Settling legal cases in the U.S. and France will help Société Générale SA focus on its strategy of cutting branches in its domestic market and growing operations in Russia and Africa.
Paris-based SocGen's CEO, Frédéric Oudéa, said May 23 that the bank was days away from settling two outstanding legal issues, one related to the alleged rigging of benchmark interest rates and the other to transactions with the Libyan Investment Authority.
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As the bank seeks growth in a highly competitive, low-interest rate environment, putting the cases to bed will help assuage investors who are worried about SocGen's legal costs, industry experts said.
The bank's shares have performed worse than those of major peers since the end of 2016, falling 11.8%, compared to a rise of 11.2% at Crédit Agricole SA 2.05% at BNP Paribas SA and 12.5% at HSBC Holdings PLC. Barclays PLC shares are down 6.6% and the STOXX Europe 600 Banks Index has risen 2.8%.
"If you can actually draw a line in the sand under this, that is probably the biggest benefit for investors," said Johann Scholtz, an analyst at Morningstar, adding that it would give investors better earnings visibility going forward.
Rate-rigging, sanctions-busting
SocGen is in settlement talks with the U.S. Department of Justice and the Commodity Futures Trading Commission regarding the alleged benchmark rate rigging, and in discussions about another settlement, with the DoJ and France's National Financial Prosecutor, regarding dealings with Libya.
"We are in very active discussions with these authorities with the aim of reaching an agreement in the coming days now," Oudéa said.
A third case, regarding breaking sanctions on countries including Iran, could be settled in weeks, the CEO has said.
The bank has provisioned a total of €2.32 billion for the three legal cases, €1 billion of which has been aside for the two cases that the bank hopes to settle in the coming days. Oudéa told shareholders May 23 that this was sufficient, but analysts said investors remained concerned that the price tag would be higher than expected.
"This is a weight on the bank," said Pauline Lambert, analyst at Scope Ratings. With litigation settlement there is always uncertainty around whether the bank will actually settle for the amount provisions, she said.
"This is one of those potential shocks that investors are concerned about," Lambert said.
Management changes
SocGen's share price slumped on May 4 following the publication of its first-quarter results, when it disappointed investors by not giving a definite date for finalizing the legal cases and announced a management reshuffle. A weak performance at its investment banking unit — one of its flagship businesses — also had an impact.
The management reshuffle came after the surprise departure in March of one of the bank's deputy CEOs, Didier Valet, who had held several senior positions over his 26 years with the bank. His exit was related to one of the lender's outstanding lawsuits. The bank now has four deputy CEOs, instead of three previously, and Oudéa will remain in his position for four years longer than his original mandate.
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Scholtz said the changes had come as a surprise to the market because the bank had a strong reputation for stable management. However, Lambert said the fact that the new deputy CEOs came from within the bank would provide continuity in the bank's strategic plan announced in November.
French banks are generally regarded as steady and stable and, unlike some European peers such as ABN AMRO Group NV and Royal Bank of Scotland Group PLC, avoided going through major restructuring in the wake of the financial crisis and retained a strong presence in investment banking.
Profitability
SocGen's profitability is largely in line with other large French and European banks. Its return on average equity was 6.30% in the first quarter of 2018, up from 5.40% a year earlier. At BNP Paribas the ratio dropped to 6.39% from 7.54%. Crédit Agricole had first-quarter ROAE of 6.40%, and HSBC had 7.45%.
SocGen is looking to cut costs by reducing its branch network in France. Closures begin in 2015 and will total 500 by 2020. It is also looking to certain international markets for growth; it is planning to complete the turnaround of its Russia business and increase its presence in Africa. It also wants to capitalize on growth in its car-leasing business ALD Automotive, one if its most profitable units.
Scholtz said he expects the bank's margins to come under pressure in the absence of an interest rate rise, while continued cost cutting would be the main earnings driver.
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