Shares in Société Générale SA slumped on Jan. 17, dragging its peers with it after the French lender warned its fourth quarter and 2018 revenues in its investment banking division would be lower amid difficult market conditions.
The banking group is expecting a 20% decline in fourth-quarter revenues and a 10% fall in 2018 full-year revenues at its Global Markets and Investor Services division due to "challenging market environment in global capital markets." SocGen also said its market risk weighted assets would see a "significant increase." RWAs determine how much capital a bank must hold.
In the fourth quarter of 2017, the bank's investment banking revenues totaled €1.35 billion, down 3% year on year.
The bank's shares were down 5.33% at in mid-afternoon Paris trading, underperforming the broader European banking market, with the Stoxx Europe 600 Banks index down 1.52%. Peers BNP Paribas SA and Crédit Agricole SA fell 3.31% and 1.64% respectively, while Natixis performed slightly better with a 0.38% decline.
SocGen did not give any specifics on why the tough market conditions were hurting revenues, but analysts noted that the volatile market conditions, notably in bond trading, at the end of 2018, had contributed to weak results from U.S. investment banks such as JPMorgan Chase & Co. and Goldman Sachs Group Inc.
Volatility in derivatives
The revenue warning is "not far off of what the American banks have reported already although that was more on the fixed-income side but not on equities," said Pauline Lambert, executive director at Scope Ratings. "When I think about SocGen, they tend to be more geared towards equities and equity derivatives," she said.
French banks are viewed as specialists in the trading of derivatives and structured products, and the recent volatility in the market may have heightened risk as investors fret about the global economy and ensuing trade tensions between the U.S. and China.
"The high spikes in volatility that we saw in December can provoke...one-off difficulties with equity derivatives," said Benoît de Broissia, an analyst at Keren Finance in Paris.
"When there are large spikes, there is a kind of dislocation in the market, with a volatility that explodes," he said.
Volatility could have raised the cost of coverage for structured derivatives, he said. However, investors may have become more risk averse in the last quarter, which could have resulted in a drop in business, he said. Weak conditions on the bond markets may have also played, he added.
SocGen is not the only French bank to be suffering from difficult market conditions. French investment bank Natixis said in December its fourth-quarter revenues would be hit by derivative transactions on volatile Asian markets and warned fourth quarter revenues would be down 10% on the quarter and less than 1% on the year.
SocGen also said it would take €240 million charge following the sale of its Serbian unit to OTP Bank Nyrt. and the divestment of its stake in La Banque Postale Financement SA.
On a more positive note, the bank said the performance in its international retail banking and financial services as well as its financing and advisory businesses are expected to be "solid" in the fourth quarter. French retail banking will be in line with guidance.