SOCGEN: Focus on CET1 ratio…sustainable or not?

Societe Generale’s profit before loan losses was below expectations with quite a disappointing mix as revenues in French retail banking were below expectations (offset by better than expected numbers in the CIB). The good news, at first sight, is on the capital ratio as the CET1 ratio is 55bp higher. it remains to be seen whether this is sustainable and if it opens the door for a 100% cash dividend for 2019 (versus partly a scrip dividend in 2018).

Societe Generale announced this morning its numbers for Q1 19.
Total income is in line with expectations and ours but total expenses were 2% above expectations (but in line with ours).
Profit before loan losses is therefore 3.2% below expectations.

The CET1 ratio at 11.70% was 55bp higher qoq mainly driven by disposals (expected) and a sharp decrease in RWA (adding 25bp to the CET1 ratio) as market conditions have normalised in the CIB division

Net banking income (NBI) at €6.2bn was in line with consensus expectations (and ours). However, the mix was rather disappointing.

CIB’s revenues were indeed higher than consensus forecasts (+3%) but this was expected following yesterday’s numbers at BNP Paribas. The capital market division’s revenues were 7% lower yoy (vs +2% for BNP Paribas) with a weak performance in the FICC division (-16% vs +28% for BNP Paribas). We expect revenues to be 13% lower in 2019 vs 2018 (vs -5% for the consensus).

Revenues in the IRB & FS division at €2.08bn were 4.4% higher yoy but 1.7% below expectations (driven by the IRB part). French retail banking’s revenue was also 2% below expectations and 4.7% lower yoy. Both net interest income and fees/commissions were lower yoy (respectively -3.2% and -0.3%). This has happened despite a 4.3% increase in loans outstanding underlining the ongoing impact of low/negative rates on the net interest margin (even if it remains to be seen whether the bank is not aggressively taking market shares).

Total expenses were 2% above expectations (1% above when adjusted for the CC’s division) mainly due to higher expenses from the CIB division (but in line with higher than expected growth in revenues).

For the CIB division, the targeted cost cutting is confirmed (€-500m) with revenue attrition of €300m (€400-500m in our expectations).

The CET1 ratio at 11.7% is 55bp higher qoq (which is a sharp quarterly increase as normal capital generation is more at 10bp for SG). About 25bp comes from a decrease in RWA which mainly comes from the CIB division. A normalisation of financial markets’ conditions (vs Q4 18) has allowed this decrease. Hence, it remains to be seen whether this is sustainable. We are maintaining our expectations for a scrip dividend going into the coming years.