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SocGen hopes French capital buffer will end 'crazy' lending at near-zero margins

French authorities' move to raise a countercyclical buffer on lenders to rein in France's fast pace of lending may encourage banks to stop granting low-interest-rate mortgages, which generate almost no profit margin, Société Générale SA's CFO said March 20.

"I do hope that people will stop doing crazy home loan production at close to zero margin," William Kadouch-Chassaing told a financial conference in London. "As you know, Société Générale has decided to decrease its market share in home loans rather than compete for these crazy margins," he said.

France's High Council for Financial Stability, which oversees the French financial system and is headed by the country's finance minister, announced March 18 that it would raise the buffer to 0.50% as of 2020 because of the high rate of lending growth at between 5% and 6%. The existing buffer of 0.25%, approved in 2018, is slated to take effect from July 1.

Borrowers no longer necessarily keep their bank account with the same lender, and SocGen is targeting clients to which it can cross-sell other products, Kadouch-Chassaing said. When clients sign up for mortgages, banks traditionally have tried to sell high-margin products at the same time, including insurance or savings products.

"We see clients more volatile, more price sensitive, so we want to dedicate particularly our investment to other clients to whom also we can cross-sell," he said.

The buffer will have limited impact on the bank's capital, shaving off 10 basis points from the third quarter of 2019 after the 0.25% buffer takes effect and a further 10 basis points next year, he said, noting that it would not have a material impact.

Excess liquidity

Kadouch-Chassaing said, however, that he saw a "contradiction" in monetary policy, which could lead to the move having no impact on the pace of lending.

"We all have excess liquidity," he said of the banking sector. "If I have excess liquidity, I have to place it at the ECB at minus 40 basis points. So there is a strong incentive to still rather lend, including with low margins, than keep these excess liquidities and keep it on the balance sheet."

SocGen's shares have been underperforming the broader banking sector as investors fret about its capital levels and its weak profits. Its shares have fallen almost 40% in the past year while the STOXX Europe 600 index has fallen about 20%.

The bank lowered its 2020 profit targets after a tough fourth quarter and said it would embark on a review of its trading activities and cut €500 million in costs at its investment banking unit by 2020.

Kadouch-Chassaing said the bank wanted to achieve its 12% common equity Tier 1 ratio target "as soon as possible." The ratio — a key measure of financial strength — stood at 11.5% at the end of 2018, and the bank is planning to reduce risk-weighted assets at its investment banking unit and speed up disposals of nonstrategic businesses to help it achieve its goal.

The disposal plan is expected to boost capital by 80 basis points, and Kadouch-Chassaing said the bank had already signed deals for about half of that.

"So this will flow into the 2019 numbers — already 20 basis points are closed that will flow into the Q1 numbers," he said.