SocGen to revamp trading arm after equities revenue wiped out
CEO Frédéric Oudéa pledges second round of changes in a year after ‘extraordinary’ crisis
Société Générale will revamp the trading arm of its investment bank for the second time in a year after suffering a devastating hit to its core equities business, chief executive Frédéric Oudéa told the Financial Times.
The French bank fell to a shock loss of €326m in the first quarter after revenue in its equity trading unit — long hailed by executives as a key strength — collapsed almost 99 per cent to just €9m.
While its European rivals posted gains of a fifth in similar divisions, SocGen floundered when a rash of companies cancelled dividends to conserve cash during the coronavirus pandemic, which resulted in big losses on equity derivatives linked to potential future shareholder payouts.
“We saw something extraordinary and to a certain extent the worst environment you can imagine for these products,” said Mr Oudéa in an interview on Thursday. “We will have to accelerate the transition to simpler products to limit the impact in such incredible scenarios.”
Mr Oudéa, who has led SocGen for almost 12 years, has been under pressure to revive performance after a string of disappointing results at the investment bank. After a disastrous end to 2018, the bank announced 1,200 job cuts and pledged to remove €500m in costs last April but continued to back the equities division.
The latest turmoil has now forced its management to rethink one of the bank’s historic strengths, reducing the risk the division takes and threatening a vital profit driver.
The Covid-19-related market turmoil that roiled global stock markets and the plummeting oil price “was a kind of stress test,” said Mr Oudéa. “We are going to draw the lessons . . . and accelerate if we can on a certain rebalancing.”
“We have started to simplify the products and also to an extent sometimes make the clients take more risk,” he added. “It’s always a balance between yield and the risk taken on board by the client and the risk that we can try to take on board.”
SocGen’s share price fell 8.6 per cent on Thursday. It has more than halved this year and is one of the lowest-valued lenders in Europe’s struggling financial sector. The bank’s earnings also dragged down domestic peers BNP Paribas and Natixis, both due to report next week.
It was “a bad surprise this morning”, said Citigroup analyst Azzurra Guelfi. Investors will be disappointed “given the extent of the investment bank weakness” compared with peers.
A bright spot for the bank was the €609m in fixed income trading revenues, which came in ahead of the €461m expected by analysts. This time last year Mr Oudéa cut back resources and headcount in the unit but he is now counting on it to help make up the shortfall if equity derivatives are rendered less profitable. He said he would also look to expand retail and private banking.
Echoing moves by European and US peers, SocGen increased its bad loan provisions to €820m — a threefold increase over the same quarter last year, as the sector prepares for a rising number of defaults. The increase included significant losses coming from two frauds involving clients.
A person familiar with the losses said one of them was related to Singapore oil trader Hin Leong, which has filed for bankruptcy and is under police investigation for fraud. SocGen had a $240m exposure to the company.
Mr Oudéa said that under his “base case” scenario, bad loan provisions would total €3.5bn this year but could rise to €5bn if the economic slump was deeper and longer than anticipated.
SocGen also said it would cut an extra €600m to €700m in costs this year using measures such as a hiring freeze and a reduction in the travel and entertainment budget.
The bank has said there will be no decision on job cuts until at least September.
Mr Oudéa told the FT earlier this year of his desire to prepare SocGen for a potential wave of consolidation in European banking. However, he said on Tuesday that, right now, dealmaking was “not the priority, and for management we are dealing with our clients, our staff . . . we have no time.”
It’s over a decade since he won the top job during the 2008 financial crisis, and Mr Oudéa continues to face questions about how long he will stay in the position. He said: “I am here to deal with this crisis, experience of a previous one is a good thing.”