has managedto surprise the market with better-than-expected headline first-quarterearnings.
The French bank posted group profit of €924 million on May 4, an about6% year-over-year increase. Net banking income was flat in French retail andhigher in international retail, but declined in global banking; risk costs werelower. The share price ticked up about 1.7%.
Speakingto analysts, CEO Frédéric Oudéa emphasized the bank's diversified andgeographically spread business model and the importance of synergies, while CFOPhilippe Heim said the business mix minimized the impact of low interest rates.
In aresearch note, Bernstein analyst Johan de Mulder said the results were"very strong … with a 23% [net profit] beat to consensus driven by robustoperating trends."
However,a bank credit analyst speaking to S&P Global Market Intelligence said thequarter was "not so strikingly good" if one considered that SocGenhad received a €218 million EURIBOR fine refund that was largely responsiblefor the beat. The analyst, who wished to remain anonymous, said he thought theshare price had risen not least because SocGen had retained a 10% return on equitytarget.
AlainTchibozo, an analyst at Mediobanca, said in an interview that only the fallingcost of risk stood out positively. He said that, like other French banks,SocGen is under perceptible pressure from low interest rates. Excluding one-offitems, the bank's net interest income from French retail fell by 4.4%; whilevolumes grew strongly, this was offset by lower reinvestment yields and theeffect of renegotiated loans.
Tchibozosaid that loose ECB policy was reflected in the drop in provision costs.Management highlighted the "significant improvement" in the cost ofrisk and confirmed the guidance for the year of around 50 to 55 basis pointsfor the group. At the same time, costs and revenues from French retail appearare set to be more or less flat.
Thereis no doubt that SocGen is reacting strongly to the pressures on retail bankingin France, taking market share by expanding lending in a declining market,while reducing the branch network and cutting the number of employees by afifth. At the same time, significant investment in digitization is taking place.
Oudéasaid a decline in the capital markets business was, when ignoring one-offitems, offset by the strength of French retail. SocGen's net banking incomefrom global markets and investor services fell by 12.9% year over year, with a37% decline in equities but a striking 17% rise in FICC. This was, Oudéa said,a better performance than its peers and, moreover, market conditions do appearto have improved and helped in recent times.
Yearover year, SocGen has cut its capital market RWAs and is now reducing staff,exiting gilt trading in the U.K., among other restructuring measures. The goalis to take a further €220 million by 2017 out of the wholesale bank, inaddition to the €323 million already announced. The broad aim is to keep costsflat here and elsewhere in the bank despite rising regulatory levies andcharges.
Thesignificant challenge in the wholesale bank, Tchibozo remarked, comesprincipally from falling revenues. He said all the European banks he covers arecutting staff in response to the recent market decline.
SocGen'sinternational retail banking business does offer the prospect of higher andsustainable growth, yet there are risks associated with operating in Russia,central and eastern Europe and Africa. Management expected Russia to recoverfrom recent losses and economic decline and said it was already breaking evenexcluding U.S. dollar mortgages. Year-over-year adjusted international retailrevenues rose by 5.4% and net income more than doubled thanks notably todeclining risk costs.