Shares of Société Générale SA fell 6.77% on Feb. 7 after the group revised its 2020 profit target and undertook a review of some of its trading activities.
The French bank's shares underperformed the broader European banking sector following publication of the bank's fourth-quarter earnings and the profit revision, with the Stoxx Europe 600 Banks index declining 2.18%.
SocGen revised its 2020 return on tangible equity target — a key measure of profitability — to between 9% and 10%, down from an earlier target of 11.5% after its fourth-quarter net banking income fell 6.3% on the year, dragged down by a 6.9% drop in revenues at its investment banking division amid poor market conditions. Global markets revenues fell 19%, with fixed income down 29% and equities declining 16% in the fourth quarter of 2018 versus the same quarter in the prior year.
Lower interest rates, regulation
CEO Frédéric Oudéa said the revision was due to the bank now anticipating lower interest rates for the period up to 2020, as the signs of an interest rate rise in Europe dissipate and a general slowdown in growth expected into 2020. He also said the bank would reassess its fixed-income business as a result of greater regulation in Europe, adding that the bank aimed to cut an additional €500 million in costs at its investment banking unit.
"It's not just a reaction to the fourth quarter," he told analysts on a conference call. "It's a reaction to the way the market is evolving with the regulation in Europe, whether it's more capital demand, whether it's MiFID," he said, referring to the EU's Markets in Financial Instruments Directive, designed to standardize regulatory disclosures.
SocGen is now estimating a European interbank offered rate of 0.3% in 2020, down from its previous forecast of 1.0%, which would translate into a €500 million reduction in 2020 revenues.
Investment banks across the board have been suffering in the market downturn. The major French banks, which have been counting on investment banking to offset soft results at their retail units amid the low-interest-rate environment, have been hit particularly badly in the fourth quarter because of their exposure to equity derivatives. Peer BNP Paribas SA said Feb. 6 that it would increase its cost-cutting and revise its strategic plan to offset difficult trading conditions.
Market is 'back to normal'
Oudéa said market conditions were "back to normal" and that he was comforted by the fact that SocGen had made no losses on its trading positions. BNP Paribas said it had made a €70 million loss on derivatives trading in the U.S., while Natixis said in December that its fourth-quarter 2018 revenues would be hit by derivative losses in Asia.
SocGen maintained its 2020 target of a 12% common equity Tier 1 ratio — a sign of a bank's financial strength. At the end of 2018, it was 11.5%. CFO William Kadouch-Chassaing said the bank would step up its nonstrategic-assets disposal plan, which would add 80 to 90 basis points in capital, up from the 50 basis points forecast earlier. It will also reduce risk-weighted assets at its global markets division by €8 billion, which would add a further 85 basis points to capital levels, he said. RWAs determine how much capital a bank must hold.
In retail banking, net banking income was down 6.8% to €1.91 billion in the fourth quarter and down 1.9% to €7.86 billion in the whole of 2018, in line with the bank's guidance. While the bank is expecting an improvement in 2019, Kadouch-Chassaing said a commitment from the French banking industry not to raise fees in 2019 following the "gilets jaunes" movement in France would shave €70 million off revenues.
With regard to the bank's €2.20 per-share dividend payout, with the option of a payment in shares, Oudéa said the board had made the decision because the ECB's targeted review of banks' internal models, known as TRIM, could shave 30 to 50 basis points off the bank's capital levels, and offering shares as part of the dividend enabled the bank to have a strong capital level.