Société Générale SA expects revenues at its French retail bank to stabilize in 2018, as it speeds up the transformation of its retail operations.
"We see a slowdown in the erosion of revenues, and this is consistent with the stabilization we expect now for 2018," CFO Philippe Heim told analysts during a 2017 earnings call, noting that the 2.9% dip in full-year French retail revenues was better than the 3% to 3.5% drop the bank had expected.
In the fourth quarter of 2017, French retail revenues, which account for about a third of the bank's total revenues, fell 1% to €2.07 billion, while a 4.1% rise in fees helped offset a decline in net interest margin.
The French bank unveiled plans to cut its branch network in France to 1,700 from 2,000 in November 2017, and Heim said it would close 100 branches in 2018.
The banking group reported fourth-quarter 2017 net income of €69 million, down 82.3% from €390 million a year earlier amid restructuring costs at its French retail operations, tax changes in France and the U.S. provisions. Fixed income, currencies and commodities trading revenue fell 6.5% to €515 million amid weak market volatility, while equity trading totaled €501 million, down 1.6% year over year but up 40% compared to the third quarter of 2017.
Deputy CEO Didier Valet said the bank expects to see increasing market volatility in the weeks and months to come, which should drive market volumes.
"We are expecting interest rates to go higher, especially in the U.S., and then investors will again start to look at their asset allocation and make some shift from one asset class to another," he said.
Impact of Basel III, US litigation
Heim estimated that the revised Basel III banking standards will lead to a €38 billion increase in risk weighted assets at the bank on credit and operational risk, based on end-2016 results. Yet he noted that the bank could refine its projections going forward.
"This is a rough estimate," he said. "We have to be patient. We have to understand what will be the translation in European law, and of course, we will accordingly make the decisions on our exposures and on the type of business we keep."
Under the new requirements set by the Basel Committee on Banking Supervision, banks must hold at least 72.5% of the capital against risky assets recommended by standard models, though this so-called 'output floor' will be phased in incrementally until 2027, starting at 50% in 2022.
Société Générale is currently the subject of three legal cases with U.S. authorities — one related to transactions with the Libyan Investment Authority, another linked to alleged rigging of the Euro Interbank Offered Rate and the London Interbank Offered Rate, and the third one over dollar transfers it made on behalf of entities based in countries that are subject to U.S. economic sanctions. CEO Frédéric Oudéa said the bank hoped to settle the cases soon but added that it was impossible to give an exact timing.
"The problem is that it is not something we monitor directly," he said. "You depend also on pure administrative delays and reactions from the U.S. authorities."
He added that there was "still uncertainty on the timing, between weeks and months, still uncertainty on the amounts, but I would say we are pretty optimistic to be able to put that behind us in the coming weeks and months."
The bank has provisioned €2.32 billion for the lawsuits, and Oudéa said he did not expect any additional costs related to them that might weigh on capital.
"We will not settle at any price," he said. "So, the deviation cannot, in my mind, be that significant."
Kerviel case
Société Générale also confirmed that the French tax authorities had requested it pay back a €2.2 billion tax break that the bank received due to losses it incurred from the activities of rogue trader Jérôme Kerviel, but the lender said it saw no need to provision for future losses. It said it would fight any move to recoup the money in the courts, which could take several years.
Kerviel's actions, discovered in 2008, cost SocGen €4.9 billion, and he was initially fined the same amount, but a French court found that SocGen failed to properly supervise the trader for months. The Versailles court of appeal ruled in 2016 that Kerviel was "partly responsible" for the bank's losses in 2008 and ordered him to pay SocGen €1 million, opening the door for the state to recoup the tax credits SocGen had received.
