Risk haunts Societe Generale's Oudea in elusive hunt for growth
By Maya Nikolaeva
PARIS (Reuters) - Frederic Oudea made "lower risk growth" promises to Societe Generale investors after being named chief executive in 2008. That year, a rogue dealer lost billions in equity derivatives and brought the French bank on the verge of collapse.
A decade later, SocGen's share price is at record lows and the bank's market capitalization is 78% lower than when it acquired Oudea after losses on complex investment products wiped out earnings from stock trading in Q1 and Q2 2020.
"SocGen's current rating makes no sense," Oudea, whose term expires in 2023, told Reuters.
The bank's share price, which closed Tuesday at 12.2 euros, up 6.7%, results in a market capitalization of around 10 billion euros (11.8 billion US dollars), around a quarter of the price of rival BNP Paribas <BNPP. PA> and half of the Agricole <CAGR.PA> credit.
Oudea has responded to the recent setback by overhauling top management at France's third largest bank and is again focusing on lower risk growth.
The 57-year-old Parisian says a revamped market unit coupled with an end to the European Central Bank's ban on dividend payments, which restricts the way banks can reward their shareholders, and a restructuring of SocGen's retail business can reverse the situation.
"The situation should be very different in three or four quarters," said Oudea, currently the longest-serving CEO of a major European bank, during a meeting at SocGen's modernist twin tower offices in La Defense, Paris.
"We recently confirmed our forecast of better results in the second half of the year, particularly in terms of our equities business, and started a promising study to create a new leading retail bank in France," he said.
In 2010, Oudea said that mitigating risk means "significantly reducing market risk" and strengthening the risk department. Since then, he has managed to lower SocGen's Value at Risk (VaR), a measure of trading risk or a maximum amount of daily losses that could occur with a 99% probability.
While the filings filed by SocGen show the quarterly VaR has dropped from € 23 million in 2013 to € 35 million in 2019 to an average of € 23 million, this year's outbreak has left some investors and analysts unsure of whether Oudea is close to closing of the order.
"The last two quarters have been a vivid example of how their business model is unlikely to be as balanced or stable as they wanted it to be," said Olivier Panis, rating analyst at Moody's, of SocGen's latest results.
Oudea has spent much of his tenure making profits at the investment bank and group level less dependent on the sale of complex structured products by investors that are related to stocks.
However, tighter capital regulations made growth difficult in other areas such as fixed income, with equity derivatives remaining the only niche in which they had significant market share.
"They had an issue with structured products in the second quarter, but the rest of the investment bank did not compensate for it. This was in stark contrast to the results of other French banks," said Guillaume Brisset, partner and fund manager at Clartan Associés holds SocGen shares, said.
Stock trading accounted for 29% of SocGen's investment bank sales and 10% of the group’s total sales in 2019. This compared to 17% of the investment bank's turnover and 5% of the group turnover of French rival BNP in the same year.
SocGen's share trading revenue declined 80% in the second quarter and was almost entirely wiped out in the first quarter, while JP Morgan <JPM.N> and Goldman Sachs <GS.N> were the only two banks with larger franchises for Equity derivatives are both coalition dates posted a surge in equity gains.
However, UBS analysts predict that SocGen's share trading revenue will increase 20% in the third quarter, outperforming all of its competitors including BNP, JP Morgan and Goldman.
"Volatility remained elevated, but without major spikes, typically a constructive environment for derivatives trading," UBS said in a note, adding that Barclays and BNP are the top picks, with SocGen being the "least preferred" bank for European CIB (Corporate and Investment Banking) is. .
LOWER RISK REWARD?
With limited opportunities to gain a foothold in other trading areas, Oudea has no plans to scale back equity derivatives. Instead, he wants to sell the same amount of products in billions of euros, but focus on products that pose fewer risks.
This means fewer products with exotic names SocGen lost millions as companies canceled dividends and stock prices fell during the market sell-off in March.
SocGen will now offer alternative products where risks are easier to manage but the returns for investors are lower.
"So we've already developed new products where ... we don't have that dividend risk," Oudea said during a banking conference last month, adding, "We'll likely choose more individual products than products with correlation."
De-risking will only address part of the challenge Oudea faces in his remaining years as CEO.
Oudea, who has been with the bank for 25 years, is credited with propping up the capital base, Achilles' heel after the 2008 crisis, and selling some non-core businesses.
Sources also told Reuters that SocGen is preparing to sell its Lyxor asset management business in an effort to cut costs. SocGen declined to comment.
More asset sales and French retail restructuring will bring costs down, but they will do less to improve profit growth and scale, and Oudea has announced that it will only participate in larger deals as a buyer when European banking turns up prepared the expected consolidation.
However, some investors say that SocGen's options are limited.
"Something is stuck because it is too small and therefore has no room for maneuver. Many of its activities are not optimally sized," said Brisset of Clartan Associés.
($ 1 = 0.8487 euros)
(Reporting by Maya Nikolaeva; Editing by Rachel Armstrong and Alexander Smith)
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