Société Générale Société Générale, France’s second largest bank, returned to profitability in the second quarter, as strong performances from its retail and investment banking units helped offset balance sheet writedowns and weakness in its Russian retail banking division.
Net profit was €309m ($444m), 52 per cent less than in the same period of 2008, but exceeding analysts’ expectations for a €122m profit and marking a rebound from the group’s first-quarter loss.
Frederic Oudea, chairman and chief executive, said that in spite of the “very tough economic environment” he saw signs of stabilisation in the market, with interbank activity returning to “more normal and healthy” levels.
SocGen’s corporate and investment banking division reported revenues of €1.3bn, almost double the €655m reported in the second quarter of 2008, boosted by the rally in equity markets and by market share growth in the group’s fixed income, currencies and commodities division.
The unit’s sharp rise in revenue helped cushion the blow from writedowns and mark-to-market losses worth €1.7bn. Overall the CIB unit contributed a €12m loss to the group’s net income, outperforming analysts’ forecasts for a €166m deficit.
Jean-Pierre Lambert, analyst at KBW, said: ”If you strip out the one-off items, the bank’s underlying earnings are quite strong. The tier one ratio has improved, which reduces the risk that they’ll have to raise capital, equity derivatives revenues are recovering and the loan loss charges have stabilised in several divisions. There remain localised pockets of concern, in Russia and in consumer finance, but overall it’s very positive.”
SocGen had already warned that its second-quarter results would be hit by writedowns on the value of its credit default swaps, which the bank took out as insurance against default on corporate loans. SocGen reported that tighter credit spreads had reduced the value of CDS by €0.8bn. The group was charged €0.5bn due to improvements in its own debt, and suffered €0.4bn in writedowns on risky assets.
Profits at SocGen’s international retail banking division were hit by dire conditions in the Russian market. The group said shrinking demand for loans in Russia and a deterioration in the quality of existing loans had a heavy impact on revenue, pushing up the cost of risk to 559 basis points compared to 223bp at the end of 2008.
SocGen said it expected the cost of risk in Russia to remain high for “several quarters”, and had implemented a number of measures to cope with the crisis environment, including a 10 per cent cut in jobs across Russian operations and a freeze on expansion in the region.
Overall, net profit from international retail banking fell 49.2 per cent to €122m, from €240m in the second quarter of 2008.
Mr Oudea said: “In an environment of global recession, the group is focusing on consolidating its market share, controlling risks and restructuring the activities most severely affected by the crisis in order to adapt to the new environment and prepare for the future.”
However Mr Oudea also said he would be on the look-out for acquisitions, especially in retail banking, over the next 18 months. “This crisis involves risk but also creates wonderful opportunities,” he said. “We want to grow our retail banking unit. Our idea is to identify banks that would provide growth, and consider them as potential acquisition targets.”
Shares in SocGen rose six per cent after the results were announced, to €49.07, giving the bank a market capitalisation of €26.8bn.
