SocGen's retail bank merger points to showdown with unions further down the road

French lender Société Générale SA faces more tough decisions on its domestic retail banking network in the years ahead despite confirming Oct. 12 the closure of more than 600 branches and the loss of thousands of jobs.

SocGen submitted a finalized plan to unions for the merger of its Société Générale and Crédit du Nord banking networks, which will involve the loss of 3,700 jobs between 2023 and 2025. France's third largest lender is aiming to avoid forced redundancies by allowing natural attrition of its workforce through 2025, which it estimated at 1,500 per year.

The merger will see Société Générale and Crédit du Nord's combined branch network reduced from around 2,100 to 1,450. It was first announced in December and aims to save the company €450 million per year by 2025 from 2019 levels as SocGen struggles to boost weak profitability amid a raft of challenges besetting Europe's largest banks.

Further cost-cutting is required in the near future and will likely involve the thorny prospect of forced redundancies, Sam Theodore, senior banking consultant at Scope Insights, said in an email. "The next challenge will be to start reducing more drastically the physical branch network, beyond what has been done to date," said Theodore. "But this will not be easy as it means [forced] staff reduction, which is not the case with the current intragroup merger."

French banks are some of the most over-branched in Europe. France has more bank branches per one million people than any other major European economy, S&P Global Market Intelligence data shows. The country has almost 500 branches per one million people, while Germany has less than 300 per one million, the data showed. "This is not SocGen's problem alone, it is a problem for all large French banks," said Theodore. "In fact, SocGen is not the worst placed among them."

SocGen has 2,772 bank branches in France, including its subsidiaries, while BNP Paribas SA has 1,773, Crédit Agricole SA has 1,725, and Groupe BPCE has 7,024, according to Market Intelligence data. The Crédit Agricole Group, of which CASA is a part, has 5,908 bank branches in France in total.

SocGen's French retail banking division, which includes its online bank Boursorama Société Anonyme, made up almost a third of the lender's total income and a slightly smaller share of its total expenses in 2020. The bank did not respond to a request for comment at the time of writing.

France's Confédération Générale du Travail Unitaire union called SocGen's merger plan a "risky and socially expensive strategic project," according to Les Echos. Another union, the Confédération Française Démocratique du Travail, disputed the voluntary nature of the job losses, stating that the affected employees will be forced to relocate or leave the company.

The lack of any compulsory departures from SocGen as a result of the merger means that the plans are likely to survive any union pushback, although it is possible they could be delayed, said Arnaud Journois, vice president at credit rating agency DBRS Morningstar.

"We have seen a reaction because we're in a post-COVID year," Journois said in an interview. "Unions are very powerful in France. It's an ongoing battle between the management and the unions every time [job losses are announced]."

SocGen's handling of the merger has had to be particularly sensitive given the impact of the pandemic, said Nicolas Hardy, executive director, financial institutions at Scope Ratings. "This [is] happening at a time when the real substance of [environmental, social and governance] strategies, including the [social] factor, is under scrutiny," Hardy said in an email. "Defining specific metrics and targets underpins credibility in this area. Shedding light on a set of indicators to measure progress, from workforce re-skilling, gender diversity, to client satisfaction, is a positive development."

SocGen in its Oct. 12 announcement justified the merger as a response to "the multiple challenges facing retail banks, including low interest rates, competition, new entrants and an acceleration in digital use due to the pandemic."

Stiff competition

The lender has struggled to keep pace with its French peers in recent years. SocGen's return on average equity lagged its three largest domestic rivals in 2020 at 0.29%, Market Intelligence data shows, after net interest margins tightened because of lower interest rates and fee revenue slumped due to lower activity.

Reducing costs has been an ongoing problem for SocGen and other French banks. SocGen had the highest cost-to-income ratio of the four largest French banks in 2020 at 75.44%, falling behind BPCE to become the worst performer of the four. SocGen has remained in this position in 2021, with a cost-to-income ratio of 70.34% in the first half.

"The efficiency ratios are not that great for French banks," said Journois. "[SocGen] has been announcing plans for cost savings initiatives, reducing branches, increasing efficiency, digitalization [throughout the last decade]."

Operating expenses have remained broadly flat across all four banks since 2017, but SocGen has achieved the largest reduction in over the period at 3.59%.

SocGen's merger of its retail branches with those of Crédit du Nord has been "long in the making and makes a lot of sense," said Theodore. SocGen bought Crédit du Nord and its associated banks from BNP Paribas in 1997.

"You do wonder why it took so long to take what appears to be a logical step," said Johann Scholtz, a European banking analyst at Morningstar.