Societe Generale CEO Discusses Q3 2010 Results - Earnings Call Transcript
Societe Generale SA (SCGLY.PK)
Q3 2010 Earnings Call Transcript
November 3, 2010 8:00 am ET
Executives
Didier Valet – Group CFO
Michel Péretié – CEO, Corporate and Investment Banking
Analysts
Jean Francois Neuez – Goldman Sachs
Brice Vandamme
– Deutsche Bank
Pierre Flabbee – Kepler Capital Markets
Omar Fall – UBS
Kinner Lakhani – Citigroup
Delphine Lee – JPMorgan
Maxence Le Gouvello – Morgan Stanley
Guillaume Tiberghien – Credit Suisse
Patrick Leclerc – Merrill Lynch
Alessandro Roccati – Macquarie Securities Group
Jacques-Henri Gaulard – Autonomous Research
Pascal Decque – Natixis Securities
Jon Peace – Nomura Securities
Simon Mayo [ph] – Cheuvreux
Robin Down – HSBC
Jean Pierre Lambert – KBW
Pierre Chedeville – CM-CIC Securities
Kian Abouhossein – JP Morgan
Anke Reingen – Execution Limited
Jim Hyde [ph] – Primerica Investment
Guillaume Tiberghien – Credit Suisse
Presentation
Didier Valet
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Good afternoon, everyone, and thank you for attending the presentation for our third quarter 2010 results. As you would see, these results confirm the Group’s results, and also the soundness of Societe Generale model.
Before giving you the highlight for the quarter, I would like to say a few words by a way of introduction. In an environment of hesitant economic recovery and mix market conditions, the Group achieved revenues of EUR6.3 billion this quarter, up 2.6% compared to last year, and you will see that in the Corporate Centre, we had some one-offs.
The strong momentum of the retail banking businesses and the performances of the Corporate & Investment Banking once more illustrates the quality of SocGen universal banking model. On the strength of the performance to date, the French Networks should exceed the 3% annual target that we set at the beginning of the year to reach 3.5% in 2010.
Within International Retail Banking, growth is starting to pick up with, in particular the breakeven contribution by Russia this quarter. You will see where it’s minus EUR2 million, so almost at breakeven, one quarter to date of our expectations.
In Corporate and Investment Banking, our customer-oriented development strategy is continuing, with some good commercial successes. In all, revenues from the core activities reached the EUR2 billion mark, thanks to the very strong performance of financing activities and the satisfactory results of the market activities in a mixed environment.
As for the management of our legacy assets, that contribution was in line with our expectation, and we continued with our policy of registering our exposure this quarter with EUR2.6 billion of disposals and amortizations. Finally, as you can see, there was a confirmed gradual fall in the cost of risk for all the businesses I would comment more into detail later on.
So, in total, the Group net income for the quarter was EUR0.9 billion, amounting to EUR3 billion for the first nine months of the year and the return on equity after-tax was 10.2% for the first nine months of 2010. The Group also has maintained a strong financial structure with a Tier 1 ratio of 10.4% and a Core Tier 1 of 8.4% at the end of September, excluding the floor effects. Also, I will demonstrate the Group ability to rebound, and with the first transformation underway, SocGen will be Basel 3 compliant as this 219 Rule is effective on the 1
st
of January, 2013. The Group expects to post a pro forma Core Tier 1 ratio of 7.5% on the 1
st
of January, without taking advantage of the phase-in of the deduction and of course without a capital increase.
Now, let’s move to page 4 and have a look to the P&L of the Group. As you can see, the net banking income rose by 2.6%. This includes EUR216 million negative revenues in the Corporate Centre, linked to the CDS spreads and also the fine that was booked by all French banks in the third quarter. Over the first nine months, you can see that the rise equal to 15.1% on a like-for-like basis. Operating expenses at EUR4 billion, rose by 1.4% versus last year. And for the first nine months, it’s an increase of just 0.4% on a like-for-like basis, reflecting the discipline of the businesses and also the Group’s improved operating efficiencies.
Other results, the cost income ratio amounted to 64.1%, but when adjusted for non-economic factors moved in the Corporate Centre, the underlying cost income ratio is at 62.3% for the quarter and 62.4% for the first nine months of the year. As a result of declining provision that I will comment on next slide, you can see that we have been able to double the net profit compared to third quarter of last year.
Let’s move on to page 5 and have a look to the cost of risk. As announced in the beginning of the year, the fall in the cost of risk is gradually improving, with a 10 basis points decline compared to the second quarter at 77 basis points for the third quarter. In the French Networks, the cost of risk is in line with our expectations were now below 50 basis points, at 46 basis points, representing a decrease from the second quarter and compared to last year. The allocation to provision for the last operating decline, the level remained high for SMEs and professionals and has over the last two years the loss rates is extremely low for new customers, due to the predominance of the housing loans.
In International Retail Banking, the cost of risk at 174 basis points, dropped 18 basis points compared to the second quarter. This change was largely due to the improvement that we have seen in Russia, cost of risk declined by almost 40% and particularly at first note [ph]. In Czech Republic, you also witness a decrease in the cost of risk, which is now almost back to its pre-crisis level. On the other hand, in Romania, we have seen cost of risk at 300 bps in line with what we have seen in second quarter, reflecting the deterioration of the economic environment, and the allocation to provision for Greece is still significant, particularly for insurers and small businesses.
Regarding the cost of risk for the Specialized Financial Services at 221 basis points, it fell slightly for consumer finance, while remaining stable for equipment finance activities. Last but not least, for CIB, core activities like in the previous two quarters, the cost of risk is almost nil, extremely low, reflecting the portfolio’s strong resilience. And last but not least, you have seen that we have set aside EUR108 million for the legacy assets, almost in line with the guidance that we set at the beginning of the year, and we update at mid-year saying that we would be at the low end of the range of 0.7 billion to 1 billion pretax.
Let’s move now to slide 6 and 7 to the subject of capital. First, starting with the situation of the Group as of end of September, and then trying to get, give you projection for the Basel 3 implementation. First, when you look at the Group financial structure, as of end of September, it remained stable overall compared to end of June, despite the minus 23 bps negative impact, which is linked to the consolidation of Societe Marseillaise de Credit. We closed the deal in the last days of September. This means that it is in our balance sheet, it is you know, sort of a key issue, but the impact in the P&L will be booked as fast as from the fourth quarter of this year.
As I mentioned already, excluding the floor effects, the Group Tier 1 is at 10.4% and the Core Tier 1 ratio is at 8.4%. And risk-weighted assets under control at EUR333 billion, an increase of 0.8% over the quarter and 2% adjusted for changes in the Group structure and the constant exchange rates.
Let us try to look at what could be the ratio of the Group under Basel 3. And first, let’s look at our projection of Core Tier 1 under Basel 2, so on the same regulation. Based on the assumption that we use for our plan Ambition SG 2015 presented last June, the Group is able to generate 300 basis points of risk-based capital of Core Tier 1 over the period last quarter of 2010 and 2011 and 2012. While the first being, a 35% payout ratio each year. Even if we have assumed that, we would propose for the next two years, a scrip deduction and that success rate will be at 60% for 2010 and for 2011.
So, this means that in this projection, the 2012 dividend is still pretty provided in cash in the projection end of December 2012. On the other side, the organic growth of our activities, which is 4% growth that we will assume in 2011 and 2012 will buy it for 120 basis points of the ratio, and thus other results, you can see that our Core Tier 1 is expected to be at 10.2% by end of 2012.
Let me maybe take a step, say that this is a considerable achievement, this 10.2% compared to the situation that we were all together witnessing before the crisis, let’s say mid-2007 where the bank like Societe Generale Core Tier 1 was expected to be appropriate at 6%. This means that in six years’ time, we would have to almost double our Core Tier 1 ratio compared to pre-crisis level.
If I move now to page 7 and look from the starting point of Basel 2, what are the impacts coming from first, Basel 2.5 Societe industry [ph] and Basel 3. And we remind that the Basel 3 rules, well, there was still a certain uncertainty that will be decided by the Basel Committee by the end of the year, and then we would have also to see for the European Commission and European Parliament as well as the French regulator. We will finally apply these rules. So, let’s start with the 10.2% ratio as estimated. The impact of CRD3 that we disclosed last June is 105 basis points reduction of the Core Tier 1, this, it reduce our ratio to 9.15. And then, I will detail that, if you wish, during the Q&A.
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