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Executives

Frédéric Oudéa – Chairman and CEO

Philippe Heim – Group CFO

Didier Hauguel – Co-Head of International Banking and Financial Services

Didier Valet – Head of Corporate & Investment Banking, Private Banking, Asset Management, Securities Services

Jean-Luc Parer – Co-Head of International Banking and Financial Services

Analysts

Delphine Lee – JPMorgan

Kinner Lakhani – Citigroup

Guillaume Tiberghien – Exane BNP Paribas

Flora Benhakoun – Deutsche Bank

Jean Francois Neuez – Goldman Sachs

Kiri Vijayarajah – Barclays

Jon Peace – Nomura Securities

Alex Koagne – Natixis

Stephan Stalman – Autonomous Research LLP

Nick Davey – UBS

Pierre Chedeville – CM-CIC Securities SA

Societe Generale Spo (OTCPK:SCGLY) Q3 2013 Earnings Call November 7, 2013 7:00 AM ET

Frédéric Oudéa

Good afternoon to all of you and thanks for attending our third quarter result conference call.

I will say a few words and then leave the floor to Philippe Heim, our CFO and then with our team, management team who will answer your question. As for previous conference call what I would suggest and you are very good in that, is that we stick to something like one hour and a quarter. There are lots of results I am sure you are very busy and if we could comply with one rule, and have two questions per analyst, that would be great.

So if we turn to page four let me just highlight the three major takeaway for me, for these results. First of all, again solid commercial performance in Q3. I would say in line with what we have delivered in the first half. Revenues of businesses are up and that’s not so frequent in the banking industry in Europe given the, still the environment. It’s a plus 3.8% versus Q3, 2012 on a like-for-like basis.

You’ve seen that we have EUR 534 million net profit, the underlying net profit is EUR 976 million. The difference comes from three non-recurrent items or non-economic items Philip will comment on that. One which is the reevaluation of our own debt. The second one is [Tesila] and small amount for the legacy portfolio and then additional provision for litigation.

That’s again the first major lessons of the first quarter, strong commercial performance in Q3. Secondly a very important quarter in my view in terms of the transformation of the Group. When I say this first of all implementation of our new organization and we have negotiated with the trade union and we were able to implementation quickly this new organization around three pillars. I will say a few words on this.

Secondly further what I would call optimization of the business model, the successful sale of our non-core Japanese private banking business on the 1st of October. So again not accounted for this quarter but the end of the year.

Secondly the announcement of the purchase of minority stake of VTB and Rosbank. As you know these two operations overall will have no impact on our capital. And then more importantly we have entered into exclusive negotiation with Credit Agricole to acquire full ownership of a Newedge. I will say a few words also on this move, which I consider as a strategic one.

Beyond that may I just say that we carry on with our cost containment program. We have now secured EUR 260 million out of the EUR 900 million we have in mind, again for the period 2013, 2015.

The third lesson is of course that we are now fully compliant with our targets in terms of balance sheet. The core tier 1Basel III fully loaded, I mean making a calculation as if we were in 2018 is 9.9%, up 51 basis point compared with end of June 2013 and that allows us to confirm our assumption for the payout ratio this year of 25% but also to add that we will not propose as quick option dividend and so it would be a dividend paid in cash.

Regarding liquidity LTR is above 100% and leverage ratio stand at 3.3%, actually 3.34% exactly up more than 10 basis point compared with end of June. That’s what I wanted to say to summarize the third quarter results.

Now if we turn to page six, let me say a few words on our new organization. You know we want to really focus on three pillars, the French networks, no major change there; international banking and financial services, we’ve decided to put together our former retail banking operation with our specialized financial activities; And third, putting together our CIB business and private banking and services to investors.

If you look to page seven you will see first of all that it’s in my view pretty well balanced business model, both in terms of capital allocation. We have here the Basel III capital allocation to the businesses and you see that it’s again well balanced, especially if you consider that at the end of the day half of the capital, just half of the new GBIS division are under CIB and investor solution business. So 20% at the Group level is allocated to capital market, the rest to the other activity.

So we are fundamentally building something which is geared towards retail and stable activity knowing that the capital market business, as you can see again in the third quarter is a very, very resilient performance.

In terms of contribution you see also a pretty good balance on the same slide. You have the gross operating income divided for the three pillars. And let me again highlight that from my perspective the fact that despite all the changes and the constraints on the scales results is both capital and liquidity. The fact that we’ve been able to increase our gross operating income for the first nine months of 2013 versus first nine months of 2012 is of course very positive.

If I turn to just the two new pillars, the slide eight what do we expect from putting together international banking and financial services? First of all you see here the mix of businesses. It’s structurally well balanced business mix in terms of countries and in terms of client base, corporate and retail. We now want to develop a universal banking business. At the end of the day I think diversification like this make sense in my view.

Secondly we really want to share clients and extract more synergies. In particular we’ve our specialized businesses dedicated to corporate clients. We have very strong fleet management activities and equipment finance. We can do I think more by putting together all these businesses under the same management team and also off-course regarding insurance. Regarding the cost we will also [mix] the support functions when it makes sense.

Regarding the other new pillar, the global banking and investor solutions, let me just highlight the idea is again to build something very much focused on the clients. Secondly a business which support the economy, at the end of the day when you think about where the regulators want to drive the evolution of these activities. They want to have activities dedicated to the clients and economy. And third it’s a low risk profile resilient business model and so with good profitability.

I am convinced that we have franchises in our CIB business, which are particularly well suited for this new world. When I say this everything on related to structured finance, regarding infrastructure, oil & gas, mining, trade finance, export finance are so key for the world growth that they will be protected going forward.

Secondly our activities on the equity derivatives which are dedicated to the saving collection by private banks or retail networks are also particularly appropriate for client needs and as you know not particularly targeted by regulators who now want to reduce more the OTC product in fixed income. And eventually we have a fix income business which is very much dedicated to our corporate client base and investors but with this idea of this implementation. So something where we can build on the global strategy which is client driven.

Let me highlight that by putting together all these businesses, we again have in mind to foster cross selling and the cost energies, particular with have our wealth management business, the private banking business with the CIB and of course with this idea of providing an integrated execution and first rate service to our clients.

And I just would like to say a word, more specific word on Newedge page 10. I think here we are really investing for the future, building for the future. As you know so we’ve entered exclusive negotiation to take full control of Newedge and fundamentally integrating in our business with the idea that regulators fundamentally would like to see CDS and interest rate derivative swaps to disappear as they stand today, as OTC products and to have a migration towards clearing platforms.

So by acquiring, taking control of an industrial tool, which is already a leader in the growing business for future products, we have in mind effectively to offer these new products to our clients, leverage definitely a client base, put that client base in common with our existing CIB business, provide also an integrated commercial offer from execution of trades towards custody so you have execution clearing and custody and look at this as an integrated value chain for our clients. So leverage also on synergies.

Let me say that this transaction we’ll have also to strengthen our presence in prime exchange and commodities as well as increase our share of business in Americas and in Asia. From a financial point of view let say I am also happy with the structure of the transaction. We are buying of 50% of Newedge for a consideration of EUR 275 million. And basically we are financing that through the sales 5% of Amundi to Credit Agricole. So we keep the 20% stake. That means absolutely no change of governance and no change at all of the way we work with Amundi with have our different distribution networks. No change at all product lines, why? We are effectively benefiting from the good valuation of Amundi and reduced to a certain extent the burden of this minority share in terms of capital.

So I think it’s something which make sense from a financial point of view and limits the impact on our capital of this transaction, overall transaction to something just of 10 basis points at closing.

Now I will turn to Philippe Heim, who will describe more in detail our results. Philippe.

Philippe Heim

Thank you Fredrick. So good morning everybody. So as usually I will give you a brief overview of the results at the Group level. Then I will move through the various businesses to give you some flavor, some color regarding our results.

So first move to page number 11. To commence our prudential capital ratio. As mentioned already by Frédéric, we are happy to post this quarter a fully loaded Basel III capital ratio of 9.9% as at end of September. So we have already reached our targeted level. The ratio is up to 50 basis points, thanks to several factors. First one is capital generation for return earnings, and capital increases for employees. So amounting to 22 basis points.

Secondly and very important is a soft legacy deleveraging process during this quarter. I guess to highlight that’s a net book value of the non-investment grade assets say to just around EUR 1 million. Just keep in mind that we were at EUR 1.8 billion end of Q2. And we started the year with EUR 3.1 billion for the non-investment rate part.

We expect further deleveraging during Q4 and it will provide us an additional gain to our core tier 1 ratio of roughly 10 basis points. What is important here and I have to highlight the relevance, as a result there should be no significant remaining CD recording left by year-end and we expect no negative P&L from the legacy asset portfolio from 2014 onwards.

The [relevance apart[ on this capital trajectory is the attitude to the containment of risk weighted assets. So, so much for the core tier 1.

Regarding the total capital we stand at 13.1%. You know that our guidance for the coming two years is to be between 14% to 15% . Regarding deleverage we disclosed this figure in Q2. We in September we mentioned that we were seeing a 3.3%. So we confirm this 3.3%. But bear in mind that in fact this ratio is up 15 basis but rounding brings it down to the 3.3%.

So I move to funding page number 12. Just to remind you that the Group’s funding conditions remained excellent. We have so far executed let’s say 116% of our funding target for 2013. So we have raised more than EUR 23 billion since the beginning of the year through mix bag of diversifying instruments, subordinated debts and secured loan, loan securitization.

One element which is very important is that as you get it previously we are fully compliant with Basel III rules on liquidity. We are above 100% on LTR and as mentioned during the Q2 we have begun to optimize our liquidity result. So that we can reduce the liquidity drug and as such we have reduced our available deposit at Central Bank by around EUR 20 billion as mentioned on the slide. And at the same time we increase the unencumbered Central Bank eligible assets by EUR 7 billion and reduced our short term funding by EUR 4 billion.

So overall our liquid asset therefore stood at EUR 137 billion at the end of September covering 129% of the total short term needs. So if we step back one month on capital or liquidity it’s fair to say that the Group delivered on all its key objective and is fully CRD4 compliant and ahead of schedule.

Moving now to cost of risks on page 13, this is a picture globally stable. If you look at the commercial cost of risk this is the bold red curve on the slide. So this is stable. It was 77 basis point in Q2. It is now 79. So whole picture shows element of stability across the board. For example for the French network it was standing at a 57 basis points, slightly down from the previous quarter. I have to mention that as a Group enforced its collective impairments on corporates.

You will notice we have increased this quarter the provisions for the CRD legacy assets portfolio at EUR 154 million. This is consistent with what I mentioned before regarding capital and this is aligned with our policy to get rid of our remaining non-investment grade assets and will be rewarded for our efforts in the mentioned area we expect no negative P&L impact from the legacy asset portfolio from 2014 onward.

I move now to page number 14 to the consolidated results. So NB1 stands at EUR 5.9 billion in Q3. Operating expenses remain under control. If you look for example on the first nine months the evolution is a plus 1.7% at constant rate but if you exclude EUR 170 billion of one-off costs we have to execute our confirmation plan. Operating expenses are stable during those nine first months of the year.

As a Group underlying income ratio remained stable during the first nine months when compared to the previous years at 65%. It compares favorably to our peers. Regarding now the Group net income for the quarter as mentioned by Frederic it stands EUR 976 million at 14% and it represents a return on equity of 8.6%.

Now I will move to the businesses. I will try to be quick so that we can have a sufficient time for the question. So I move to page number 16. Regarding the French retail during this Q2, the first element I have to mention that we have slight uptick in the French economy during this quarter but globally the environment remains very challenging and this context the French retail network out performed some of the competition.

Revenues are up 2% excluding PEL and CEL on the back of [Seliga] interest income plus 2.9%. Fees and commission are up 1%. In this very challenging environment on the economic side and this is very interesting, there was continued and significant growth in deposits, up 9.6% and in contrast credit demand remained subdued, particularly for investment loans and as a result this is a logical consequence loan outstanding are down 1.7% versus Q3 of last year. And the loan-to-deposit ratio continued to decrease. It reached 111% at the end of Sept from 123% a year earlier.

Operating expenses are kept under control and the contribution to Group net income of the French Network was EUR 308 million in Q3 and this context of good commercial performance lead us to confirm our yearly guidance for the French Retail. And so we expect NBI to increase at least 1% and operating expenses to remain stable as compared to last year.

So now I move towards the international banking and financial services. I would like you to move to page number 18. Our activities in international retail banking remain globally resilient in a challenging environment. Just to put the things under perspective in Czech Republic the GDP rose in Q2 after sixth quarters of contraction. And we expect now GDP to rise by 1.8% in 2014.

In Romania this is still context of slight recovery but thanks to strong exports and increasing industrial production but what is important is to notice that construction is under pressure due to the decrease of actual wages in the private sector. In Russia the economic slowdown in the past few quarters has been stronger than anticipated. We anticipate the GDP to grow at best around 1.6%, 1.7%. But progressive recovery is expected next year. So in this environment, the third quarter showed strong growth in deposits at 9.2% in our international network.

Loan growth was moderate, only 0.8%, plus 0.8% and if I look our various franchise may be to give you some granularity in Czech Republic deposits were up almost 8% while loan outstanding rose plus 3.2%. In Romania there was a dynamic increase in deposits, up 6.7%. Loans were down 10% in an environment which remained difficult. In Russia we’ve got good commercial trends with solid increase in deposits at 20% while loan on funding were up 10%.

Regarding now the performances of the specialized financial services and insurance, so I move to page 19, just to mention that our view automotive enjoy a strong gross momentum with a sustained straight increase of 5.6%. In equipments finance we’ve got good business volume, in line with the sluggish economic environment. So we’ve continued with our strategy to refocus on our high margin products and geographies.

In insurance we continue to see very positive dynamics. In the life segments our funding were up 6.1% while in personal protection, property and casualty good quarter, so steady growth, premium up 20% and driven mainly by Russia and Poland.

So now I move to the pillar of financial results. So to be brief in international retail banking I am now in page 20 profitability continued to be impacted by the weak economic environment and by low interest rate in Europe. The contribution to Group net income was resilient in Czech with EUR 60 billion. And it remained however slightly negative in Romania with a net result of minus 7 million. In Russia the NBI for the whole is SG Russia, so the parameter covering all our Russian entities is up 12%. The cost income improved to 64% and as a result the contribution of SG Russia to group net income stands at EUR 32 million, representing a return on equity on allocated capital of 10.3%.

Regarding SFS, so specialized financial services and insurance we had another record performance in Q3 with the contribution to Group net income standing at EUR 205 million, out of which EUR 81 million for insurance and EUR 73 million for ALD.

Now I move to the last pillar so global banking and industrial solutions. And we’ll first look at CIB. So I am page 21. We had a solid commercial performance in the core businesses. All the valuation I will mention now are excluding CVA and DVA and non-recurring items. I would like to say first that this quarter was characterized by conflicting evolution with very slow beginning of the quarter in the context of the Syrian crisis the fall out in emerging countries, uncertainties regarding, as I said tapering and by September sentiment become more positive again providing good client flows.

So in this context our market activities delivered let’s say a very robust performances and which compares favorably to our peers in Q3. To be more specific inequities NBI decline only slightly from the high level reached in Q2, 2% down, when globally the industry was down 12% over the same period and the performance was good on flow equity derivatives despite low volumes in Europe. And there were strong results on structured products.

In fixed income currencies commodities NBI showed good resilience, down only minus 7% that is Q2, 2013 despite challenging market condition and just to remember over the same period the industry is down 19% in financing and advisory NBI was 5% below versus the previous quarter better from the industry which perceived a decrease of 15%. I move now to the remind part of JB’s divisions. Just to mention on page 22 that’s private banking and so NBI is up 16% versus Q3, 2012 excluding a provision to write back of EUR 17 million, with a high margin of 99 basis point and positive in-flow in France and in Asia.

In Securities Services asset under custody rose by 7.7% while asset under administration went up 11.6%.

Moving now page 23 to the financial results of global banking and industrial solutions. Just to mention that the revenues on this pillar were up 7% with NBI of EUR 1.7 billion. Cost in Q3 mainly because of the effect of systemic taxes were slightly up but we have to mention that for the first month of the year and for me this is more accurate to measure performance in terms of cost. The cost income ratio was maintained at a low level at 62%. Regarding profitability calculated on the basis of a 10% allocation of capital of Basel 3 allocation the return on equity stood at 17% for core CIB.

Regarding now private banking global investment management and services, revenues reached EUR 459 million, up 7.4% and leading to a contribution to Group net income amounting to EUR 71 million.

So now I before leaving the floor to Frédéric I finish with the corporate center. So on corporate center we are on the corporate center as you know the impact from the revaluation of the own financial liabilities, spending at EUR 223 million before tax affected reduction at a group credit spread. Just to remind you that we have now CDS below 120 basis points. The underlying GOI excluding own debt gain was for the quarter EUR 260 million and it amounted EUR 706 million for the first nine months.

So this is clearly inside the full year guidance we had for the corporate center of GOI below EUR 1 billion. And as mentioned before within the corporate center in the cost of risk we include an additional EUR 200 million of general provision for disputes and traded goods, total credit provision to EUR 700 million at end of September 2013.

Okay, so much for me. So now I will leave the floor to Frederic.

Frederic Oudea

Yeah, thank you Philippe. So let me add that we will present our Q4 results and 2013 results in new format and which will be in line with our new organization. Let me just conclude page 28. I think we have done the job if you wish at the end of 2013 on the balance sheet. I don’t come back to the different ratios and I would like to say few words for 2014 and 2015.

On the environment, let me say we expect in the Eurozone a progressive but slower improvement of the economic situation with still 2014 relatively sluggish year for Eurozone countries and with of course the perspective of the beginning of the less accommodative monetary policy by the Fed.

2014 and 2015 are also of course important years for Europe and Eurozone in particular with implementation of the banking union, something as you know that we support in order to revert the trend towards fragmentation.

So in that environment now that we have done the job on balance sheet and of course keeping as a same discipline on the management of the balance sheet and all our risks, the priority is really to further transform our businesses and take advantage of this new organization, I have just mentioned.

For the French network, as you know the challenge is really to ensure the own resiliency of NBI, to ensure that we adapt to the changes of the behaviors of clients and innovate with the impact of the digital technologies.

Regarding the new pillar, international banking and financial services is of course to ensure in the next few years the turnaround of certain of our activities, like in Romania and ensure more profitability in Russia and we make money in Russia but we want to make more money. So we will re-leverage on all the efforts we are currently implementing in the different countries and on the synergies.

And regarding global banking and investor solutions, we will take advantage of also synergies with our different client franchises and of course ensure a smooth integration of Newedge.

We will further – of course work on our cost reduction program and it’s also a commitment. And let me conclude that realizing our view should lead to this target of being able to deliver at the end of 2015, a business model which can reach in a sustainable way 10% return on equity.

Last word, we can now give you the date of our Investor Day. It will be the 13th of May 2014. Why the 13th of May is that we are going to celebrate our 150th birthday in 2014. This group was created exactly I think on the 4 May, 1864. And I felt that having a strong correspondence between beginning of this celebrations and this Investor Day which we dedicated to our future would be a nice symbol not just for our shareholders but also for staff.

Now we are all open to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions). We have the first question from Delphine Lee from JPMorgan. Madam, please go ahead.

Delphine Lee – JPMorgan

Yes, hi. So two questions on my side. First of all, we start with legacy assets. So I understand the non-investment grade will grow below EUR 1 billion and that will release more capital in Q4. But just wondering if there is more to come in 2014 or if you have a target in absolute terms given that by the end of the year there will be limited impact from CDO 10 release. So what can we expect actually for 2014 onwards?

The second question is on litigation. Now that you have EUR 700 million collected provisions. How comfortable are you in terms of the charges or fines which have been reported by the press regarding the rate fixing probe by the EU? Thanks.

Frédéric Oudéa

Okay Delphine, I will leave Philippe to answer the first question and will take the second one.

Philippe Heim

Yes. Good morning Delphine. So I conform that in fact the end of this quarter, we have only in our portfolio EUR1 billion of non-investment grade legacy assets. So we intend to reduce further the amount of those toxic assets by the end of this year. Bear in mind, we expect as mentioned before in our capital planning, we expect positive gain on capital trajectory of roughly 10 basis points. So it will lead us basically to 10% quarter one. Down the road we will [inaudible] of efforts. What we expect is that and I repeat myself, we have no negative P&L impact from the legacy asset portfolio down the road starting 2014, so this is a very good news. And so we have no significant exposure to CDO and MBS.

Frédéric Oudéa

And if you wish in terms of further deliveries, it will be marginal given the size of the portfolio. So don’t expect too much additional capital relief. It will not be very significant at this size of the group but I think again we have done the job and at much quicker pace than expected actually even at beginning of this year.

And now regarding the litigation, let me just say, I will not comment on any specific forgery, we are commenting in our document of reference, the different litigation which are currently underway. What we decided end of last year is to start to provision on the collective basis, seeing that risk increasing for the industry as a whole and as a way of prudence.

We decided to add EUR200 million this quarter. What I can say is I feel that we can be adequately provisioned at the end of this year if you wish, while at the same time confirming this dividend and paying in cash instead of even considering a payment potential script upfront. So I mean we are able, I think to support this kind of things. It’s clear today that the whole industry as a whole is growing risk and we will have to live with it.

But the idea is you wish to try to have to really to complete the provisioning as much as we can in 2013 and then see how it goes to 2014, 2015 for processes which can take some time, a lot of time. Next question.

Operator

We have a question from Kinner Lakhani from Citigroup. Sir, please go ahead.

Kinner Lakhani – Citigroup

Yes, hi. So, I have three questions. Firstly on CIB. It felt like there is reasonable amount of cost pressure in terms of the cost income ratios whether we look at it sequentially or year-over-year. I know you mentioned there was some tax in there. But just wanted to get a sense or what might be driving that, are you investing so on?

Secondly on the Newedge plan, I completely understand the strategic side of it. So I wanted to better understand the financial side of it, in terms of what value do you think you can extract from this franchise on a two to three year view? Clearly the contribution in terms of earnings has been relatively limited.

And thirdly just on the corporate center, so we have seen the context of the level of Central bank deposits that you have previously talked about. I just wanted to get some context on what then happen to the liquidity drag in future years and whether there is any change in guidance? Apologies I missed the comment on that.

Frédéric Oudéa

Okay, Kinner, three questions but it’s an exception. Now I turn to Didier for first one and then Philippe for the question on corporate center.

Didier Hauguel

Yes, hi, Kinner. So on the CIB on the cost side, let’s say first just to mention or to mitigate the increase that you have seen, you should remember that last year we allocated from the corporate center to business lines the systematic tax at the end of the Q4 for the full year. So this means that this year actually we have that on a quarterly basis. So this partly explains let’s say some of the increase but not all of it.

The rest I’d say, yes we have, so let’s say, one set of the increase come from taxes, one set from investments, i.e. we are investing on businesses, we have also invested on regulatory changes like the DSA, DMA program which getting some traction. So definitely, we have increased the [high teens] development on that side. And the last is as Peter would say across the board, if we to restate Q2 and Q3 from especially from the taxes we will be up by 1%. So I would say it’s maybe more this trend that has to be looked at.

On the cost income despite the fact that the revenues were down compared to last year we can say that the cost to income for the first nine months is at 62% and is in line with overall our targets and very well compared to our peers. I think that we continue to be disciplined and we will adapt further to any headwinds it was come on the top line.

On the Newedge rationale, well you mentioned that you were convinced from the strategic point of view, the complement team will boost client products, also adaption to the new regulatory environment. I will not comment too much into detail income of financial targets especially because at this stage we just announced sequential growth negotiation Credit Agricole. We will have now to get to know together a little bit more, even if it was a 50% subsidiary that’s still little bit outside of the group.

And so some of the synergy will come from cross selling in the clientele. As we said that we would have a lot of capability to hit some of our existing clients base with the profit line coming from Newedge. It will be also a way for us to match some of the platform that come under commodities.. Just to mention on the commodities we already share a lot of clients for on the trader, across the trade financing and also the trade derivatives on the other side. So clientele like [Hitachi Guha, like Metro] for example are already accounts of the two franchises. And of course in terms of general platform, we would have some synergy in terms of investments as rather than build two platforms we will get only one and also I think that with part of large group we will provide some scale between Newedge and the CIB side.

So that’s what I can tell you. We will come back to you further when we will get more grip on the acquisition.

Frédéric Oudéa

Thank you, Didier. Philippe, on the corporate center.

Philippe Heim

Yes, on the corporate center. So hi, Kinner. So basically you are right, that we have got on corporate center as an fact the impact of the liquidity buffer. So that we can be in the compliance. So we are pretty over on the situation. So we started in Q3 to optimize our balance sheet and we decided to reduce the amount of cash we have available in Central bank. So this is the policy we will pursue to optimize the mix inside the balance sheet.

I can’t give you precisely an impact. What I can tell you is that it is consistent with our guidance to reduce our [ATG] drag, embedded is a negative NB of corporate center of EUR1 billion for this year. We wanted within two years to reduce the liquidity drag by roughly EUR200 million. So this is consistent with this objective. This is so much I can say at this stage.

Frédéric Oudéa

Thank you. Next question.

Operator

We have a question from Guillaume Tiberghien from Exane. Sir, please go ahead.

Guillaume Tiberghien – Exane BNP Paribas

Hi, its Guillaume Tiberghien. I have got a question on the business of [Facon]. I’d like to know what’s your exposure now I think you had 1.5 billion of exposure at the end of last year. And I’d like to know how much provisions you have done already? I was wondering whether the provisions you are doing for Facon is included in what you call litigation. Thank you.

Philippe Heim

Guillaume I will not comment that much. Just say you can imagine that the business has not grown. So it has not grown. In terms of provisioning, it is part of the $700 million. We will not comment on the level of provisioning that we set aside on this, it’s part of the business, it’s part of the whole goal, I’d say exposure that we have in the EUR 700 million in unallocated provisions.

Frédéric Oudéa

And we will of course at the end of year assess again announce for that litigation which is public as well as for others.

Next question please.

Operator

We have a question from Flora Benhakoun from Deutsche Bank. Madam, please go ahead.

Flora Benhakoun – Deutsche Bank

Yes, Good afternoon. My first question is on the cost of income in Russia. The costs were particularly low this quarter. You are very close to your 60% cost income target. So I wanted to know if the cost cutting that you have achieved in that division is very sustainable and whether we can expect you will be at 60% very soon?

And then the second question is just to come back on the provisioning you do on the legal reserves. So I understand the comments you made earlier that you would not pay dividend in cash if you have any big doubt on your potential fine. But should we nevertheless expect some more legal provisions next year? Thank you.

Frédéric Oudéa

We will leave Didier to answer the first question and I will answer your second question.

Didier Hauguel

Our objective is to be on the recurrent basis at 60% in 2015. We had the good quarter and thus we are making good progress on the turnaround of it. And we had the significant improvement in the increase of NBI and the control of cost with the Rosbank. That being said, I think that the nine months number is more reflective of the situation of the platform than the very satisfactory Q3 result in that respect.

Frédéric Oudéa

Okay. Perhaps on the litigation. Let me again explain that you know the litigation that we made public, our litigation coming from the past. So, firstly I’d like to highlight by essence the new risk culture that we have implemented now for the last few years is precisely there, not to generate new litigation but of course again as you know the risk has increased and have to say for the industry as a whole.

So, the first thing I’d say preventing new litigations to come from existing activities and first we have to deal with the past, I don’t think there is it is that exposed compared with others but nevertheless as we have said there are few litigations that you know we have communicated.

And I that would be very prudent in terms of impact. What’s we have done against this provisioning, the collective provisioning is by essence because is based on precisely things where we have no necessary, no certainties not such strong visibility. So, what I’d like to do is achieve that process fundamentally at the end of 2013 as I said. And then see how each process goes.

So, we might have in 2014’15 to present to banks perhaps additional impact depending on how things are moving forward. But the idea would be that fundamentally try to achieve these collective provisioning which has impacted the last few quarters. That if you wish the way I see it, let’s see how things are evolving. But as you said, the fact that we confirmed the dividend in cash means that we are comfortable and we would do what is needed in the fourth quarter to remain comfortable with the level of provisioning and this different litigation.

Next question.

Operator

We have a question from Jean Francois Neuez from Goldman Sachs. Sir, please go ahead.

Jean Francois Neuez – Goldman Sachs

Hello there. I just have two questions. One on the tax rate guidance. I think this quarter the tax rate looks lower and in general we will see low tax rate CIB this quarter in core activities and also the nice write-back more than usual in the corporate center as well I think in terms of percentage at least. So I just wonder what’s your normalized tax rate if you could update us on that.

And my second question was on CIB, where we can see high double-digit returns in CIB on Basel III which is very impressive, actually I can’t think of many banks which are close to you let alone even double-digit and I just wondered whether you could maybe elaborate on your secret source in this division and also essentially talk about what you said in your previous introductory remarks that you are expecting some pressure from some of the derivative and that’s the reason why you want to include Newedge in your setup more fully?

Thank you.

Frédéric Oudéa

Okay. So, I will leave Philippe answer on your tax question, Francois. And then Didier on the CIB.

Philippe Heim

Yes, Good afternoon. Jean Francois So I will be quick just to mention tax rate is bit low this quarter but it is not representative of that of yearly basis. The tax rate this quarter is quite distorted by exceptional items. First the evolution of our online abilities and we will have this year some exceptional events like disposal of subsidiary. So globally we confirm that our tax rate should be roughly between 20% and 25%, this is a normal rate.

Frédéric Oudéa

On the CIB.

Didier Hauguel

On the CIB let’s I think that the high return that we are able to deliver and actually is a result of the mix of activities that we have in the franchise. Philippe was mentioning that at the beginning. I think really Philippe, equity derivative is highly profitable business in which that say regulatory changes are of the limited impact and so we’ll carry on investing and developing in this business.

On the structure financing business let’s say what we have achieved over the last eighteen months which is to reduce the balance sheet consumption reduce the funding let’s we have roughly EUR 40 billion of funding consumed by structured financing and commercial lending which is almost most of our competitors is aiding to the fact that the consumption in equities is limited while at the same time the sale there is shift in certain key activities – to get more fees and with also a very competitive cost income.

So overall that also combined with low cost of risk at this point of the cycle explain the high return that we have in the structure financing activities and so what we want to carry on developing let’s say is and Newedge is part of the answer and Newedge will be more at a cost income play then a return because return on the equity will be limited. But we will have at the same certain equities to continue to be very disciplined enough cost income adjustments so that I say for more traditional productivities it will not impact on the medium term that’s returns that we can extract from equity derivatives, structured products, certain cost fixed income and off-course as structure financing.

Frédéric Oudéa

And Francois just to come back to my comments I think that what regulators want is much less opaque financial system and fundamentally I think they would like to see a very, very significant reduction if not the disappearance of a lot of OTC products in the fixed income side I mean CDS and interest rate derivatives if you know because all these products all these contract by natural on OTC cannot allow again regulators to a certain extent to have such a clear view on the overall risk and the interconnection of the systems.

And I feel think that what they would like to see more is as you know clearing platforms which could concentrate simpler more standardized products enabling the clients to hedge. Also this kind of risk but in the way where they can see the concentration of risk and reduce the interconnection.

And as we see that is a strong trend we feel that investing again in what is already a strong player on this clearing business and which we’ll develop further while extracting all the synergies that Didier has mentioned on the client base make sense. So we are not investing for the next quarter we are not investing for even 2014. We are investing for the next five to ten years taking a view on where the regulators want to drive the financial sector and I feel that they are willingness is pretty strong in that.

Next question.

Operator

We have a question from Kiri Vijayarajah from Barclays. Please go ahead.

Kiri Vijayarajah – Barclays

Yes good afternoon guys. I noticed your operational risk is unchanged this quarter and actually falling year-over-year but I wonder if you continue to take litigation charges through the P&L. Is there a risk that your operational risk will actually start creeping up?

Frédéric Oudéa

I don’t think the operation risk had changed that much. I don’t have in mind the figures and we have actually a – it moved from EUR 43 billion risk weighted asset to EUR 40 billion and knowing that they were changes of parameters and we stop also certain activities. So I mean there was basically no change and I have no clue at this stage of whether it would have an impact I don’t think so but I mean it’s part of the modeling. I mean we’ll see and we will integrate the different losses as we do on a regular basis in the model.

But I don’t think you should have in mind major changes.

Kiri Vijayarajah – Barclays

Okay

Frédéric Oudéa

Next question.

Operator

Yes. We have a question from Jon Peace from Nomura Securities. Sir, please go ahead.

Jon Peace – Nomura Securities

Yeah hi so my three questions was first of all in terms of capital ratios you are obviously comfortably above minimum standards. But as you think as some of the uncertainties out there over the next year like the asset quality review and the stress test. And what sort of the buffer on the core tier one of the leverage ratio do you intend to operate at?

And then the second question I guess is a fairly recurring one if you could give us perhaps the non-performing loans in Russia and Romania and could you just remind the ROE targets you had for those countries in the medium term and what the equity base is in each of those? Thank you.

Frédéric Oudéa

Yeah let me see and I’ve not changed my mind. I think that we’ve minimum level of 8% for Societe Generale, we belong to the category number one of global cities. Looking precisely at buffers to absorb any kind of stress scenario I can see there we have to be above or at 9.5% fully loaded. So with 10% we have clearly a buffer and I’ve not changed my mind from that perspective.

And DAQR does not change at all I think we have a very good portfolio, yes it is gone I don’t see a concentration in problematic situation in these real sectors. Regarding the return on equity I’ve always set target of 15% return for Romania and Russia end of 2015 we’ve now met this allocation of capital at 9% and this has not changed. We stand at 10% currently for SG Russia so we need to increase that and as you know Romania is still at break evens like just like in [inaudible] then we are here to improve definitely.

Jon Peace – Nomura Securities

Excellent and just I think about the leverage ratio....

Operator

We have a question from Alex Koagne from Natixis. Sir, please go ahead.

Alex Koagne – Natixis

Yeah hello this Alex Koagne from Natixis. Four question from my side. I was just wondering whether it is possible to ask the breakdown of your RWA in the CIB between corporate financing and capital market? And one question on the liquidity reserve. You have decided to reduce the size. I am just wondering what makes you comfortable to do so because one of your competitor was just saying that it is too early to do so because they are waiting to have more clarification on while liquidity ratio – through three by the end of the year before starting to redeploy the liquidity reserve? Thank you.

Frédéric Oudéa

I will let Philippe answer on the risk weighted asset but may I just say. I would like you to take into account what they would call the formidable transformation of the liquidity profile of the group. When I say this and it’s – look at the loan to deposit in France look at the evolution of deposits versus credits in our international retail activities. Look at the way the businesses in specialized financing are financing themselves independently.

And may I say I consider that 2014 will be a year where you will see a same kind of trend. I mean in 2014 I don’t think that credit will increase very much in France and I think that people will still save money. So at least for 2014 I will more or less similar trends. And we are going to further pursue this policy of having strong balance between the deposits and credits in each of our subsidiary of such forms. And also more and more independent funding.

So I think with, on top of that the quality of the Association [inaudible] I felt as we’ve said actually and mid 2013 it was time to start to adapt our balance sheet and avoid keeping dozens of billions of euros in central banks. And I think that there is really no issue with that. On the risk rated asset.

Philippe Heim

Yes, Alex so the question was regarding the liquidity.

Frédéric Oudéa

No I mean a risk rate asset on capital markets are ,,,.

Philippe Heim

Okay so usually we are not disposing these but on page seven as you can see that we have EUR 13 billion of capital at 10% with 130 of FWA and it seems to be all FTB even the split between global markets and financing product banking and custodies for at least you have the global market.

Frédéric Oudéa

Okay. And what I would like to really to insist on and I think that actually that second quarter and third quarter results of fixed income reflects that we have now a model which is very, very client driven. We’ve limited positions and I think that’s why we were not hit by certain movements on interest rate in May or emerging markets at...

Next question.

Operator

We have the question from Stephan Stalman from Autonomous. Sir please go ahead.

Stephan Stalman – Autonomous Research LLP

Good afternoon two questions please. The first one is one of your major mutual competitors today said that he wants to run his banking group in France with a 13% common equity tier one ratio by 2015. I guess it could be company specific considerations but do you think there is any pressure for you from this competitor target?

And the second question is if I look at your Basel III capital disclosure you actually benefited from a lower capital deduction this quarter. It was lower by about EUR 0.9 billion that is deductions and other prudential adjustments. Could you may be provide a bit more color as to what happened there? Thank you.

Frédéric Oudéa

I think you know the deductions again is related to the reduction of legacy assets. Bear in mind that when we say legacy asset is both positive impact in risk rated asset but also and probably predominantly for securitization product, direct deduction so I mean as we sell non-investment grade and heavily capital intensive portfolios currently.

Off-course it has to increase the capital without any off-course impact on our businesses. So that’s really ,if I had to single out a few very positive off-course outcome and achievements this year or you think particular the sale disposal of these very, very capital intensive products been able to achieve.

I have no comment to make on this 13% I think it’s not related to any regulatory request or at least it might be specific to them but not for us so I think again 10% is for us and absolutely adequate level.

Next question.

Operator

We have a question from Nick Davey from UBS. Sir Please go ahead.

Nick Davey – UBS

Yes good afternoon everyone. And two questions and please. And first one if I could ask you just to talk a little bit of more around the revenue base in the financing business. And you mentioned obviously 17% down year-on-year. I guess my question will mainly focus on the volumes and what you are saying as far as balances in the financing book because if I look at your credit risk rated assets it seems to be falling about 15% year on year in that business. So I just wondered some of your peers are beginning to talk about a bottoming out of volumes in those operations.

Do you think it’s too early for us to hope for that. It seems to that they are still contracting Q3 versus Q2? And could you help, may be your run rate begins to outperform the loan book contraction in that business at some point, if this disintermediation business plan begins to take group?

And the second question please on the total capital ratio where you are now talking about aiming for 14% to 15% total capital ratio from here starting at 13% today. Please just a few more thoughts around the structure that 14% to 15% from here and the earnings impact we should be aware of as far as cost of that incremental capital? Thank you.

Frédéric Oudéa

Okay Nick I will first turn to Didier Valet and then Philippe. Didier?

Didier Valet

On the financing and advisory well definitely I mentioned at the beginning of this year I was expecting something like $0.5 billion a quarter and let’s say we are definitely below this in the third quarter Q2. We were there if we exclude tax co-pay. So we were outside 10. So why such reduction first in Q2 we have a large one-off transaction with other fees which we are not able to get this quarter. Second let’s say we have a small impact of the weakness of dollar of the business, dollar denominated and which has an impact on the overall performance. And that’s beyond that also in that certain activities could have done a little bit better this quarter.

So that’s where we are. In terms of trends let’s say what we are doing now in the new model is definitely to rebuilt the business as a portfolio activities but still extremely limited in terms of growth due to the model to push to distribute more assets but as you know it’s an engine that is not because you are producing that all the deals already drawn in term of their own validation.

So it takes some time. So there is some lag effects but we will get that across 2014. So definitely it’s a quarter where we could have done little bit better but we also impacted by no large transaction and also weakness of the dollar.

Frédéric Oudéa

Thank you Philippe on the structure of the capital.

Philippe Heim

Yes, on the structure of capital. So as mentioned before so we stand right now in terms of total capital at 13.1% so a long term and medium term objective is to be between 14% to 15%. By this sense we are not far. As we know what we need to do is to add to our cost, so as to have our tier one ratio at least 1.5% and then we can add tier 2 instruments. So in fact it will be let’s say not opportunistic choice we of course we are mindful of cost where we should already end of August in additional tier one instruments.

We in fact we’ll burn the market with these kinds of instruments. So the objective is clear is to between 14 to 15 we may add some tier one cushion to that. We may also be back on the market after [14month] so we will figure out what is the best mix but let’s say as objective is pretty clear between 14 and 14.

Nick Davey – UBS

Okay thank you.

Frédéric Oudéa

Okay thank you and next question.

Operator

We have the last question from Pierre Chedeville from CM-CIC Securities. Pierre, please go ahead.

Pierre Chedeville – CM-CIC Securities SA

Hi, good afternoon I have one question regarding your third pillar in the French retail banks and my first question is you seemed very active regarding the buyback of some minorities interest that we have seen. What do you think of the Boursorama in that case. And marginally we have seen that Boursorama has not had big success in foreign countries so far. And I was wondering if it was because it was not integrated or a little bit more integrated with existing network.

And I wanted to know if you have made any survey regarding the potential development of online banking in Romania, in Czechoslovakia and Russia for instance where you have network and where you could make some partnership or integrate Boursorama – with Boursorama in case of future squeeze out of Boursorama in the future? Thank you.

Frédéric Oudéa

And Pierre I will ask firstly Jean-Luc Parer to comment for example on the market like the Czech Republic there is already a certain development of digital and multi-channel business. On Boursorama there is no specific plan on the minorities. On the France business I mean we like for a lot of assets sometimes both before the crises and with the change the regulation economic environment we had to write off some goodwill.

May I say that what is particularly it’s not so easy and except I would say may be ING the capacity to develop cross border online business model has been very difficult. So you need to still take into account the specificities of each market and it takes time before you establish your brand that’s something which on the very competitive in countries where everywhere it’s pretty competitive it takes time.

And I will ask [inaudible] to comment on what we want to achieve generally speaking on the digital transformation in France. And again perhaps after that Jean-Luc to comment on how we could leverage on synergies technology, marketing scale et cetera in other countries.

Unidentified Company Representative

Yes I think you have a slide on the page seven in the presentation showing what is the strategy of French network in Internet and mobile-banking in France and I think for both brands it means for both [inaudible] and Oklahoma we are very active in digital banking business and this is the way how we are dealing with the change in the customer value and so far we are I would say successful in allowance of few product like believe like innovations through twitter and we have some rewards like the best client relationship bank for – in October 2013 and we are confident in the way or we can continue to deal with the three brands in the digital banking in the way how to change the relationship with our clients.

Frédéric Oudéa

Thank you Jean-Luc.

Jean-Luc Parer

Yes just a quick current about you mentioned at Czech Republic and Romania but basically obviously we have been drawing relations on using the experience of what has been done with Boursorama and may be others. But basically the digital on the lying on internet banking has been developed within the existing branch of it’s quite extremely powerful you can do everything everywhere in this countries paying your bills connect with the bank et cetera et cetera.

Then the tools are clearly existing and are very much used in these countries.

Frédéric Oudéa

Okay so Pierre if you wish, so we can again buy. There is link between France and the international banking activities to try to disseminate expertise marketing approaches. But if I may say don’t expect something spectacular to happen and in regarding Boursorama itself there first focus off-course on the front banking market where they are doing very, very well in terms of capturing new clients and also pursue their developments outside France. Knowing again as I said that it takes time to establish branch.

Thank you. If there is no more questions let’s end this conference call I don’t have a particular conclusion to say rather than just to say that we will meet with you off-course for the end of year results. And as I’ve said put that already on your diary, the 13th of May. We don’t know yet where we will have that but might have a nice dinner may be in our head office in Paris I think it could be a nice place to have before the beginning of the investor day. So please put pencil that in your diary and we will welcome in Paris at that time.

Thank you very much for your attention good bye.

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