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Société Générale has found another €900-million ($1.18-billion) of expenses flab to work off after shedding €550-million over the last year. For some institutions, a crash diet like this might smack of despair. But the top line of the French bank's first-quarter results outdid those of bigger rival BNP Paribas.
The bulk of last year's savings came from corporate and investment banking. Two-thirds of the new effort will come from slimming everywhere else. Some of the remainder could come from hacking investment banking further: back-office trading support may be outsourced to Accenture – in which case more than 600 jobs would go, SocGen deputy CEO Severin Cabannes said on May 7.
SocGen will be well placed if other divisions follow the lead of the corporate and investment bank (CIB). Revenue from equity trading rose 5 per cent from a year ago and fixed-income revenue fell less than at most rivals. SocGen also closed the gap with BNP Paribas: the CIB's €1.9-billion of overall revenue was only 25 per cent less than its competitor's, versus more than one-third lower, on average, in the last four quarters.
The unit had a return on equity of 15 per cent in the – typically strong – first quarter. With retail banking revenue also steady, the bank's new group target of 10 per cent return on equity (ROE) by the end of 2015 looks achievable. Group ROE was 7.4 per cent in the first quarter.
Would-be investors may wonder whether a 10-per-cent ROE target is ambitious enough: the bank's cost of capital can only be a smidgeon – if at all – lower. That may change over time if SocGen can boost equity. The bank had a Tier 1 Basel III ratio of 8.7 per cent at the end of the first quarter. Cost savings can add 20 basis points, management reckons. Retained earnings would take it close to 9.5 per cent by the end of the year.
BNP Paribas may be further ahead on capital, but it faces a higher hurdle because of its systemic importance. Meanwhile, SocGen shares are trading at less than half book value, against a 30-per-cent discount at BNP Paribas. That looks harsh – provided cost-cutting makes SocGen leaner without slicing into muscle.