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

Good morning, everyone. Good morning, Slawomir. Nice to have you again.

Good morning, Tarik. Thanks for having me.

So what a journey. 2 years ago, I remember, at the same stage, I was trying to figure out why such a downbeat strategic plan. A reminder, it was day after you leased it, 2023. Then last year, we established that it was necessary reset to expectations. But the last 2 years were a rollercoaster and required some believing, but your strategy has paid off if we go by the share price. So French Retail revenues have turned the corner in a very unstable political environment in France. You executed the cost synergies, implementation in French Retail and Ayvens, and showed sovereign business model can be resilient and [indiscernible] including CIB. You delivered as well on the capital buildup and started to return capital as we speak. So I guess now probably the difficult partners, I'm then saying what you've done so far is a difficult, but is to start to address the profitability in the long run and how you can actually cover the cost of equity. So yes, this is -- I mean, we'll try to go through as many topics as possible in the next 40 minutes. And maybe let's start straight through that on capital and the strategy. First on the capital, you built capital fast. I mean, you are now at 13.5% as of first half. And you generate more capital going forward. So how do we square the fast capital build with your target of being at 13% plus some margin by year-end.

I mean thank you for your kind words. I mean in the end, what's important is that in the way we communicate, when we talk about our targets, we set them and design them. We try to be as close to reality as possible and not try to deliver a marketing statement, but rather a strategic one. And so we're very happy with what we've done so far. But to your point, the main statement I can have about history here is that a lot more work is ahead of us, and we're focused on this. Turning to your capital question, I mean we had this target of 13% by end of the plan, 2026. And for a number of reasons, we delivered faster. And so we're -- and we benefited from the postponement of FRTB as well, of course. And so we have a good problem, which is how to use this excess capital. And here, one statement, again, in the long run, we are not in the business of accumulating more capital than the target that we have. That's very important. And the thinking of everybody who's interested should be framed by the statement first. Second, we are going to address the excess capital always with the same approach, which is how to best use it in the interest of shareholders. And there are 3 main options: One, organic growth; two, inorganic growth and then return to shareholder, arguably best way to do it in the form of buybacks. And there, we are very committed to be rational and to be good stewards of our investors' capital. We're not in the business of building up our ego or building up things for the sake of building them up. We're in the business of investing very rationally this excess capital. And today, it is fair to say that organic growth is a very good option from a marginal rate of return given the risk management framework at SocGen. There are a number of businesses where we can do this safely in a diversified manner and generate interesting returns. But obviously, with the kind of excess capital that we have, we cannot. It would be stupid to channel all of that capital into organic growth, and therefore, we're not going to do that for obvious macro risk management reasons. That leaves us with inorganic and return of capital to shareholders. And there, from a risk return perspective, right now, the buybacks seem the best option. But we're committed not to buybacks. We're committed to making these decisions as we go in a very rational way in the best interest of shareholders based on facts and not opinions or sentiment. And ultimately, you see a Board decision.

So based on facts and rationale, if we do some quick math, I know this math is always difficult to be precise. But if you look at return on investment of buying back minorities on Ayvens, for example, versus a yield on a buyback at the current valuation, the math is becoming a bit tight. I mean is that still a favor of buyback versus acquiring more of Ayvens or [ part ]? Or is the buyback still the priority at this stage?

I mean, the logic is, again, to be strategic because excess capital is a strategic resource, which needs to be handled strategically, right? So the numbers point to something which is close in the example that you're giving. But from a strategic standpoint, you need to make the determination of why would you do one versus the other? And also, obviously, since it is about stewardship of our shareholders' capital, what is the risk-adjusted return between the two options, right? And this is how we intend to do this, very rational strategic decisions.

And in terms -- and last question on capital. In terms of the capital return policy, expectation rises now rightly on distribution, including myself. I mean, I have or full disclosure of EUR 1 billion share buyback additional with Q3. But it's just to keep the capital under control in terms of forecast. So how the communication you think will be in terms of having a clear message in terms of when to expect announcements and utilization of capital in terms of distribution?

So two ideas here. I think. Again, these are strategic decisions, right? So one thing I can say is that it's not going to be like a quarterly process of trying to square a ratio, this would make no sense. I mean this is a deeper decision that needs to be taken in that context. That's one idea. The second one is, you said it, right, the buildup was successful and much faster than initially planned. And so we are, it's fair to say, in a situation right now where we want to kind of establish some foundations, right, and some grounds for the long term. And in this perspective, we're trying to figure that out, knowing that you also have some pieces outside which are not entirely clear, and I had the discussion in an investor meeting earlier today. What about FRTB? How do you account for this, right? Today, you cannot account for this as gone, right? Because today, this is not the statement of the supervisor. And so whatever my feelings about what is going to happen are from a management perspective, I have to account for this particular charge coming early 2027. So today, we're basically building the sustainable foundation of long-term policy. And so we'll figure that out and no announcement as far as Q3 is concerned.

So the -- I want to ask this question later, but let's do it now since you brought up FRTB. So what's your sentiment in terms of capital requirements and demand from the supervisor mostly coming. I mean, we were all worried about this on-site inspections about a year ago. Now we hear about having internal models revisions up with high risk density that pushed the market to do more of securitization and synthetic securitization. So how do you see this buildup of capital evolving when you think of your capital evolution?

Sure. I think the first element, and this was also factored in our thinking about the 13% target because back then, maybe not you, Tarik, but some people were questioning why 13%, it's too much or whatever. I had these conversations. And one of the answers, not the only one, was when you run a bank, you cannot run it close to whatever the limit is. I'm not even talking about the regulatory requirement, but the expectation of the market, et cetera. And so you have to cater for all kinds of uncertainties that are inherent to banking operations. And regulations and the part that you -- supervision more precisely, the part that you just referred to is part of the uncertainty. The most important thing there is to have the toolbox to manage it, and capital buffer is one, obviously, the obvious one to manage anything and we're more than there in this respect. And then is what you just referred to, right, having a very strategic approach to capital management and being able from a more business than SRT perspective, the ability to react to the stimuli that you receive from the outside world, right? So that being said, I also think that we're reaching some form of a plateau in terms of the supervisory actions there. I mean, we have on-site inspections, all of us, like many times a year. But I think overall, we're closer to wherever they want us to be than to the beginning of that process.

Very clear. Thank you. Moving now into your strategy and your aspiration for to improve the profitability of the group. I'm sure you are probably thinking already of the next plan and what's the measures in terms of now converting this restructuring into higher profitability. So what would be the key pillars of your new strategy? I have a strong idea but I'll let you comment on this, and then we can dig on.

I mean it's not going to be a surprise to you. I think a key pillar, not the only one, but the key one will remain efficiency and cost management. Just to keep it simple, it's kind of obvious on the one hand, but also if you look at benchmarks in terms of cost per RWA because if you only look at cost-to-income, obviously, you're embedding top line considerations and market feature differences, et cetera, et cetera, jurisdiction differences. But if you look at cost on RWA , I mean you're pretty close to something that is really comparable. And there, we have more work to do. And there's absolutely no reason. You've heard me say that in the past, that we would have some form of either as French banks or as SocGen, some sort of a curse and some sort of a structural inability to deliver better efficiency. And I think this remains a #1 target. When we started our work with the new management 2 years ago, we were faced with a certain situation but also major projects, restructuring projects, which were burdened, an opportunity, of course, but a burden of their own at the same time. I'm talking about the merger of the French Retail banks and Ayvens, of course. And so we had to deal with this first. And we are, to your point, maybe we'll come back to this later, we are delivering there. But clearly, this was not the end of the battle in terms of efficiency. And across the board, across the group, not only in French Retail, we have room to do better, and we are already working on this and we will work some more. In terms of the top line, it's across the group. First, reallocating more organic capital than in the first plan, because, as you know, part of the capital buildup for it not to be dilutive was done internally and part of it was basically very strict control of organic growth. So we can release that because of the capital situation that we're in. And to the point I was making earlier, it's very, very profitable on a marginal risk-adjusted returns in many of our businesses, and that's what we intend to do. And that alone, if you do the math, and I know that you're doing them well, is also very supportive of the performance. And in the end, continuing to execute well on risk management, obviously, is key as well. So I mean, usual cocktail, but clearly, cost and efficiency are still a pillar of what we need to do.

Okay. Maybe starting with the cost part then of the cost income. I mean, often, I hear -- I mean, I've been hearing that for more than a decade, France is impossible to take out costs. It's difficult. Some have tried. What's your portion here to actually implement that? Because that's basically the name of the game for you in terms of bringing the whole group cost. This is, I would say, the [indiscernible] cost heaviest in the mix.

So I mean, first comment, and it's not about defending French reputation whatsoever. But one of the benefits of having people from outside, like Leo and bringing a wealth of experience and expertise from other markets is to challenge us to do better in a number of ways, but also sometimes to remind us that it's not easy to take out costs in Spain. Definitely not easy to take out costs in Germany and many other jurisdictions. So I think French has to serve France's image, but it's not an excuse not to do our job. And I think in France, like in any other jurisdiction, if you're focused on taking advantage of natural attrition rates, for instance, they are actually significant in some of the pockets. And actually, in some of the most challenging pockets like French Retail, some of the attrition rates are high. And the question is, how are you using this to fuel your ability to deliver actual outcomes on costs? While at the same, obviously, optimizing and we've discussed this in the past, optimizing some of our spending. What's idiosyncratic from a cost perspective to SocGen is that when we took over 2 years ago, we had very high IT spending with outcomes, which were comparable to that of the market, right? Meaning we were not ahead of the market from a technology perspective, we were in line with the market. So basically, we were inefficient, sorry, to a pretty large number and dealing with this, which has nothing to do with employment or whatever, which has to do with how you source your IT expenses, et cetera, et cetera, is a huge cost lever. And last year, we -- for the first time in probably ever, we reduced, in absolute terms, the spend there. We're continuing this year, and we, for instance, in this case, intend to continue optimizing this expense. So all I'm trying to say here is that the combination of all the levers that you have, if you instead of looking for excuses, right, focus on delivering on your agenda in terms of cost efficiency, I think you can do a lot. Maybe it's slightly slower than, say, in America, for sure. But it is doable, and there's absolutely no reason to use that excuse not to do it.

So your target is 60% cost-to-income in France and group next year. Can you share with us what could be a range or a realistic level you could reach?

You mean '26 or later?

Later.

So maybe that's a little early. I don't want to give you that scope. Listen, we're focused on delivering 2026. It's very important. We don't want to kind of project ourselves, especially out there. Of course, we're working on this before delivering, executing and delivering on our promises is absolutely key from a cultural standpoint in the management team today. So we're focused on this. And for 2026, as you know, the unpacking of how we get there has to do with no more CTAs, still over EUR 300 million this year. So no more CTA next year, which, by the way, will be like the first year, I don't know, in something close to a decade, that we will have no CTA and that whatever investments we need to make, which we are making continuously comes off the baseline of our business profitability. So that's a big piece. The second one is obviously the contribution of BoursoBank to the cost-to-income because the acquisition cost, which was substantial, as you know, hundreds of millions come off the top line, and so this will contribute both to reaching the target in terms of cost-to-income at French Retail level and group level and obviously, supporting the ROE target. And then as I said earlier, the continuation of all the work on the IT spend and other initiatives that we have. But there's a lot of work to do, and at the same time, obviously, delivering the last leg of the restructuring of Ayvens and moving it from whatever, a little south of 60% cost-to-income last year to the 52% target next year. So that's how we're going to do it. And then the statement for the future is we need, as I said earlier, to substantially -- continue to substantially decrease the cost base, and we will. So the next leg will be a substantial improvement over this target.

Very clear. I think you mentioned BoursoBank, and I think the [ converters ] perhaps as you put it in your CMD 2 years ago of the brick-and-mortar model and the digital model would probably contribute to that better cost efficiency overall. Could you maybe remind us because this was a while and I think it's still valid within your thinking on how you see this business evolving? How do you see that actually these 2 networks coexisting and how that will evolve?

So I mean the slide you're referring to, which indeed was important because it was -- real thinking about the business was that you have 2 assets, and we're blessed for that, that we have both today in the French market, and we're the only ones to have both to this kind of level of NBI and footprint with the clients. On the one hand, you have the traditional banking model with a very high cost-to-income, but a very high NBI per client, very high, right? And so that's one piece of the equation. The second piece of the equation, you have BoursoBank, which handles today 8 million clients with a full fledged, that's extremely important, right? This is -- in that regard, we're very different from virtually any other competitor today from the biggest ones to the smallest ones. We have an entire full-fledged bank that has EUR 60 billion of assets and high numbers of deposit per client close to EUR 10,000 per account, right? So if you look at these things, I mean, no one else is in that kind of a situation. So these guys are running 8 million clients, #1 in client satisfaction consistently over the last decade or so, and with 1,100 people. So here, we have something which is extraordinarily efficient in terms of costs, in terms of client satisfaction, which in retail is the name of the game and in terms of growth. And the only thing is that the NBI per client, obviously, is a fraction of what you have in traditional banking. So the cross conversion is this idea that as BoursoBank grows both in size, client base and maturity, it will, it has and it will work more and more on increasing the revenues per client. It's both the intensity of the relationship and the structure of the product offer, the ability to offer, say, a different package for high-end clients because of the breadth of the product offer, we can, right? You can actually and I encourage you to do so. You can be banked almost like in private banking by BoursoBank as long as you accept the self-care aspect of it. And -- but growing the NBI per client, as we grow further the assets in more mature ways, so to speak, is what needs to happen there. At the same time, on the traditional banking, it's extraordinarily important to protect the top line, and this is by increasing the client satisfaction at the end of the day, while decreasing substantially the cost of operating this client base. And these 2 trends are what we need to foster work on consistently and will deliver both as we go better and better performance in French Retail, but also ultimately provide a comprehensive hedge to changing behaviors, right? And in the end, yes, maybe we have that online asset, which has taken over, maybe this is 10, 15, 20 years from now, has entirely taken over the business. But by then, it's probably the #1 bank in France.

That's very clear. And then it's a good transition. I mean, the competition on digital banking in France so far was not very difficult. I mean there was some players that never really find the right business model. But now we have Revolut with strong ambition, not only in France, but France they made as a Western Europe headquarters, but a bit everywhere in Europe and actually Ireland and U.K. So how do you see that as a threat? Or how that actually, more importantly, change your strategy on client acquisition for BoursoBank?

I think the first comment is when you have by all means a powerful competitor making your market focus of his or you have statements where they want to compete specifically in Europe for market, the first thing you need to do is to pay attention, right? And not to treat this lightly because you could go and say, well, Revolut, to the point I was making earlier, is not in the same business, right? We, again, right, offer broad products on the brokerage side, life insurance in Luxembourg wrappers, you can buy alternative investments, you can do virtually, again, anything in [indiscernible] hence, the current substance that you have there. So we could go. We don't really care because these guys are making payments. That's absolutely not our attitude. Our attitude is there's a powerful player that has a slightly different strategy, go wide and shallow before going deep, while we basically did the opposite, go very deep instead of wide and shallow. But in the end, it is to be seen who will be the winner. So we pay attention, right? And when we pay attention, what do we see? We see that there's, for instance, from a customer acquisition perspective strategy, there's a difference, right? Much more marketing and certain features of the product offer that are more on the marketing side of things, while we are focused on basically paying a fee to the customer, but making sure, right, even in the structure of the fee, that substance in terms of deposits and product ownership comes fast, and we monitor this maturity of the client, this NBI per client very carefully, et cetera, et cetera. We're probably both right. And so adjustments to the commercial policy will come as we compete, right? This is what's extremely healthy about a situation like this, right? But in the end, today, we are in the business of offering full-fledged banking services on an online basis, #1 in client satisfaction and #1 in terms of breadth of the product offer. And that remains and will remain a key feature of what we're doing already and where we want to go, right? We're in the business of online banking.

And could you get inspired by the revolution model to take the best of it in terms of expansion outside France? Or as you explained, it started being France and then...

So listen, I mean, the international expansion of BoursoBank or I think more accurately of the digital banking of SocGen outside of France is an obvious strategic topic on which we're constantly working. But in the spirit of it, everything that we're doing, we don't want to make decisions based on slogans or kind of marketing statements, right? The idea of doing this is very appealing and seems simple. The practicality of it because of the deep, deep differences between jurisdictions in Europe in terms of client behavior, in terms of product offer, in terms of even like the value proposition, how you're making money as an online -- not online, but as a retail bank, is so different from one market to the other. That if we were, say, to try and duplicate very deep jurisdiction per jurisdiction operations, well, that will require very substantial investments and the capacity to be relevant in all these jurisdictions that today, we don't have, right? And the idea that we'll just kind of take a bunch of extremely successful French bankers put them in Italy and all of a sudden be successful, that's not something I'm supportive of. But on the other hand, we do have very strong features in what we're doing, which we could expand. And we're thinking about this, but no announcement there.

Very clear. Moving now to the revenue side. I'm sure you're glad that we don't ask you about NII every quarter. But still it's a big part of your growth and especially in France. So how do you describe now the dynamics in terms of deposit migration? I mean we've seen now with always going in France, and I'm not asking you to comment on this, but there could be some uncertainty where we see a bit more of savings, less investments and then cost of deposits or on the asset side growth. So how can you describe the dynamics on NII in French Retail? So revenues in general, not NII.

But -- so revenues and starting with NII. So NII in our case, first of all, very strong growth year-on-year, quarter-on-quarter because of the end of the drag of the hedging, and if you compare H1 to H1, low single-digit growth on NII there. And the trend there is going to be marked by, one, clearly the stabilization of the shift from a non-remunerated to remunerated deposits. It's still going on a little bit, but nothing compared to the massive shifts that we had in '22 and '23 and a little bit in '24 still. So stabilization of this. Support on the NII deposits because of the [ Liberia ] price coming down, and that's a tailwind, significant, it's not revolutionary, but significant. And then basically a stability with that support and repricing of the back book on the loan side because, as you know, we have very long-dated fixed rate instruments. And so as the back book reprices and now that we have reignited growth in terms of mortgages, this is going to be also supported. But again, because of the features of the French market, this is not something, and I was very clear about this, that is going to be explosive in terms of growth. But it is a number of longer-term trends that are supportive from this perspective. Now from a volume perspective in the future, clearly, it's mostly in retail driven by the GDP growth and the macro dynamics of a particular country. The good news is that against a backdrop of a lot of, let's say, political uncertainty, a lot of political activity, you have a resilient growth. I'm not saying that 0.6% expected for this year is something stellar. But it is resilient, especially if you compare to, let's say, what the sentiment seemed to be last -- let's say, a year ago, right? And so from this perspective, good news and what we're forecasting is a low single-digit growth of the loan book. Now the good news in our case is that we have a very strong fee origination in retail, which is based on our very strong market-leading dynamic in terms of asset gathering in life insurance on the one hand and also with our private banking in France in particular and across the entire network. So we're constructive, and we see this growing. And as you know, our fee component in the NBI of the retail is very substantial.

Very clear. I mean moving to Ayvens, which is a large part of your revenue generation. It was difficult start to the merger, to say the least. Now I mean, with the used car sales organization well advanced and the integration as well, how do you see the growth of the business? Maybe taking the 3 parts of revenues, used car sales, services and fleet growth and put that with the operational leverage, how do you see the profitability recovering in this business?

So the short answer is we see it recovering and converging to the objective that we set, which is, I remind you, 13% to 15% ROE by 2026 based on a 52% cost-to-income, which are both high performance levels in the market, especially the cost-to-income, which is obviously pre -- only excluding UCS impact, as you know, because sometimes we will communicate differently from this perspective. So that's important. And that kind of level you have something which is clearly accretive to the overall equation, provides some form of diversification because the cycles there are slightly different from the rest of the bank, and the growth prospects are strong for a number of reasons, both in terms of behaviors of the customers, fleet characteristics, et cetera. Now what's very important is, as we took over with my team and in this case, in particular, with Pierre Palmieri overseeing this business, we made a few determinations like; one, that from a margin perspective, this business had been run without enough regard to the fixed rate component in the contracts, right? And in the growing inflationary environment, this has across the industry, right, compressed margins very significantly. And so we took a very important decision a little bit against the market trends at the time of saying, well, no, right? If you want to run this business in a healthy way, you have to work on restoring the margins and you have to understand what you're doing, right? Is that you're extending fixed-rate instruments with variable cost based on the service margin side, which I remind you is half of the -- basically of the NBI there, right? So we were focused and still are on making sure that the business we underwrite is a good business from a margin perspective. The second feature is as things were moving a lot, as you know, on the EV side of things, which was seen, say, 5 years ago, has a massive growth underpinning the business because of the cost of one unit, obviously, there. So people were very keen on doing this. And here, once again, 2 years ago, right, and well ahead of many of our competitors, we said, well, I mean, this doesn't look as easy as simple as it used to, and we need to be very careful in risk managing this aspect of the business. So this is why you see significant improvements in margins and significant improvements in like core profitability, but muted growth. So this is entirely by design and because of the decisions I just described. And so the future for this on top of the restructuring benefit is growth. But you see off a very healthy base, both in terms of cost-to-income and in terms of margin structures and in terms of fee structures, we do actually expect a substantial uplift there in profitability down the road.

We have 5 minutes left. I don't know if there's any questions in the audience? Then I will carry on. Maybe 5 minute to speak about your actually quite sizable division, GSIB -- GBIS, sorry.

So that's the division of the regulator.

And maybe more on the capital markets side. We've been enjoying quite nice environment in the last few quarters. And you always mentioned this word conducive and not to extrapolate that environment and being cautious. Do you believe the -- I mean, environment we are now in is probably the new normal or we should be careful not to extrapolate too much with what's been seen in last few?

Listen, so just to give you some perspective, when I took over CIB, so this was in 2020 and starting January 1, 2021. We had posted, I think, EUR 3.6 billion in NBI. And basically, there was a EUR 1 billion hole because of the COVID markets, as you may remember, right? So say the normalized steady state at the time was around EUR 4.5 billion. So today, the last guidance that we gave was above the top of the range, which is above EUR 5.5 billion. So keeping it simple, you have EUR 1 billion of revenue more than back then and extremely important, right, with a fraction of the risk that we were running at the time because the RWA on market side are down 30% and stress test usage is down 70%. So not only we have EUR 1 billion more and which was there quite sustainably over the last few years. I'll come back to the conducive market conditions, but just to set the scene. So EUR 1 billion more at a fraction of the risk. And that's what we're working on, right, making sure that we operate this at maximum capacity, but at a very -- with a very low risk profile, which leads us to what, which leads us to what, which leads us to also leave some of the marginal opportunity to make money on the table for the sake of higher stability and better risk return over time. That's extremely important in the way we think. Now more specifically on your question, the market conditions have been supportive, right? And it's quite remarkable, right? But we could go -- we don't have time, but we could go year-by-year since 2021. And every single year, there was something very specific that was driving volatility up, trends -- multiple trends during the year were present. Both are very conducive to the business, while never going into a dislocation, right? So these were like the perfect conditions, right? Obviously, then you have differences asset classes by asset classes, blah, blah, blah, but -- and we are, as you know, on the fixed side, for instance, geared more towards rates, not so much towards credit and blah, blah, blah. So -- but without consideration to the business mix differences, these were somewhat perfect conditions, right? So do I think that it's the new normal? Well, I don't think that perfect conditions are the new normal, right? And we will see different things happening from a volatility perspective. And obviously, hopefully not. But you need to be mindful of potential dislocation. It's not like the world lacks reasons for profound instability. So going back to the heart of what we're trying to do is to operate this business with a very low risk profile and with that statement trying to capture the opportunities with the low risk profile, and we'll try to do our best this year, probably above the top of the range.

Very clear. Thank you very much, Slawomir.