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

Good morning, everybody. Tarik El Mejjad from European bank's research team covering the French and Benelux banks. Before our next session with SocGen, I kindly ask you if you could participate to our small questionnaire on French banks that you could find by clicking on the polling button. It should take just a few seconds. I will read the questions in the meantime. First question, the French banks have good capital positions with buffers well ahead of regulatory requirements. How, in your opinion, should this capital be better used? Number one, 50% payout and use the rest to fund faster organic growth and M&A; secondly, don't bother with growth and go for a material step-up in distribution through a higher cash payout, topped up with buybacks; and number three, 50% payout and build a higher buffer as more restructuring is needed and we are not done with the regulatory impact. Question number two, do you believe the French banks can deliver above 10% ROE? Not sustainably, as long as CIB remains a large part of the business; yes, in the midterm, thanks to a growth recovery, low cost of risk and reducing capital buffers; and lastly, yes, but it will take time as significant restructuring is required in the retail and CIB business. And lastly, we observed some revival in M&A activity in the years before the pandemic. What do you think will happen now? Number one, progress on banking union will resume and could see some large cross-border M&A in the coming years; number two, M&A will be limited to small bolt-on acquisitions; and number three, it's too early to think about consolidation, banks will focus on organic growth in the medium term. So I'll show quickly the answers. So the first question, majority actually would favor a balance between a 50% payout and fund organic growth and M&A. On the second question about 10% ROE, it's a split between not sustainably as long as the CIB remains. And also, yes, in medium term boosted by low cost of risk and capital buffers -- lower capital buffers. And last one M&A, it's clear that expectations are more for small, small deals. Well, I mean, I would like now to welcome Mr. Frederic Oudea, SocGen's Group CEO. Frederic, I personally, and on behalf of Bank of America, thank you for joining in the 26th Annual European Financials Conference. I also thank you for your continued participation at our conference for the past many years. Frederic, you will first highlight some key points through a quick presentation, and then we'll move to Q&A. I'd just remind the audience that you can also type your questions using the Ask Question area.

Hello, everyone. Good morning, Tarik. Thank you for your words. And let me effectively go through a very quick presentation, and then we'll enter the Q&A session. So I will use just a few slides, sorry. Okay. Here we are. Just a first reminder on where we stand after a very good first half results. As you can see on the slides, let me just remind you, a double-digit return on tangible equity, EUR 2.7 billion in terms of underlying group net income. It's again, figures which are above 2019. That is -- it is reflecting the capacity of rebound of the group and the strength of the business model. As you know, in terms of capital position, or as you mentioned, actually, in your question, strong capital position. And let me say that it is including a provision for -- term for shareholder EUR 1.2 per share, which is actually higher than what we have been able to announce for 2020. And as you know, we will, of course, implement a share buyback program in the fourth quarter of EUR 470 million, that represent EUR 0.55 per share. Going forward for this year, let me just say we remain positive on the perspective of 2021. We expect revenue growth for all our businesses in an environment where we see a good rebound of the economies, the pandemic seems overall to go into the right direction, being under control, thanks to the vaccinations, and we don't expect any new lockdowns. And of course, let me just remind you that there are different dynamics there. We have said for the French Retail, yes, we will have a growth with an economy which is rebounding well at 6% this year. International retail also benefiting from the better economic prospects and also some interest rate hikes, which have taken place, both in Czech Republic, in Romania and in Russia. And CIB activity, as you might have seen, which remains dynamic in terms of corporate activity and capital markets. Overall, on the risk, we have lowered our guidance from 30, 35 basis points to a range between 20 and -- 20 basis points. As you know, we are seeing no increase of defaults. And we think, again, the level of the structure of the balance sheet is pretty resilient. So overall, a positive perspective in the short term. Let me turn now to the more midterm and long-term view. And here, certainly, we are entering into years of accelerated transformation in different major domains, and we will come back to that in the Q&A, I'm sure. First, of course, digitalization. The usage of technology will accelerate. What does that mean for a bank? It means transforming, of course, its business models. That's what we are doing in all our retail activities, developing digital channels, automated processes. It's also taking advantage of, if I may say, alternative models. Boursorama is -- will it further benefit from what is happening in the French Retail, you might have seen a few announcements. For example, ING reviewing its position, ING Direct. So it means for Boursorama new opportunities for growth, but it's also building new business models, [ shines ] is the start-up for entrepreneurs, which will be part of our way of thinking, providing services to these clients within our new retail bank. But also, for example, thinking about platforms to sell second-hand cars, used cars, like [ Lease Your Car ] or developing our business called [indiscernible], which is providing back office services to new banks or, for example, an internal startup, which is group Forge on crypto assets. So I think this -- the new development, which will not change the picture in terms of P&L in the coming 1 or 2 years are nevertheless important for the long-term future. Let me, of course, comment on energy transition. Here, it's the beginning of a very important journey. We are -- as you know, we have a very strong starting point. We are a leader in the energy transition, #2 in renewable financing in the world, #1 in advisory. A lot of, of course, financing to come. The amounts of money people talk about are in trillions of dollars a year. It is going to be an opportunity. And also to a certain extent, of course, a challenge for the financial system because you need to ensure that it's a mix of bank financing, but we will push the limitations in terms of size of balance sheet and, of course, capital market mechanisms. But for us, it's certainly an opportunity overall. Beyond this, it will mean starting a journey to change the credit portfolio step by step, accompanying the clients in their own journey and taking advantage, the same thing of new activities which fits particularly with this new world people think about. I have in mind, of course, in the mobility sector, ALD, as you know, is a formidable company, #1 in Europe, #2 in the world in new activity, if I may say, which is around providing the usage of cars and of very different cars. As we all know, we have switched to electrical vehicle, but the opportunities for growth are absolutely significant. And third, let me just say savings. Savings will remain certainly at the heart of our business models. People will carry on savings. I think at some point, probably less than in the last 12 to 18 months when governments preserved revenues and of course they did not spend. So probably a slightly better balance going forward with a normalized life. But nevertheless, we expect savings to remain, in particular, in Europe, with also the issues of pensions. And we think we are also, there, well positioned with, on one hand, a capacity to structure investment solutions, but also in our retail networks. We have this disruptive open architecture model in France. We are the #1 bank in France, opening the architecture to other partners in asset management and being able, I think, to offer innovative, responsible products. And I must say, in the long run, it's something which is attractive. So the idea really in the next years is to capture these opportunities. Let me just finish with the last slide. Sorry, necessarily to press -- here we are. Let me just say, for us, the next 3 years are going to be dedicated to the execution of a significant number of strategic initiatives, which, in my view, are very value creative. The merger of our French networks, it's not just a story of cost savings. It's obviously a story of cost savings but beyond, it's to tailor a new bank, which, in my view, will be competitive versus the mature banks. And effectively, with the benefit of one IT system, with more digital enhancement, and as I've said, ambitions in terms of business models, including on the saving side. Boursorama, certainly, taking advantage. As I said, it's interesting to see a bank like ING reviewing its position and it further reinforce the competitive edge of Boursorama. And I think it's a differentiating asset. So we'll have a pretty unique proposition in the French Retail. Of course, internationally, take advantage also of growing banking markets in our different geographies, reap the benefit, as I've said, of interest rate environment, which should be overall more positive in the Eurozone, at least if you factor like we do in the next 3 years still negative short term rates and just a progressive improvement of the interest rate curve. Transformation of the digital infrastructure is also at the heart of the strategy. I've already mentioned ALD, which is, on top of its organic growth, benefiting currently. And that might last beyond 2021 from this situation of the new car market related to the shortage across each of semiconductors, which means that we have very high residual value of used cars. And in GBIS, and I hear what you said, really a trajectory of maintaining a balanced portfolio with a strong risk monitoring and effectively more cost savings to ensure an acceptable profitability. And let me just remind you, our target of 12% return on normative equity, excluding the single resolution fund contribution in 2020. Beyond, let me just highlight that the attention on cost will remain very strong, also on our central infrastructure, if I may say. It's a central function. On one hand, it is around IT, further developing, for example, the usage of cloud, materialization of application, usage of -- efficient usage of data. And of course, benefiting also from the progressive phasing out of our remediation, 2021 being, as you know, a crucial year. This year, hopefully, we will put behind us the different DPAs with the U.S. authorities. And [indiscernible] in a more kind of run mode for all compliance processes. That's what I wanted to say in a nutshell, Tarik, and I now open to your questions.

Thank you, Frederic. So I remember the same time last year, you were in a very different situation. I think your share price was almost at all-time low, certainly the lowest since Lehman crisis, somewhat driven by the top-down context, obviously, with the pandemic and the uncertainties around at the time. But also others were intrinsic to your business model, leading to like quite super ROE in the last few years. So however you took stock of the situation and you engaged in streamlining some businesses and fixing capital position, and the latest is the retail business in France and fixed income and equities in GBIS. So I think it will be interesting in the last 25 minutes left to go through all these moving parts and then discuss the prospects for the profitability in the next few years. So my first question will be -- I mean you were having a new strategic plan probably presented next year, I think the dates to be confirmed. You already commented and communicated on many moving parts on ALD, as you mentioned, on [ Commercially ], Boursorama, CIB, the French Retail, but we don't have the full picture. If you put all these guidance you gave together, do you think your bank in the next 2 years can deliver a return on tangible equity close to 10%?

Yes, you're right, Tarik. We commented on many businesses, but not the full picture. And as we've told the market, I think it's better to have a better visibility on the economy. On the regulatory framework, hopefully, in October, end of October, we should have the proposal of the commission on Basel IV, the timing, the calibration. So we will be then able to give the full picture and refine further, if you wish, in our returning the capital allocation. Certainly, in our view, we have an opportunity to deliver a competitive return on tangible equity. If I look at the different businesses by improving structurally these returns on equity, and we've mentioned the French Retail, we might come back to that. GBIS, certainly, and this year we are demonstrating that, of course, we are able to deliver a good revenue level and monitoring the cost base, it's very important. So the idea is to pursue there. But of course, taking advantage also of the growth opportunities of all our international retail and financial services which are probably not fully factored for 2024, 2025 by the market. So again, we will give the full picture in due course, probably in the first half of next year. But yes, I'm definitely positive that beyond the very strong return on tangible equity, which is double digit this year, but of course also supported by a low cost of risk, all these ingredients will be reflected in improvement of the sustainable profitability, which will, of course, mean even further upgrading of our value. We did a good job. I mean let me just highlight the one-off element which was related to the structured product behind, it sorted out, it's dealt with. But beyond the structural improvement is, of course, the attention of all the management team, and I'm positive on the development which will take place.

And I mean, without giving too much away of the next plan, but the -- what assumptions you would check in terms of rates? I think you hinted that you'll assume a gradual recovery? Isn't that risky strategy given like the last 2 plans? And that's not only directed to you. I mean all banks were kind of optimistic, assuming that now we reach the trough and rates will increase. And on the other aspects, on the single resolution fund contribution, are you assuming that this is something will go away in 2023? Or there will be some -- it will change name and will remain there?

Listen, first, on the interest rate, let me say we will keep for quite a long period of time the [ minus 05 ]. What we are just factoring is a very progressive improvement of low interest rate. To be frank, at the end of the day, for the next 2, 3 years, there is no change of the picture that too optimistic way improve the perspective for revenue generation, in particular, if I may, in our case in French Retail. But we will, nevertheless, if you wish, benefit in the coming 2 years, probably of the TLTRO benefits that we have not also fully factored at this stage and accounted for. Let me say on the single resolution fund, I mean I don't know by definition, but this mechanism, as it exists, we will stop. And let me highlight that French banks are particularly exposed to this mechanism. We are probably paying 35% of the total fund, which is totally abnormal. And if there were at least any new idea on whatever kind of tax, I think even the French government would be supportive to say it's enough as it stands. It was much more than expected because, yes, French banks developed also more the way it was calculated. So I mean, I don't -- I have not full certainty, but this system as it exists will stop, I'm pretty confident on that.

Thank you. Let's now shift to the CIB business or GBIS in your case. So I mean, you showed a very solid rebound in -- from the end of last year actually. And you mentioned in Q2 that the restructuring -- the last part of the restructuring related to equities was now done. I'll be transparent, I mean I was very surprised by the rapidity and the very good execution of that restructuring, especially the way you described things has to be redone, I mean within 2 quarters, it was all done. So my question here is, I mean, can you give us -- can you discuss actually the steps you took to basically derisk the business from the downside and by preserving the volatility to the upside? Well, we haven't tested yet to the downside in the new cycle, but clearly you were able to capture the revenue revival. And because it's very important to understand if it's not a stop-and-go strategy or it's actually generally done and we move down from that restructuring.

Yes. Let me say I fully understood the question marks after what happened. The question whether we would be able, as we had decided, to maintain the activity but effectively to transform the portfolio, reduce the overall size, but more importantly, change the composition and be able to sell the new products with less risk. As we said in the last 4 quarters, we demonstrated, it was the case and it's a done deal. What do I mean by this? First, the portfolio has been restructured and why we were supported by the good market conditions because the products are auto call. So by definition, when market conditions are good, there is a redemption. So of course, that helped. But beyond this, I must say, it was a great execution in the capacity first, as I said, to do it, which means now that the portfolio is done, the stress test with a similar dislocation is reduced by 70%, but also that the commercial teams were there with the clients to explain the new product, to say, yes, we are there, we will pursue and effectively to maintain the relationship with the clients. And then on top of that, we have also overall pretty good conditions on the margins of the products, perhaps because of what happened. So if I may, what was not 100% sure in September and October, I can say it's done. And of course, that is positive for the future. Beyond this activity, let me just say that we have, in our strategy, the idea to maintain a presence in areas where we have in our new expertise. In a world of risk sharing, let me just say, take the Archegos issue, where we were not impacted, we had no exposure, but that shows that every player has to monitor its concentration risk. And it's again a business where you need to share the risk. And we have a capacity to take part of this risk, we've added value. And knowing that beyond market -- capital markets, as I've said, the ESG is a huge opportunity. We are a leader in the world. There is a huge amount of financing which are needed. It will be a cocktail of bank's balance sheet and debt, bonds, equity also for the project, for certain project. We have here a key opportunity. So I mean, that's why we are positive and doing that we want, of course, to pursue the efficiency efforts on the setup and meet this acceptable profitability. So a lot of execution, a lot of focus, but so far, so good. And I'm very happy in what we have been able to achieve in the last 4 quarters.

Very good. I mean revenues were up, but also the jaws were actually expanding. So a question here. How are you comfortable to maintain actually the operating costs stable or even going down actually in the short term while the revenue is going up? At some point, you'll have to start to increase the variable. I mean I think it was very easy to justify to your teams last year that the variable will be thin. Now that revenues are above -- are well higher and the competition for talents in France particularly, are we confident that the jaws will not suffer a bit from the higher operating costs?

Yes. But let me say already this year in the cost line, which, as you said, was well monitored and with good [indiscernible],we see an increase [ about it ]. It's obvious because the performance will be much stronger, and it's natural to take that into account. So already this year, with the strong performance, we have that effect. But it is also with the benefit of all the efforts on other elements that we are going to pursue, such as automation of processes; more efficiency in IT in general; the end -- the progressive end of remediation; the capacity also to even take more advantage of offshoring, and again, we've been very successful in doing that. All these elements means in our trajectory while, of course, compensating adequately our talents, a further improvement of the cost-to-income ratio. And as I said, and access to an acceptable profitability, knowing that the cost of risk. I think our track record is very strong and we are very positive to be able to maintain that at an acceptable level. So all in all, further efforts, structural efforts to reduce the costs and improve the efficiency. Of course, paying the people, like they deserve, depending on their performance.

Thank you. Let's move to French Retail. And maybe from the top-down perspective, I mean, maybe you can explain us the drivers of very significant growth in the sector at least. We haven't seen the numbers for Q3, but for the sector it shows like a huge rebound in mortgage loans and consumer. So I mean, on the ground, how do you explain that?

Well, listen, first, the economy is doing pretty well, plus 6%. No increase of unemployment, much lower figure than people expected. People had their revenue preserved. It means, if you wish, not such a bad mood for consumers then on the mortgage, I think it's a way for people to save money. Let's face it, traditionally, people think that buying your home is the way to protect your long-term future, take into account more uncertainty on pensions. And of course, people take advantage of very low rates. So that's why I think the activity of mortgage will remain pretty good. And the prices of housing and flats did not come down. So I think these elements should remain at least as long as you have a reasonable, favorable perspective for the French economy. We were already beginning of the year at 6%. We have upgraded our figures for next year, even if we remain slightly lower than the consensus, but have a figure of 2.5% for next year for France. So I think these parameters should overall remain. And of course, after this, you had the base effect in the second quarter last year, of course, there was a lockdown. So less attention on these topics from consumers than in a more normalized way of living.

So from the revenue perspective, if we put together the potential benefit for TLTRO, the volume growth, the lower deposit growth that hits -- hurts your deposit margins as well, would you be confident to reiterate our guidance of definitely growing revenues this year versus last year? Maybe we can take versus 2019 as well because last year was a bit particular.

We've said again versus last year, certainly. And overall, step by step, we should see slightly more positive elements. Again, as you mentioned the TLTRO, we have not accounted for the second part of the additional benefit. We will probably start to do it in the second half with full visibility on meeting the increase between the beginning of October and December. Let me just mention for the group as a whole, it's a EUR 300 million additional revenue. We will spread that alongside the duration of the TLTRO. And of course, retail in France is just part of it. So it's not the full -- but nevertheless, it will help. But beyond, as I said, at least if we succeed in selling our investment product, and we had a very positive first results of our open architecture, we should have a certain dynamic on the financial fees. In a normal economy, the service fees, the commission paid on payments should do okay. And then on the loans, at least if we have some dynamic, it will slightly compensate for still the negative impact of [ minus 05 ] on the deposits. On the deposit, what is important, too, I hope to see less dynamic on the side deposits that we saw just in the last 18 months where both companies and people saved so much on their side deposits. I mean at some point, maybe they will spend, they will reimburse debt, et cetera. So let's look at the dynamic, but at least some positive element going forward to maintain a more -- to avoid, of course, the decrease of revenues and have something with some moderate growth going forward.

Maybe last question on the French Retail. If you can give us like an update or [ point it up ] on your merger of SG Network and Credit du Nord, and what's the next step? And how do you see the execution risk at this stage of the process?

It was forward exactly according to schedule. Some important milestone just in the last days and coming weeks. We've just actually signed on the -- we need to harmonize the status between the 2 categories of staff. And in October, we'll give more detail on the organization of the bank and with more detail also on the social impact. So things are moving forward exactly in line with plan. And I'm confident. The way we do that is the right one, involving the teams on the ground, at the top. So so far, so good. And I think we can execute that in a disciplined way. It's, of course, a complex operation, but I'm positive on the way we do that and deliver on this front.

Moving to IBFS, which consists mostly of international retail and ALD, simplifying here. So for the international retail, I mean, you've been divesting a lot of business in the last 2, 3 years to boost capital. First of all, do you think the current scope is where you want to be? Or there's some more met adjustments there? And it's an area as well where I guess you have some upside on sense of revenues in the coming quarters, especially from the potentially higher interest rates than you budgeted or expected. So is that a view you have as well? Or you think you've already assumed quite optimistic rates environment?

No, I think you're right. First, let me highlight again the very good news in the second quarter was the fact that across the board, the performance of international retail was very strong, both in terms of commercial dynamic but also in terms of profitability. And the cost of risk was also very good, very well controlled, despite the fact that we have not seen the same support of government than in Western Europe. We keep the same view. And as you've said, on top of that, step by step. And we will probably take advantage of interest rate hike that we saw in our main geographies, Czech Republic, Romania and Russia. Beyond this, it's around further developing the franchises in banking markets which are not as mature as in Western Europe. I have in mind, of course, in particular Russia and Africa. Regarding the scope of the activity, I think we did very well in disposing of banks which -- we have good banks but in small markets and where we were not able to have a trajectory towards the position of #3, #4 at least in the small market. The job is done. Now we have presence where we think we can compete. Of course, we will remain pragmatic and agile. We want to ensure that -- and it's part of the job that we are doing until the end of the year. The next phase, 2022, 2025, these banks can deliver, of course, the acceptable profitability, too. And it's part of our request. But again, I must say, we have, I think, good prospect in this activity.

So on ILD -- I mean ALD did really very well, especially from the resale value of cars given the issues in supply chain for car manufacturers. Do you think that tailwind will fade from here now that the activity recovers. And maybe you can comment as much as you can on the market, talk about potential acquisition of [indiscernible].

Yes. First on your first point, let me say, when I speak to car manufacturers or car equipment manufacturers, they tend to think that actually this pressure on the production of new cars would last beyond end of 2021, probably at least some part of the first half of 2022. So I guess we can expect, yes, to still benefit from this exceptional market conditions where the sale of use car contribute on top of the good dynamic of the business. Let me just remind you, our guidance between EUR 600 and EUR 900 per car, knowing that beginning of the year, we were at something slightly positive. So of course, a big difference. And I think we were standing at roughly EUR 750 for the second quarter. Regarding -- I will not comment on market rumors. ALD is again has great organic growth potential. Has been able to also add to that external growth, of course, as part of the business model where it can integrate. And as part with the shareholder policy, which is, of course, always to ensure that it makes sense from a capital usage. But again, the priority today is the development of organic opportunities, bolt-on acquisitions.

Thank you. We still have 4 minutes left. Maybe we can spend this on capital and dividend, another key topic at the moment. So you've been very clear about a dividend policy of 50% payout, that includes a proportion of share buyback. And you are actually paying the 2019 scrip dividend in Q4 as a buyback. So the question here is this sounds a bit below kind of the average of new dividend policy or at least aspirations from banks, given that the excess of capital that the banks have and the growth prospects. So why are you -- I mean, 50% is good, don't take me wrong, but why you seem a bit more conservative than the average good European bank? Is it still CIB restructuring? Do you still concern about the macro or regulation? Or maybe because ROE is not fixed yet, so you want to keep some capital build there. So maybe just to understand, tell us if there is any upside to that, actually.

Well, listen, first of all, it seems that this 50% meets the expectations of investors. I was listening to the call. And if I may, with a bank which has growth prospects and which might seize opportunities if it makes sense of M&A, which will help to build a sustainable, better profitability, I think the 50% is a balanced way of looking at capital allocation. If you are just a Eurozone retail bank with no growth, and if I may, perhaps a long-term future issue, but the capacity, yes, for the next 2, 3 years to distribute more than 50%, okay, you can do that. In our case, when I look at the -- well, just been discussing the prospects for growth of businesses, which will mean structurally better efficiency, better profitability, I think it's fair to feed this growth at a minimum level. And 50%, let me just say at this stage, at least with the kind of results we have, is still a very attractive yield for investors, knowing, as you know, that we will always also consider a portion of share buyback, in particular, with such evaluation . So I think we can have an attractive, at this stage, policy with this kind of level. We want to absorb Basel. So we've been very clear and transparent on the impact. I don't know yet what it will be. We factor this absorption. Also, it's part of the game. And that's why I think it's a pretty good balance for the business model that we have, and we stick to this level without changing it. I can't hear you. I don't know what happens. I can't hear you, Tarik. Are you on mute? Yes, yes, yes.

And this is basically the guidance as well for the next plan that you...

At this stage, we are just refining our next plan before year-end. But at this stage, there is no reason to change this 50% payout ratio, yes.

Very good. I mean, Frederic, thank you very much for your time today, as usual. And hopefully, next year, we can meet in person at the conference and in between. So thank you very much for your time and availability.

Thank you. You're welcome. And keep safe. See you soon. Bye-bye.