After Stunning Losses, SocGen, Natixis Clear Out Executives
Amid one of the greatest periods ever for Wall Street, two of France’s top investment banks posted losses in the second quarter.
The result: corporate bloodletting. Societe Generale SA Chief Executive Officer Frederic Oudea ousted two of his top deputies on Tuesday, including the head of investment banking, just hours after directors at Natixis SA pushed out CEO Francois Riahi.
The C-suite dramas underscore the uphill effort to reshape businesses during the deepest recession in decades -- all while reining in the derivatives units that have been central to their operations. Dealing in those complex structured products triggered much of their losses, prompting some strategic introspection as well as the personnel moves.
“Management change looks to me like a knee-jerk reaction at this stage that will obviously not address immediately the composition of the business,” said Jakub Lichwa, a credit strategist at Royal Bank of Canada in London. “As with all restructurings, there will be more costs and uncertain outcomes.”
Shares in SocGen climbed about 5% in Paris trading while Natixis increased 8.5%. Both have dropped by about two-thirds in the past two years, compared with a 44% drop for the 39-member Bloomberg Europe 500 Banks and Financial Services Index.
The losses were especially stark when compared to standout results at BNP Paribas SA, the biggest French lender, and profits across the Atlantic.
The five biggest U.S. investment banks reported $45 billion in revenue from trading and dealmaking in the second quarter, records for those businesses. The firms feasted on the market chaos during the onset of the coronavirus and unprecedented measures by central banks to prop up the economy.
The departing executives are among the most experienced in French finance. SocGen Deputy CEO Severin Cabannes, who’d overseen investment banking, will leave at the end of the year after decades spent at the bank. His international retail-banking counterpart, Philippe Heim, joined in 2007 after years in the civil service. Both were named to their roles only two years ago.
SocGen’s second-quarter loss of 1.26 billion euros ($1.5 billion) was its worst since the exposure of rogue trader Jerome Kerviel in 2008.
Riahi had only been in his role at Natixis for two years before his abrupt exit. He’d been at the bank for more than a decade after previously working as an adviser to ex-President Nicolas Sarkozy. He helped lead the bank’s embrace of risky derivatives and Asian and U.S. markets while overseeing an aggressive asset-management unit.
The 57 million-euro second quarter loss capped its worst period since the financial crisis more than a decade ago.
“If a group is to work well, for a strategic plan to work well, there needs to be full alignment in the governance,” said Laurent Mignon, chairman of Natixis parent Groupe BPCE said on Monday. “As soon as the divergence is acknowledged, it is best that things go the way they did.”
At the heart of the French banks’ woes is their embrace of structured products, multilayered synthetic securities linked to stocks and bonds that are popular among retail investors. While they can be far more lucrative than more straightforward trading businesses, they are notoriously volatile.
“SocGen and Natixis have a similar problem -- credibility that they can appropriately restructure and reduce risk without significant income loss,” said Bloomberg Intelligence analyst Jonathan Tyce.
SocGen, Natixis and BNP Paribas rely on the business for much of their equities-trading revenue and consider it a traditional strength, making them outliers among the world’s biggest investment banks.
These businesses had blown up before. Natixis lost $300 million in late 2018, just six months into Riahi’s tenure, when a batch of Korean structured products blew up. The bank had pushed into this market and ignored warnings of mounting risks, Bloomberg reported last year.
There was more pain to come. The coronavirus tore through European economies, forcing corporations to cancel or pare their dividends. The turmoil upended the French banks’ equities businesses throughout the first half.
The banks are now trying to stem the damage. Riahi’s replacement at Natixis, Nicolas Namias, is overseeing a project to “adjust” the bank’s equity-derivatives business so that it focuses on “key clients” and the “retail networks” of parent company Groupe BPCE, a move that may signal a retrenchment from overseas markets.
Socgen will stop producing the structured products that went awry in the first half, and is working to develop alternatives that will be less sensitive to market dislocations, Cabannes said at a press conference yesterday.
“Both banks need to revisit their strategy in these businesses,” said Gildas Surry, a partner at Axiom Alternative Investments in London. They “share the same skills amongst their ranks: sophisticated brains well versed in financial structuring. Unfortunately, the markets, as distorted as they are by the central banks’ liquidity, are not prone to this innovation.”
©2020 Bloomberg L.P.