Société Générale: loss linked to Russia hides quality operational performance – 03/08/2022 16:06

(AOF) – Société Générale (+ 3.21% at 22.34 euros) is in second place in the CAC 40 index, investors welcome the good results of La Défense bank. The exit from Russia plunged its accounts into the red by € 1.48 billion, but the market was forecasting a loss of around € 2 billion. This loss reflects the € 3.3 billion pre-tax impact of its exit from Russia. Excluding the exceptional elements, the French bank achieved a net profit, group share, of € 1.5 billion.

The brokerage margin increased by 12.8% to 7.065 billion euros, beating the consensus of 11%. As management fees only increased by 8.5% in the second quarter, Société Générale therefore exhibits a significant jaws effect.

The group now expects an underlying cost / income ratio, excluding the Single Resolution Fund, of between 64% and 66% in the year 2022. Société Générale aims for a cost / income ratio of 62% or less by 2025.

For its part, the cost of risk jumped 52.8% to 217 million euros, but analysts had expected an amount greater than 60%. It represents a low of 15 basis points in outstanding customer loans. In the year 2022, the cost of risk is still expected to be between 30 and 35 basis points.

Analysts point out the quality of these results, Jefferies notes that the outperformance is explained by higher-than-expected revenues across all divisions.

The core capital ratio (CET 1) stood at 12.9% at the end of June 2022, approximately 360 basis points above the regulatory requirement.

These good results are accompanied by the presentation of the 2025 objectives of the French bank. Its revenues are expected to grow at an average annual rate of 3%.

“By 2025, after having reaped all the benefits of the numerous strategic and operational efficiency initiatives underway, we confirm our ability to achieve a profitability of 10% based on a core tier one target of 12%, while maintaining an attractive distribution policy for our shareholders “. added Fréderic Oudéa, managing director. Profitability was 10.5% in the second quarter.

Société Générale thus maintains its policy of distributing 50% of the underlying net profit, group share, with a maximum of 40% of the distribution in the form of share repurchases. In this regard, a share buyback program will be launched for an amount of approximately € 915 million.

“SocGen’s excellent results this morning, better than expected revenues and cost of risk and high operating leverage generation. The financial targets for 2025 are also very ambitious and suggest a net profit of € 6 billion within this horizon,” he commented. Kepler Cheuvreux.

Jefferies does not go there 4 ways: “the 2025 targets mean that a huge reassessment is needed”.

At the general meeting of May 17, 2022, Frédéric Oudéa, CEO since 2008, announced that he would not ask for the renewal of his mandate in May 2023. The name of his replacement should be known in the autumn, Frédéric Oudéa confirmed during a conference call.

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Key points

– Bank founded in 1864, one of the leading European financial services groups;

– Net banking income of 25.8 billion euros generated by retail banking in France – Société Générale, Crédit du Nord and Boursorama brands, international retail banking, financial services and insurance, then retail banking customers and solutions for investors;

– Business model at the forefront of positive transformations: a 100% digitized bank, open platforms and architectures, winner of the race for European leadership;

– Capital characterized by the presence of employee shareholders (6.65% and 11.9% of voting rights), with a board of directors of 16 members chaired by Lorenzo Bini Smaghi, with managing director Frédéric Oudéa;

– Strong balance sheet with € 65.1 billion of equity, a CET 1 ratio of 13.7%, a liquidity coverage ratio of 129%, a leverage ratio of 4.9%, hence a rated debt TO .

Challenges

– Vision 2025 strategy, based on the merger with Crédit du Nord, local roots, responsiveness, adaptation to customer needs and responsibility:

– Innovation strategy rooted in the group’s DNA, focused on the emergence of a data-driven bank through artificial intelligence: 200 million euros of annual value creation through data and AI / 8/10 of servers in the cloud (2025 cloud of “second generation” objectives, of which 50% in private cloud and 25% in public cloud / new business models -Shine for individual customers, Forge for digital obligations, reezocar for vehicle rental and treezor, platform payment and digital currencies;

– Environmental strategy aimed at becoming the world leader in sustainable finance with 2 axes: integration of criteria in all activities: offer of 100% responsible savings, support to customers in their energy transition and structuring of solutions around hydrogen … / commitment for sustainable transition: 10% reduction in global exposure to oil and gas extraction by 2025, complete exit from thermal coal by 2030-40 and by 2023 from reserve-backed loans, i.e. +150 billion euros of energy transition assets;

– Continued integration of the Crédit du Nord, finalized in 2023;

– After the refocusing of activities, financial availability to refocus on mobility (purchase of LeasePlan by the subsidiary ALD and discussion on Boursorama’s offer of alternative banking services to ING’s French customers).

Challenges

– Net equity per share of 68.7 euros, to be compared with the stock market price;

– Impact of the Russia-Ukraine war: sale of the stake in Rosbank, with consequent reduction of the CET ratio to approximately 13.5% and depreciation of net profit of approximately 2 billion euros;

– targets for 2022 of a sharp increase in the cost / income ratio between 66 and 68% and a cost of risk down by 30 basis points;

– 2021 dividend of 1.65 euros and equity program, i.e. a total distribution rate of 50%.

The negative effects of rising interest rates

Rising interest rates usually cause bank income to increase through loans. In Europe, according to a survey conducted by S&P of 85 banking institutions, the sector expects on average an 18% increase in its interest margin. However, this new inflationary environment also has undesirable effects, notably an increase in refinancing costs. It is also accompanied by the fear of a new recession, which would then affect all the bank’s activities, from loans to asset management, whose income is correlated to market valuations. Reassuring element: euro area banks are strong enough to cope with a deteriorating environment.

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