160 billion equivalent AUM equivalent for clients who have wealth of EUR 150,000 and above. So [ 72 ] is EUR 500,000 and above, that's private banking, and then you do more than doubling that number for the other component. So that -- when you have that base, and you take stock of the fact that we are getting more and more digital, everyone of us as well as base MiFID and the willingness and capacity for people to compare offers and the challenge of the fees and the service they provided, you come to the conclusion that you have to adapt your offer in a way that has to be flexible. You add to that the willingness of clients, including retail, to have a meaningful investment, particularly with sustainable investment, the willingness to make sure that they can pick and choose from various sources in that respect. So you come to the conclusion that an open architecture is probably the best thing you can offer if you're able to process it, digitalize it and sell it rightly with the right advice. So this is what we've done with strong partnership, of course, with Amundi, with BlackRock, with Financière de l'Echiquier, DNCA, Primonial in France. I mean we think we have a good set of offer will be an architect and an adviser. To this point of proof of success, we have continued to increase, and actually, we have -- the speed at which we increase AUM as rate increase in the past quarters, we have continued to increase the net new money we collect, whether this is in life insurance, in asset management products in Italy or whether this is with mandates in private banking or other type of financial savings. So that's first case in point. The second case in point is the performance we have in financial fees. You see that they were strongly up despite the context in 2020, 80% relative to the past year. And in the first quarter, it was still at 55%. So again, not all that is linked to the offer that we've just launched. There are also some trends and an effort we make to move people away from site deposits to other type of savings. But only thing I can say that it fits well our client base, and it works well.

Excellent. That's very interesting. Now switching gears a little bit to your CIB business. Recently, actually, Jamie Dimon, of all people, said that he saw European banks coming back to competing harder in their home territories than had been the case for a number of years. It's been a debate that's been going on for a long time, how U.S. banks [ have been taking share ] here in Europe. I just wanted to know -- obviously, your results in the first quarter showed a great rebound compared to that of last year. So that's the statement. What's your view? I mean how can you take advantage of this right now and compete with U.S. banks?

I was a -- as a JPMorgan alumni, I have to respect and -- what Mr. Jamie Dimon says. So I would say, I would agree on the view that both elements of what has been said are true. First of all, it is clear that U.S. banks have tended to increase the market share of the overall wallet in CIB in the past years and including in Europe. Part of it, if I take the wallet globally, is linked to the fact that the U.S. market has been more dynamic than the European market. We see that with our own operation. We have higher growth by all means in the U.S. and Asia than we had in Europe. A part of it is also a clear market share gains, particularly on the market side, but also on the corporate side, they've been quite aggressive. The other element of the quote from Jamie Dimon is true as well. I think in 2020, there's a bit of a reversal a bit, particularly with corporates. It is clear that when I look at market share, to begin with, for loans as well as bonds, I see that companies such as Société Générale, we've been able to keep our market share in Europe. We, in fact, increased our market share in France. And some others have been able to do that in Europe. I see that the U.S. banks retrenched a bit, but that's a bit normal in a crisis. You see that more regional banks are usually closer to their clients. It's good investments that we are starting to yield now -- new to yield from now because we're harvesting the relationship benefits and sometimes it transfer it into clear deals. We know in a big operation in Germany, I mean, the -- all these investments are obviously beneficial for the new -- for cross-sell and CIB. So that's true. I think that factor is quite fundamental.

Okay. Now on the flip side of that, we've seen also a number of more regional banks, smaller investment banks or corporate and investment banks in Europe, showing plans to shrink certain businesses, et cetera. So there is also a divide, which is operating itself within the continent. Where is the opportunity for SocGen here in terms of expansion and market share gains?

I would not necessarily draw a lot of conclusions from the fact that a quarter relative to the other, you see larger-sized bank versus midsized bank. I mean it depends upon what really was a trend in a given quarter. This is more sort of commercial lending. Maybe you see smaller banks coming up in terms of overall share of wallet. If this is more CIB/IDD core sense products and not to mention markets, of course, you see that the larger banks are doing better. As far as Société Générale, overall, when I compare the market share we have in Europe in Q1 2021 relative to 2018 or 2019, it has increased a bit. It has increased in equities. Of course, you had, in 2020, the impact of our loans in the first half. But if you look at 2021, relative to '18 and '19, it has increased. It is pretty stable in the other component, particularly in Financing & Advisory, we see a good trend because we have revamped our transaction banking activities, an area where we are gaining share. And of course, we benefit and that's why I don't think this question of smaller versus larger bank is necessarily very relevant or will be very consistent over time because we benefit from trends which are global in nature, such as energy transition. To your earlier question, European banks have here, a key competitive advantage relative to U.S. banks because we are stronger traditionally in infrastructure finance, in energy finance. And there is a trend, as you can see, for more infrastructure finance and particularly on the renewable side. Another area in Europe is at the forefront positive to other geographies, including the U.S. So we have capacity there to potentially grow share. And I think it's a question for more big -- for bigger banks because you need to have strong expertise, you need to have balance sheet, you need to have strong risk management. So that's what I think will make the difference in the end.

Okay. That's true. The French and also some of the Japanese banks always very, very strong in infrastructure and project financing. And that's been true for a period of time, [ decades even ]. One last on CIB, but more structurally speaking, I was just thinking, when I was looking at your plans for the next few years in CIB and your ambition for revenue growth, obviously, you've shown less appetite for the market activity revenue growth versus the opportunity that you just described in F&A in particular with regards to those type of loans that you just mentioned. Just wanted to understand, for example, is this more driven by an ambition to limit your risk appetite in markets to a certain amount, and therefore, this is what the revenues can be -- at what pace they can be produced? Or is this more an assessment of what you believe the opportunity set is? And the reason why I'm asking this is if it turns out, as for example, was the case last year in fixed income that the market revenues would be up more sustainably, how you'd manage this constraint [indiscernible] or you get the capital allocation go out? You take from somewhere else? How would you manage that about the upside risk for once?

Well, since -- that's, again, a very important strategy question. First of all, if I may challenge your statement, we don't have less appetite for markets. The truth is that we want a more balanced business model, which we -- resilient and growing Financing & Advisory, 10 markets. But we have ambition to grow on the market side. I think Slawomir has been quite clear that at the minimum, we see our market revenues rebounding to the through-the-cycle Société Générale revenue tax, so up to EUR 4.5 billion. As you can see, looking at the previous quarters, this is a number that is very realistic and achievable. And so that means that there are areas where we decided, in fact, to continue to innovate, continue to invest in digital processes, continue to be aggressive on the client front. And you know this is about -- in FICC, we've been much more focused. We've done the restructuring in 2019. We've successfully achieved. You see that we were able to grow FICC in 2020 and in the first quarter of 2021. But with a focused approach on the backbone of the corporate relationship, plus some structured underlined. On the equity side, we've grown. In fact, we did the acquisition of listed products by Commerzbank, which is also part of this idea that we should have more resilience in the overall business front. So just to make sure it is understood. Yes, we want to rebalance the capital allocation between markets and Financing & Advisory to the advantage of Financing & Advisory because it is more resilient than the structural growth behind it, but we also have ambitions to grow and capacity to grow on the market side. It is clear that overall, there is a link, you are right, with the risk-reward approach. As Slawomir Krupa said in the Investor Day, we want to reduce the standard deviation of the CIB results. And that means, not only that you have to reallocate some more resilient businesses, as we said, but it's also a question of reduction of the risk appetite for some segments on the market side. So you have a bit of the 2 force. Yes, depending upon the market parameters overall, there could be some increase in some RWA allocated to markets, compensated by a decrease structurally in some of the segments because the portfolio will be shaped -- or are shaped as of today differently, particularly on the Autocall sector. I don't want to go into too much details. But yes, you're right. It's a rebalancing, but it's not a rebalancing at the expense of converging towards the EUR 4.5 billion we have said on the market side, which again, based on what we've seen in the past 3 quarters and what we see now is very achievable.

Very clear. Now my last question is on capital. At least at the beginning -- towards the beginning of your tenure, this is to be a debate maybe not so pleasant, but frankly, congratulations on the management of the capital position for the swift rebuild. And today, it is a debate again, but it's probably a more pleasant one, which is whether there is, as many asked, whether there is upside risk or opportunities for shareholder distribution. Can you just remind us clearly from the capital question that you have today, what the headwinds are? And then from there, whether for your next business plan, which you said is coming at the beginning of next year, whether you think there is even a possibility that instead of having the traditional payout ratio-based policy like most banks do today, moving on and going -- maybe U.S. banks' time to an MDA-based distribution policy, so essentially distributing excess as opposed to pay out, which I think a lot of investors are valuing at least on that side of the Atlantic.

Well, a few things on this topic. First of all, we did effectively end up the year -- sorry, the first quarter of 2021 with a hefty buffer above MDA at 13.5% core Tier 1 with 450 basis points above MDA, with our through-the-cycle target is 200 basis points above MDA, 200 basis points post Basel IV because we think it offers a very significant buffer in euros equivalent terms. So that's -- equity investors should not worry that there will be dividend distribution, and hybrid investors shouldn't be -- shouldn't worry that all will be at stake. So -- and that's something which I think is acceptable with all constituencies, including supervisors. So effectively starting with 450, and this is aimed at 200, given that we said that Basel IV, we think, would cost around 115. Based on what we know, possibly, there is a bit of regulatory consumption in 2021, '22, which is the rest of TRIM plus CRR2. So let's call it, 25, 30 basis points. And the rest, frankly, I don't see. We will have earnings generation. Mainly, it's a bit of organic consumption. So everything above that can be considered as excess capital. In terms of distribution, we want to be in a position where there's no doubt that we have a regular, predictable, and growing distribution to shareholders as opposed to big numbers that they would distribute via share buybacks or dividend. That's why we're comfortable with the 50%, a portion of it via share buyback, as you said, because it's easier for people to see on top of it, it being defined on the underlying results to define what I say is a predictable and growing distribution capacity. Now given what I said before and the likelihood that there is something such as a debate on excess capital, potentially, we could be more opportunistic going forward. If we see when we have total clarity on the regulatory road map and the economic environment possibly is a capacity -- a theoretical capacity to do more. So we'll see here. But right now, our policy is an additional share buyback in the last portion of 2020, I think to of course, the ECB removing its bank more likely than not. And then going forward, the 50% with a portion of share buyback.

Okay. Well, William, that concludes my line of questioning. Once again, I want to thank you again for having given some of your time for the 25th edition of the Goldman Sachs European Financials Conference. And I very much look forward to seeing you physically again very, very soon. And I'm sure, next year, in person, on stage, and in a rather more success of them than the Zoom that we now all got accustomed to. William, thanks very much.

Thank you very much. Thank you. Bye-bye. Bye all.