Société Générale chairman and chief executive officer Frédéric Oudéa attends a news conference to present the bank's 2011 annual results in Paris on Feb. 16, 2012. SocGen, France's second-biggest listed bank, warned of more pain in 2012 after a grim quarter hit by another writedown on Greek debt and a loss at its investment bank, where traders' bonuses are being halved.
From the FT's Lex blog
Goose farmers in Gascony would be dumbfounded. France's big lenders have lovingly fattened their corporate and investment bank units and are now forcing them to regurgitate much of what they swallowed.
But in spite of the cash thrown into their CIB divisions, French banks' domestic retail operations are the more reliable earner. Take Société Générale: in the past five years, its French retail bank has contributed a steady €7- to €8-billion of revenue, while its CIB division has been all over the farm.
The trouble is that investors keep hearing that Société Générale has dealt with its pre-crisis CIB excesses. But they just keep on coming. This does nothing for the credibility of Frédéric Oudéa, the bank's chief executive. Like BNP Paribas, SocGen had to deleverage its CIB business to meet European Banking Authority capital requirements and was forced to take some brutal fourth-quarter one-offs. That prompted a 40 per cent fall in net profit to €2.4-billion last year.
The litany of final-quarter hits came to a net €460-million, more than half the full-year total. The €420-million pre-tax loss on revaluation of toxic assets in CIB's legacy book is typical of the sort of thing that is bound to undermine investors' confidence. They had been led to believe that the assets were worth more than book value. The effect of the one-offs was to depress SocGen's return on tangible equity to just 7.5 per cent, versus a 10 per cent cost of capital.
SocGen may well be in transition. But Mr. Oudéa needs to figure out what he wants the bank to be. He must make CIB's unpredictable top line more reliable, especially since revenue in its equities unit, including in equity derivatives, declined throughout 2011. The bank's core tier one capital ratio of 9 per cent ticks the EBA box. But until CIB is sorted, thank heavens for retail banking. No doubt any Gascon farmer concludes the same.