SocGen sets Newedge €200m profit target

Société Générale plans to reverse rapidly-declining profitability at Newedge, the futures broker it took full control of last week, in the next two years by moving into equity trading services and deepening cost cuts.

In a management presentation to investors on Tuesday, the French bank's management said it wanted to make profits of €200m by the end of 2016. That compared with profits in “the high single-digits” on revenues of €650m last year it disclosed. It also aims to increase the return on equity from 13 per cent to 15 per cent in that period.

The targets are the first public statement made by SocGen since it finalised the purchase last week of the 50 per cent it did not own in Newedge, one of the world’s largest independent futures brokers, from Crédit Agricole €275m as part of an asset swap between the two French banks.

With the ambitious targets, SocGen is aiming to flourish as a provider of banking services for equities trading as rivals grapple with upheaval in their fixed income businesses. SocGen and Newedge have little credit and rates business, instead specialising in equity derivatives, futures and over-the-counter commodities instruments.

In recent years, the industry has struggled with low interest rates, increasing pressure on commissions and the fallout from MF Global, the broker-dealer that collapsed two years ago. Newedge’s profits have tumbled from €33m on revenues of nearly €900m only two years ago.

SocGen wants to push Newedge into prime equity brokerage, offering hedge funds services such as trade finance and stock lending. The group also wants to cross-sell services, offering customers trading and clearing services for both listed and over-the-counter products.

The bank hopes the €200m target will be made up of €80m in profits derived from cross-selling, €40m from new business and €80m of synergies from savings in IT and job losses.

New rules around derivatives trading are expected to benefit large brokers, which offer a range of services such as clearing and collateral management. However those services will also result in higher capital requirements under new international rules.

As a result, many brokers are finding their balance sheets under pressure, eroding their profitability. Some, such as BNP Paribas, are restructuring their clearing operations, while others like Barclays, plan to radically pull back their investment banking operations.

SocGen’s deal to buy out Newedge brought to an end long-running speculation over the long-term future of the derivatives broker, created in 2008 from a merger of Société Générale’s Fimat unit and the futures brokerage arm of Calyon.