SocGen to Shrink Trading Unit, Cut Costs After Market Rout
SocGen Will Shrink Trading Unit, Cuts Targets After Market Rout
(Bloomberg) -- Societe Generale SA is shrinking its markets business and cutting an additional 500 million euros ($567 million) of costs to combat the market rout that sent trading revenue tumbling.
The Paris-based bank is replacing global markets head Frank Drouet and cutting about 8 billion euros ($9.1 billion) of risk-weighted assets. SocGen will review less profitable fixed-income and currencies activities after a 29 percent decline in fourth quarter revenue, while seeking to maintain its position in equity derivatives.
SocGen follows rivals in deepening trading cuts after a grim quarter for European investment banks because of whipsawing markets. The bank trimmed its return on tangible equity target -- a key performance indicator -- and said it may miss a revenue goal. Equities remains one of the bank’s bright spots, with fourth-quarter trading beating analysts’ estimates, while net income also came in better than expected.
Results “were weak and lowering the targets is a realistic move,” said Azzurra Guelfi, an analyst at Citigroup in London. “The improved focus on capital generation and cost reduction is a positive.”
The stock swung between gains and losses, rising as much as 5.3 percent in Paris before reversing course to trade 1.6 percent lower at 11:37 a.m.
Chief Executive Officer Frederic Oudea, one of the longest-serving CEOs in European banking, is trying to shrug off a track record of disappointing investors. After missing two previous sets of multi-year financial targets, he’ll need to convince investors he can now meet the bank’s remaining target of strengthening capital and fixing the trading and French retail businesses. He’s also moving to speed up asset sales to boost capital, recently selling retail businesses in countries deemed as non-core, such as Bulgaria and Poland.
SocGen’s targets, presented just a little over a year ago, are based on progressive dividend growth, improved profitability, revenue growth and 1.1 billion euros in annual cost savings by next year, including hundreds of branch closures and thousands of job cuts at the French retail networks. The new cost-cutting measures are on top of existing efforts and may include further employee reductions, people familiar with the matter have said.
But the economic and interest-rate environment has since worsened, with SocGen saying that geopolitical uncertainty and slower economic growth will likely shave 500 million euros off expected revenues next year as interest rates remain low for an extended period. BNP Paribas SA announced 600 million euros in additional cost reductions after it was among the hardest hit by the stock market rout.
SocGen cuts its 2020 return on tangible equity target to between 9 percent and 10 percent, from an earlier target of about 11.5 percent. After the setback in the fourth quarter, the bank is also unlikely to achieve a goal of increasing revenue by an average of at least 3 percent a year, Chief Financial Officer William Kadouch-Chassaing told reporters in Paris.
Equities trading was one of the brighter spots of the quarter, with revenue at 550 million euros beating analyst estimates. That’s a contrast with local rival BNP Paribas, which on Wednesday reported a 70 percent plunge in revenue at its equities unit in the fourth quarter, the worst performance since at least 2013.
SocGen said it will pay a stable dividend of 2.20 euros for 2018 -- the floor it had promised in its strategic plan -- and will offer a stock alternative. The bank’s common equity Tier 1 ratio was 11.2 percent at the end of December, with the bank saying it will comfortably reach its 2020 goal.
Oudea reorganized his top management and hired senior traders from Bank of America Corp. last year to help reboot the bank’s global-markets business after the shock departure of investment-banking boss Didier Valet. SocGen’s board last year took the step of proposing a new four-year term for the CEO, and shareholders will vote on that at their annual meeting in May.
SocGen is considering closing its proprietary-trading unit, people familiar with the matter said last month, following a similar move by BNP Paribas. SocGen executives are reviewing the future of the Descartes Trading division, which makes risky bets with its shareholders’ funds, said the people, who requested anonymity as the details are private.
To contact the reporter on this story: Fabio Benedetti-Valentini in Paris at fabiobv@bloomberg.net
To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Christian Baumgaertel
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