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SocGen sees lower cost of risk in 2017 as economy improves

Société Générale SA is expecting its cost of risk to decline in 2017, bank executives said Aug. 2, as the measure declined throughout the bank's business lines in the second quarter amid tighter risk management and improving macroeconomic conditions.

CFO Philippe Heim told an analyst conference following publication of the bank's second-quarter results that the cost of risk for the whole of 2017 would be 25 basis points, down from 37 basis points in 2016. The second-quarter cost of risk fell to 15 basis points, down from 38 basis points during the same period last year.

The cost of risk is the price SocGen must pay to manage its risk exposure, measured in basis points for assets at the beginning of the period.

"We are at a very low point in terms of cost of risk," Heim said. "This is a reflection of our structural reforms to improve our risk management policy from origination to recovery." He said that signs of an improving economy were also helping.

CEO Frederic Oudéa said the bank's strategy was to keep its cost of risk down to boost long-term profitability. He said the bank has a "very good quality" credit portfolio across the board, and that, absent any extraordinary events, the bank does not foresee any change in credit risk.

SoGen reported a fall in second-quarter net income and net banking income, after the bank reached a settlement with the Libyan Investment Authority amounting to €963 million. Group net income fell 27.6% to €1.06 billion, while group net banking income was down 25.6% to €5.20 billion.

The bank has been forced to provision significantly for litigation issues. Oudéa said there are three potential litigation issues outstanding, and that he hoped SocGen would be able to put its legal issues behind it in the coming quarters.

"We are working hard on this and will see in the second half what we have to do in terms of provisioning," he said.

SocGen has been under investigation for several years over potential sanctions violations in the U.S., and also for alleged rigging of the Euro Interbank Offered Rate and London Interbank Offered Rate along with several other large banking groups. It may also face further legal action regarding the Libyan Investment Authority, Oudéa said.

Group net income from French retail banking declined on a yearly basis to €359 million from €403 million as low interest rates continue to eat into margins. Many French borrowers have been renegotiating mortgages to take advantage of low rates, but Oudéa said the bank was targeting affluent borrowers and new production in order to provide longer-term growth.

"We have a good level of confidence to generate additional revenues beyond the low margin [on mortgages]," he said.

Laurent Goutard, head of the bank's retail operations, said the pace of renegotiations was beginning to slow.

He said the bank was focusing on corporate loans, which grew 3.5% in the quarter. SocGen recently opened a branch dedicated to small businesses in the southwest city of Toulouse, he said, adding that the bank was planning more small-business branches to develop growth.