Having come under investor pressure after posting disappointing third-quarter results, Société Générale SA unveiled its strategic plan for 2020, which includes cost cuts at its retail unit and a cost-to-income-ratio target of less than 63%.
The French bank aims to boost revenues by more than 3% annually through these measures and targets a return on tangible equity of 11.5%, which would translate into a return on equity of 10%, CEO Frédéric Oudéa said Nov. 28 at an investor day in Paris.
In part, the lender aims to achieve its targets through branch reductions in its French retail network. Closures began in 2015 and will total 500 by 2020. SocGen also plans to complete the turnaround of its Russian operations, boost its position in Africa and capitalize on growth in its car-leasing business ALD Automotive, which is one of its most profitable units. In addition, it aims to strengthen its position in global banking.
The lender's share price barely moved after the announcement, rising 0.44% to €43.09 on Nov. 28. SocGen — which has been hit by legal disputes, with three cases pending in the U.S. and provisions for them totaling €2.2 billion at the end of the third quarter— failed to meet its 2016 ROE and cost-to-income targets. Both ratios are key indicators for profitability.
The bank's cost-of-risk target for 2020 is 35 basis points to 40 basis points, compared with 17 basis points at the end of September. Oudéa said the figure does not include any further provisioning for litigation. Diony Lebot, SocGen's chief risk officer, said the higher cost-of-risk target took into account the bank's growth plans and changes in accounting standards known as IFRS 9, which will take effect at the beginning of 2018. CFO Philippe Heim added that the new accounting rules would shave 15 basis points off the lender's capital.
With regard to a potential upcoming Basel Committee agreement on rules to change the way global banks calculate risk, Heim said he had "no concerns" about SocGen's ability to implement the changes, with full implementation not expected until 2026 or 2027. European banks oppose the plan because it would considerably increase capital requirements for mortgages and business loans, which are much more important to European lenders than their U.S. peers.
Other aspects of the proposed rules are also up for discussion — including the treatment of derivative liabilities and the Fundamental Review of the Trading Book, which would require banks to hold more capital against their trading books — and Heim said it was vital that European and U.S. banks were "on the same page" with regard to the new rules.
"The critical point for Europe is to be sure that this whole package will be implemented in good faith on both sides of the Atlantic," he said.
Cross-border consolidation
Meanwhile, Oudéa said he expects cross-border consolidation in the European banking sector in the longer term, predicting that the banking market in the eurozone will resemble that of the U.S. as domestic consolidation and a drive for scale take hold.
The CEO said he expects to see more concentration on a domestic level, with three to six players accounting for the bulk of the assets, allowing banks to achieve scale and cut costs as they move toward increased digitization.
"When I think 10 years ahead about the banking sector, I think about the U.S.," Oudéa told investors. "I personally consider that there will be four or five large diversified players having a large [corporate and investment banking] business, taking advantage of this evolution toward a more balanced way of financing the economies," he said, adding that the European economy would become less dependent on bank financing and would increase financing through capital markets.
His comments echo that of other commentators, including Bank of France Governor François Villeroy de Galhau, who said Nov. 22 that cross-border mergers would enable eurozone banks to better diversify their risks and to direct savings toward investment.
Oudéa said increased integration of the European banking sector would be a long process given its fragmented nature, adding that banking union within the bloc had to be completed. Banks will also need more visibility on regulation and how it will impact them, he argued.
With regard to retail banking, the CEO predicted that the integration of the retail markets would take between 10 and 20 years as banks complete their digital transformation.
