SocGen extends losing streak with 1.26b euro loss

Paris

SOCIETE Generale SA swung to a surprise 1.26 billion-euro (S$2.04 billion) loss because of charges at its trading unit, extending a losing streak that's set to increase pressure on chief executive officer Frederic Oudea.

The French lender posted almost 1.33 billion euros in one-off costs following a review of the global markets and investor services business, including a 684 million-euro writedown. That capped a tough period for the bank, which saw equities-trading revenue decline 80 per cent after structured products were hit for a second straight quarter.

Mr Oudea, already under pressure from the board after an unexpected first-quarter loss, is reducing risks and seeking to increase profitability while attempting to maintain the bank's leading position in equity structured products. Equities trading took a 200 million-euro hit in the second quarter related to companies cancelling dividends because of the coronavirus, offsetting a 38 per cent rise in fixed income trading.

Mr Oudea, the longest-serving leader of a top European bank, is accelerating a transition towards simpler products at the investment bank that will see a decline in revenue. The bank said it also expects to cut as much as 450 million euros of costs at the unit by 2022.

"We have a worldwide leading position in investment solutions with equity structured products, and we have decided to protect this franchise," deputy CEO Severin Cabannes said in an interview with Bloomberg TV. "But we have decided to adjust our product mix, to have products that are less sensitive to this market dislocation."

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SocGen on Monday fell as much as 4.4 per cent in early Paris trading. The stock has declined almost 59 per cent this year, making it one of Europe's worst-performing banks. The French firm's biggest rival, BNP Paribas SA, rebounded from a first-quarter profit warning and stock trading hit with a blowout performance in fixed-income. Revenue from trading fixed-income securities, currencies and commodities jumped 154 per cent in the second quarter from a year earlier, offsetting a more than 53 per cent decline in equities trading. It said there was only a "residual impact" from the dividend cancellations.

SocGen set aside about 1.28 billion euros in the second quarter to cover the cost of loans going sour, higher than the 820 million euros in the first three months. Its so-called cost of risk will probably fall at the low end of its range for the year while its capital ratio, a key metric watched by bank investors, also strengthened. It expects the CET1(common equity Tier 1 ratio) to be at the top end of its 11.5-12 per cent guidance. The bank also said it's on track to reach its cost target of 16.5 billion euros for 2020.

The results signal that SocGen only partially benefited from a broad-based market rally that helped US peers double revenue in fixed income trading. Overall, Wall Street banks' trading and dealmaking businesses recorded their best quarter in modern history, with US$45 billion in revenue. Still, they and European counterparts including Deutsche Bank AG have warned that conditions will probably be less advantageous in the second half of the year.

Mr Oudea had flagged in June that the bank may have missed the trading rally that boosted rivals after struggling to shake off the losses caused by the dividend cancellations after it took longer than expected for market conditions to return to normal.

Coronavirus-related market activity wiped out stock trading revenue in the first quarter, prompting the bank's board to pressure Mr Oudea to make changes at the unit, people with knowledge of the matter said at the time.

SocGen late last year initiated a formal search for a successor to Mr Oudea, Bloomberg has reported. The plan then was to have a candidate ready when the CEO's term ends in 2023, though the replacement could happen before that, people familiar with the matter said at the time.

Mr Oudea has been in charge for more than a decade, for a while in the dual role of CEO and chairman of the board of directors. In 2015, SocGen separated the two roles and named former European Central Bank board member Lorenzo Bini Smaghi to oversee the board.

Surging provisions have particularly hit the SocGen's French retail business, which saw net income fall 83.1 per cent from last year to 60 million euros. Excluding state-backed loans, the bank's loan issuance has picked up since mid-May, but remains below its level of activity last year.

The bank also took a large hit in the first quarter because of the collapse of oil trading firm Hin Leong Trading (Pte) Ltd. The Singaporean company filed for creditor protection while owing it about US$240 million, people with knowledge of the matter have said, asking not to be identified as the plans are private. That's prompted SocGen to review its commodities trading business and close its Singaporean trade commodity desk. BLOOMBERG