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

[Audio Gap] discussion between the 2 of us, CEO of Societe Generale. We have 40 minutes. The session is the same as it is for the other sessions. So we'll have about 30 minutes of discussion between the 2 of us here up on stage. We'll then jump into Q&A from the audience. If at any point during our sort of discussion here you really feel like you want to ask a question on that specific topic, please do feel free to put your hand in the air, I'll try and see where you are and come to you. But Frederic, so first of all, thank you so much for making the trip for joining us. We appreciate your insights and your presence. We obviously started this year thinking that the macro backdrop would be perhaps simpler than it has been in prior years. And obviously, events have since overtaken us. So perhaps we could just start by hearing from you how the bank is currently doing.

Yes. Well, first of all, good morning, everyone, and thanks for this invitation. Let me perhaps comment on the economy because, yes, I think the geopolitical situation probably creates more uncertainty. Who knows on the development in the coming months, in particular, for example, on the energy market, which could have then consequences, of course, for the economies, in particular probably in Europe. But we remain with a central scenario, if I may say, with kind of peak of inflation and then a soft landing with low GDP figures, but no catastrophe. And actually, we have -- what we see on the ground remains overall pretty constructive when we talk with clients. So I don't think it's -- again, there is more uncertainty early, a wider range of scenario, but a central one which remains pretty palatable. And on our side, we have started the year very well with all our businesses delivering very well. I cannot comment the second quarter, but the overall environment remains pretty positive. So we carry on, if I may say, focusing on execution. We are positive on the prospective of our businesses. So far, so good, if I may. And again, we'll see, of course, what the environment will be going forward.

Very clear. And what's your outlook here for rates? Because clearly, the ECB are trying to tread a path between managing inflation and also without sort of tipping the economy into recession. So how do you approach managing the bank through this period?

Same thing. I would say there is also different scenarios on the rates. But the rate scenario attached to the central scenario I just described is actually, yes, of course, I don't even know if I should call it a normalization, because when you look at real interest rates, incredibly negative, but at least, of course, exiting probably, and the ECB has been relatively clear, exiting this negative rate situation. But then having probably is the scenario of slowdown and softening then rates which might remain in 3, 4 years time, relatively low, and not something which might be extremely high rate. So of course, again, it depends on this loop between inflation and wages. That's where, again, uncertainty is there. But it's better as rates, if you wish rates, higher rates are better. Again, it varies a lot in our different businesses and geographies. We see the benefit immediately in the Czech Republic where you had a very significant increase. It will be much more moderate in France, for example. We've also, to start with, perhaps sometimes even negative elements on the regulated saving products before it feeds also on the deposit side and, hopefully, on the credit side. Even if same thing, the pricing -- the repricing of credit is, at this stage, more moderate than the increase of rates. All this goes in the right direction and an exit of an abnormal situation of rates would be good. Let's see how things are developing in the coming quarters.

So is it fair to say in sort of your core scenario that you're aiming to manage the bank to be well positioned for a relatively low terminal rate?

Yes. Still, I must say our long-term scenario remains relatively de-levered because structural issues remain. The demographic elements, the savings amount. Probably again, assets which are not so numerous, there's also a need for finance for the energy transition. So maybe there will be new instruments also which will be created to absorb the savings. But at this stage, our central scenario remains rate low -- long-term rates, which might remain relatively low attached with GDP growth also relatively low.

Okay. And you gave some interesting regional nuances there. So as we look across or as you look across the bank today, where are you seeing, let's say, the most positive performance? And where is performance most challenged in light of the current macro backdrop? And does that surprise you at all?

And again, the start of the year was good everywhere. Of course, the dynamic was even stronger in the Czech Republic in retail, for example, on the market, on the financing, on the business, which we are very good because we benefit from this huge demand on infrastructure finance, renewable finance. And I think it's here to stay. And it's fair to say our expertise in financing and investment banking is concentrated on this activity. So it was good across the board. As I've said, still, for example, the revenues or the dynamic on the French retail on revenues will be less dynamic because, again, the rates are not adapted like they were in the Czech Republic. And beyond, you have some elements like, as I said, regulated saving products which can have a negative impact. Livret A is more or less correlated to interest rate and inflation and immediately it's passed to the clients. So you have nuances, but I was very happy with the start of the year because the first quarter across the board, very strong performance.

So fairly upbeat performance, like you said. But in light of the sort of dislocations you're seeing across the market more broadly, does that change at all how you think about capital planning or capital distribution for the bank?

No, if I may, we will communicate in the second quarter how we think about this in the midterm. We have -- we want to maintain a balanced business model. In retail, as I said, in the long run, a more normal interest rate situation is better. Clearly, we want to allocate more capital in Central Eastern Europe, definitely, which is very profitable with markets which are pretty disciplined. We want also to put a lot of capital in our new fleet management, car fleet management business. You know how excited I am about this business because it's really -- it will be a 15-year, in my view, growth story, an ESG story because it's a business which transforms the fleet, the car fleet from fossil energy cars to electrical cars. And beyond a company, the change of usage. And I think the potential here is, if I may, unlimited, given the starting point and where it should go in 10 to 15 years' time. So we will allocate more capital there and we expect a strong growth. And then, as I've said, also on the financing business, because there is a fundamental transformation which is taking place in Europe, but not just in Europe. So -- and you know we have just updated our objectives in terms of sustainable finance. We said between 2020 to 2025 EUR 300 billion, 1/3 in financing in the balance sheet and 2/3 through leading mandates on the bond business. So -- and I think this will exist, will be there whatever the economic scenario, what you might see is less IPOs, what you might see is less M&A. But I think these trends, the structural trends which are really expected from public authorities as well as public opinion will stay. So I remain positive and you will see our capital allocation. It will be disciplined, selective, but going in the direction, which we mean putting more capital at work in our most profitable business.

Okay. We've obviously seen a big pickup in sovereign yield in recent months. But we've also seen, let's say, ongoing competitive pressures in the French mortgage market. And I wonder if you could sort of explain how you'd expect that market to evolve maybe over the more medium term rather than the immediate pricing outlook.

You're right. Again, this market remains, if I may say, is not disciplined enough in terms of pricing of mortgage. I think, overall, you might have seen an increase by 35 basis points, 30, 35 basis points on average for mortgage loans when you had a pickup of long-term rates by close or more 100 basis points. So yes, there is a time lag. You still have players who are playing the game of market share. I must say we try to be more disciplined on our side and accepting even an erosion of market share to try to, if we put this capital at work and show it's with clients, in our view which really makes sense to leverage on the sales of our products and to deliver profitability for such a market which is pretty good on capital and close to 15% after tax. So I'm happy with that, knowing that we have also, of course, Boursorama, as you know, is the leading online bank in France, which is capturing also for me very attractive clients, 35-year-old, Euroban managers, if I may. So the young people will be able to save step-by-step in the next 20 to 30 years. I'm pretty happy with our positioning in a market which is dominated by mutual banks, which again have a different way of looking at things. But I think we try to do as well as possible.

I think that -- let's turn to that topic because Boursorama has clearly been a success story and the client targets are being hit earlier than expected. So I suppose, first of all, how is that business performing right now? But secondly, what's beyond the 4 million-plus customers target of profitability? Where does the business go thereafter?

We will probably have a focus on -- in the second quarter on this business after the ING transaction to explain exactly how it has gone. Again, for us, I think let me just remind you, it's the cheapest bank in France, the one with the highest Net Promoter Score. It will have 4 million, 4.5 million clients at year-end. It's close to EUR 40 billion balance sheet. So when -- we sometimes talk about neobanks and I look at the figures, it's something very different. And of course, with an operating model which is great because last year we had just add 8 people to deal with an additional 800,000 clients. And in the first quarter, we had close to 400,000 clients. So it's really the leading online bank in France. I think it's a bank of the future. It's just for individual clients. Let's keep in mind always that in retail activities, we deal also with corporates, We deal with [indiscernible] professionals. Boursorama does not deal with this category of clients. And it will be probably too difficult to adapt the model, which is very simple, same model for everybody but, again, at the satisfaction of the clients. So we will communicate. We will, I think, in the coming years, take advantage of this capacity that we have to put this bank at a maturity. It will carry on conquering clients because the brand is better and better known. But again, I'm very positive. And as you know, we expect the profitability on capital for this bank, which will also move to advanced methodology for its mortgage at something like 25% compared with what I said the 15% we achieved today, but more something like 10%, 11% when we think about Basel implementation for all the businesses. So it's going to be, I think, an important driver for profitability and growth for Société Générale.

And then on the CIB, I mean, you referenced this earlier, but clearly, momentum has been very strong in CIB for some time. So I suppose two questions that follow on naturally from that. First of all, should we expect could there be upside to the EUR 5 billion revenue assumption for that business? And then secondly, how do you think about the longer-term strategic direction for that business in the context of the overall evolution of the European IB space?

It's tough to say for now. Seven quarters in a row, we've had very strong performance, both on the markets and the financing. As I said, on the financing side, I think benefiting from specific set of expertise, which has been historical for Société Générale. The renewable, we started 20 years ago. Infrastructure Finance. Again, we are going to remain in the next 10 years, I think, in the same momentum across the world. When you look at the trillions of dollars which are being referred to, to accompany this transition and beyond because it touches upon many, many topics. And all the companies themselves are again reflecting on their business models, are issuing sustainable finance and they need an expertise which leverage on all the components of the bank. And I think we can do that pretty well. We were awarded the IFR reward of sustainability Bank of the Year because I think we are also pioneer in certain new technology. It's hydrogen. It can be different things. But it works pretty well. On the market, after the adjustments that we did on one component which was on the structured product, which has been very, very well, I think we play our role in a market where you need a minimum number of players. You saw what happened in -- with some counterparty risks in the last 2, 3 years, Archegos. Beginning of the year, there were turmoil on the commodity market. It apparently did not impact banks, but it could have, at least referring to some of the figures. So I think the supervisors will be very focused on ensuring that all the banks manage their concentration risk very well. And again, you will need the players because we talk about a big amount of money or large companies like private equity funds, et cetera. So we -- I definitely think we have a good -- very good momentum. And we are deploying in a very disciplined way, capital, optimizing this capital. But the fact that also certain players are withdrawing clearly or have more difficulties is certainly an edge for us with a disciplined approach of this business.

And then staying within CIB. In light of the dislocation in terms of geopolitics, the Russian invasion of Ukraine, but at the same time the step change in rate policy, how has that impacted client appetite within the Investment Bank? And is that different between institutional and corporate clients?

Again, with the dislocation, there was a slowdown, as we commented, on the certain activities in investment banking, like ECM or even DCM or LBO is today a market which is struggling. So -- but I guess, as I've said, we are not that exposed on these markets compared with our peers. We see, of course, a very nervous asset management sector, which contrasts to a certain extent with probably the view we take we -- when we say -- we as Société Générale. But beyond, I would say, with banks, we do not see the stress that these people might see perhaps also because we see this correction of the market, of course, which are significant. But we are in segments, I think, which fare pretty well. So I guess, we need to monitor the risk very well, very prudently. But so far, so good.

Okay. So shifting topics slightly. There's been some, I guess, comments and headlines in recent weeks around completion or lack thereof of the banking union. So how would completion of the banking union impact the medium-term strategy for a bank such as Société Générale? And how would that materially impact how you think about M&A?

But first, yes, there was some excitement on something relatively small. I'm always puzzled to see the level of excitement versus the progress made. But maybe at some point, they will reverse, who knows? But let's -- regarding banking union, things will take time. And realistically, you -- what you can just think about is probably perhaps that this topic as well as the broader financial sector agenda will be maybe, for the next commission might, become a priority if we are able to explain what is at stake in the next 18 months regarding the financing process of all the investments. If we can explain that if you want to spend hundreds of billions of dollars and not just through government or euro paying debt, mutualized debt, if you wish, but through also private sector mechanisms, I think you need capital markets first, because the bank's balance sheet will have a limitation with the Basel IV, [indiscernible] e.t.c. You can't grow your balance sheet, I think, personally with no limits. So we have to explain that. In a context where our banks are, I think, have a pretty good image after the COVID crisis, very different from 15 years ago. We did the job. So with penetrations people are -- and I must say with the crisis that we see with Russia and the sanctions. And as part of this sovereignty play, there is -- people listen to the idea that, yes, Europe has to have a strong financial sector. But after this, the problem is to implement things, to agree and align, and it will take time. So I don't think you should expect anything. And ourselves, French banks, we are pretty prudent because we were very pissed off, as you know, with the -- what was negotiated in 2014, where it was the single resolution fund. If your banking union means that it's paid by large banks in Europe, which means largely French banks, I mean we have no real interest. So we want to be ourselves. We are pretty careful on what it could play, what it would take. Strategically, after this, as I've said, for us, the next 2, 3 years is to implement the next -- this new business model that we will actually complete in 1 year time. Merger of our 2 French networks. Boursorama, prepare the next phase of development. And regarding retail, there's a real question mark, which is given the time which is used -- has to be taken for restructuring branch networks as it makes even sense today to think about buying a branch network, you can wonder at least. And then, of course, on the mobility sector. So if I may, we have a heavy intensive road map but potentially very value accretive. So the next 2, 3 years, that's on this. Beyond, we will see there are opportunities. The world is changing very much. New technology is coming. Maybe we'll have a euro -- the digital euro currency, et cetera. Let's take the time to see what makes sense in a sector which is transforming again so quickly.

Perfect. Now switching to sustainability, you recently upgraded your target targeting EUR 300 billion of sustainable finance activity across '22 to '25. So I guess the simple question is what's enabled you to run so far ahead of the targets previously? And how does that change in terms of the context of the growing importance of energy security and energy independence across Europe?

Yes. Again, I'm amazed myself by the level of demand. There's not a single corporate, there's not a single asset manager which is not looking at its own portfolio, business model, et cetera. So the level of demand is absolutely huge. There are new initiatives and, as I've said, new technology. For example, we were selected by Total, [indiscernible], Air Liquide for the setup of a fund which will dedicate money to hydrogen experiments. So there is a lot which is happening. And again, it's across the world, it's not just a European thing. So as I've said, as a leader, having a very strong expertise on this sector, we benefit from that. The situation on the energy sector does not mean for us a change of our commitments. And we tend to think that, yes, of course, the supply -- the flows might change, less from Russia or maybe at some point 0 from Russia, more from the Middle East, maybe more from the U.S. But at the end of the day, we stick to our commitment, which is to accompany in a pragmatic way this transition of our economies and our clients. And for example, we were the, I think, maybe the first bank in the large international bank, and at least certainly one of the first banks to say, minus 10% between 2019 and 2025 in absolute terms of amounts that we -- which finance exploration and production of fossil energy. We have not changed this figure. We have not said that because Europe might struggle for the next 5 quarters, we should increase or change the figure. We stick to this commitment, which is factoring a transition, which means, again, we accompany the oil companies which are themselves switching their portfolios. We want to ensure, yes, that we take into account the reality on the ground, but nevertheless go in the direction which is very clear. Same thing with coal, even if coal is used today more, probably we want to exit coal in 2030 in Europe and OCD region and countries. I think it's important to carry on because we will be in democracies where it will remain a very -- a topic of intense tensions between generations. And I think it's important for a bank to stick to this, if I may say, rational, reasonable and pragmatic but determined commitments.

Do you think about fintech as a more of an opportunity or more of a threat? And if you think about the recent move in rates, the degree to which that makes access to equity or debt capital more difficult for some of these companies. And at the same time, the incumbents, such as yourselves, in theory, right, the rates should benefit the ability to generate and deploy capital into this field. Does that change the competitive dynamic as well?

[ Jamie ], on fintech, first of all, it's a very large -- it's a world which is not very precise. And I'm always puzzled by the same thing when people talk about banks which are not really banks, just payment companies, et cetera. So I think fintech, you will see some of them which will succeed and many of them which will disappear. You've seen an excess of valuation, which is now corrected. Ourselves, we have been very pragmatic. We have been -- we are working with certain of them through commercial agreements. We have made acquisitions, and it's a way for us to speed up the transformation of our businesses. We bought a fintech called Shine, which might be -- we will see the Boursorama for certain employee professionals in 2030, we'll see. We bought a platform to sell cars, used cars, which is called Reezocar. We made a very early acquisition, which was called Fiduceo, which is a fintech which enabled us then to propose aggregated accounts from many banks. So it was Boursorama bought it, and then we transferred the technology, if I may, to the other networks. We are -- have developed actually from scratch internally a start-up called Forge on crypto asset, which is a leading start-up in Europe on these matters. So if I may, I don't like to oppose fintech to the rest. Yes, there are new competitors who are able to sometimes think differently, leverage on new technologies which can be very efficient, which will create pressure on certain elements of the value chain. Up to us, ourselves to move ahead to think that, yes, legacy business have to transform. Boursorama, 8 years ago, was kind of a fintech, if I may, but we accepted and I decided to grow it internally even if it was a kind of internal competition. And I think we can play and work with them efficiently and a win-win -- in a win-win situation.

You've talked on the record before about the big themes of deglobalization, ESG and technology forcing corporates to rethink their medium-term strategy. And you've already discussed on stage today about how that's fed into your thoughts. Do you think when you engage with corporate clients that we're at the early innings of that rethinking? Or are we sort of getting to a position where companies, your corporate clients, know where they need to be?

No, it's just early stage, I think. And if I may, on one hand, the COVID but also what we are seeing just currently with the supply chain. Of course, the geopolitical tensions which will remain, in my view, are for long. U.S. versus China, Russia, which I think is creating a 10-year situation of tension. So no, I think it's just the beginning. And it's still, I think, a little bit difficult to anticipate all the consequences. But it's just the start.

Very clear. Okay. Look, I think in the interest of time, maybe we'll open up to audience Q&A. If you do have any questions, please feel free to put your hand in the air and somebody will come with you -- to you with a microphone. Right in the middle, halfway down. We got a microphone?

Otherwise, I think we might even hear you. The room is not so big. Yes.

Just, please, a few more words on the opportunities you see in the car financing market, especially in the context of the closing of the acquisition of ALD and -- sorry, the merger of ALD and LeasePlan.

Yes. Well, again, I'm very excited. What is happening? First, you have historically lease car fleet management as a business, corporate car fleet. Obviously, it is switching from fossil energy to electrical cars. For a CEO, if I may say, one of the simplest things to do is just to do that, to show its commitment to energy transition before even thinking about a reshuffle of his own business model, if I may. So it's something visible. And when you talk about this, it's not just providing the car, it's also a company that people to use an electrical car. And actually, there are still fears or reluctant or misunderstanding on first the cost, the overall cost, and also, for example, how do you charge. So it's a full package that we do. And what is very important also and interesting is the development on the retail side because we see also individual people who buy less and rent more. And look at the car industry, its current business is under threat and try precisely to also enter into this service industry which is the renting car but with of course the difference which is that they don't just provide their own brand, and they are -- it's not part of their knowledge. So ALD, we bought ALD 20 years ago. It's 2 in this space of specialized car renting player. And yes, we were able to strike a deal with this private equity fund, mainly TDR and with LeasePlan and make this acquisition, to leverage on size, synergies. But beyond, as I said, taking advantage of this formidable transformation. We've, as I said, I think personally an ESG story. When you look at this company, this company has a purpose, which is to precisely accompany this transition towards electrical car. We've the benefit also of the capacity to resale cars. Cars are becoming scarce and expensive assets. Might not be forever, maybe in 5 years' time, again, the construction will have smooth. But for the time being, you have scarcity of cars. And on top of that, electrical cars, they cost EUR 15,000 on average, higher than traditional car. What does that mean? When you think about recycling economy, you can take a car, you can rent it for 4 years to a company and then have a second and probably a third lease with a car which also is much less damage, if I may say, or when it's an electrical car with a fossil energy engine. So you can imagine capacity to offer access to cars at a much cheaper price than just for people buying a new car. So I think there are many avenues. ALD is doing it also with the benefit of white labeling agreement with other banks. We, at this stage, don't provide the service to our own network. This is something that we have in mind. So again, I think when I think about what the bank can do in terms of new development, new activities, for me, it's an area which is very attractive. That's why we are very excited about this opportunity.

Thank you for your presentation. [ Sophie Parago ] from [indiscernible] Asset Management. I have a question on OpEx inflation and on subjects which may be cyclical or structural, it's personnel cost. Because if you look at the HP remit in the bank, do you feel it's more difficult to attract the nonpaying talent? Are you concerned that the war we have seen on talent in the U.S. with salary increase come to Europe? And in this context, how confident are you to reach your cost-to-income target if something cyclical becomes structural?

Well, first, perhaps on this topic of recruitment, et cetera. I think the banking sector has normalized to a certain extent, but we don't see such a problem. And in Europe, in particular, I think it's easier than in the U.S., you still have more unemployment. We are, if you wish, recruiting very talented young people from the world. Still, I mean, it's amazing. We have a selection at the [indiscernible] where we select, for example, 50 top talents from the world, 2,000 candidates and you have an amazing people. I remember the South Korean who speaks French and was interested in French literature, I asked him why? Is it your parent? Not at all. My parents don't even speak English. So very -- I mean, this world is still even it's fragmented. You see still young people traveling around, studying around and being interested by the banking industry. Again, normalized versus -- so what happened 15 years ago where maybe the financial industry was actually absorbing most of the talent, at least the most significant talents. Second, well, your question is related a little bit to what we are going to see in inflation. As we said, this year, we are very comfortable with the management of our costs. We started -- we have a guidance which is between 68% excluding SRF. We started much below, we have kept for the time being this guidance, I'm comfortable. We'll see at year-end, depending on where we stand with the inflation. But in particular, in a central scenario where you could see inflation going down, a cocktail, I think, will be a mix of maybe increase with fixed wages but also premiums, other elements, if I may say, to precisely protect the future in case of a central scenario where inflation will land. So it juries out on that front, but I'm not sure it's really that structural scarcity of resource in countries where we still have unemployment. Demography in France, you have a demography which is also slightly better, of course, than in the rest of Europe. I'm not too worried. In other geographies, you can have more inflation. India, it's more sensitive. U.S. is more sensitive. But I think we can deal with that.

Okay. We're coming up towards the end of the session, but the one question I wanted to ask you just before we wrap up. You recently announced your intention not to seek renewal of your term of office as CEO. And so I wondered what pieces of advice you have for whoever may be the next CEO of Société Générale?

This is a little bit too early to give advice. And as you know, I have still ahead of me a very busy year and critical, crucial in terms of, I think, the success of Société Générale going forward because it happens that at the same time we should have completed the merger of our 2 French networks. Of course, the benefits will be in 2024, 2025 is the synergies. The legal merger, the migration of IT would have been on. So the new bank will exist. Boursorama will have dealt with ING. ALD/LeasePlan would be a company which will exist, et cetera. So I think, if I may, this sector will remain under intense pressure in terms of transformation. The world will remain complex, difficult. I think what I would say is really carry on thinking significant transformation of business model and with a time frame which means that to build things which are resilient, robust, you need time. And we will see there will be probably market corrections. I'm always puzzled to see, again, the excitement on certain business models. Buy now, pay later today. Yesterday was extraordinarily strong. Today, people are wondering. But the realistic put that into a reasonable context. It's just a very small part, I think, of the business, et cetera. So I think keep the distance. And the sustainable agenda is something very, very significant. I think that finding the right balance between, as I said, accompanying the clients and protecting the reputation, including with the young people. When you were talking about the young people, if there's one thing I think they are very interested in, is to participate to a company which is engaged in a responsible trajectory. Otherwise, they will not come. This is more, I think, significant to a certain extent than a few percent of wages today for the new generation. So I think this sustainable and technological agenda will be absolutely crucial. So I would recommend training. I have to do the training myself, let's be frank. It's new territory, very vast. Biodiversity. I don't know in this room, if we were asking people, would you be able to answer. It's a new field, new domain, so we need to be very humble, learn, try to have really an integrated and aligned trajectory. And as I said, always think, yes, you need to invent new business model in this world. The legacy ones have to transform very significantly, you can't just sit and wait.

Great. Thank you so much, Frederic, for joining here to spend some time with us and sharing your insights. It's been an incredibly insightful moment on stage. Thank you very much.

You're welcome. Thank you very much. Thank you.