Societe Generale SA (GLE) fell in Paris trading, reversing early gains, as investors questioned whether France’s second-largest bank can sustain the trading performance that bolstered earnings in the first quarter.
Societe Generale dropped 89 cents, or 4.9 percent, to 17.14 euros by 3:42 p.m. in Paris, erasing gains of as much as 4.8 percent, on concern Europe’s sovereign-debt crisis and the possible election of Socialist Francois Hollande as president of France on May 6 will hurt results.
“Turbulence in the euro zone has already restarted and this may damage SocGen’s results and their capacity to set aside profits to bolster reserves,” said Jacques-Pascal Porta, who helps manage 500 million euros ($655 million) at Ofi Gestion Privee in Paris and doesn’t own Societe Generale shares. The company “benefited from stability” in the markets in the first quarter, he said.
Societe Generale reported today a 20 percent decline in first-quarter net income to 732 million euros, beating the 597.5 million-euro estimate of 12 analysts surveyed by Bloomberg as revenue from trading fixed income, currencies and commodities rose 39 percent to 993 million euros.
Draghi See Risks
Shares in European banks, which rallied in the first quarter, spurred by 1 trillion euros in European Central Bank loans, dropped last month as Spain’s worsening economic data revived the continent’s debt crisis. European stocks trimmed gains today after ECB President Mario Draghi told reporters in Barcelona that the economy is subject to “downside risks,” and that tensions in some sovereign debt markets may “damp growth momentum.”
Societe Generale and BNP Paribas SA (BNP), its larger French competitor, began reducing leverage at their corporate- and investment-banking units last year as capital requirements and funding costs increased.
“The priority will be to build the capital base” over the next two years, Chief Executive Officer Frederic Oudea said in an interview with Bloomberg Television today. “We had in the first quarter a kind of rebound after the last six months of 2011. April has remained very decent given a lower, a worse environment.”
Societe Generale’s corporate- and investment-banking profit fell 41 percent to 351 million euros from 591 million euros a year earlier, the bank said. The unit, which is cutting 1,580 jobs worldwide, returned to a profit after posting a 482 million-euro loss in the fourth quarter. While fixed income, currencies and commodities revenue rose, sales from trading equities declined 26 percent to 655 million euros.
First-quarter fixed-income sales can’t provide a gauge for the business’s quarterly revenue this year, said Didier Valet, head of the corporate- and investment-banking unit. “Don’t multiply it by four,” Valet said on a call with analysts today. “The start of the year was very good.”
The bank booked 226 million euros in losses from selling 4.9 billion euros of corporate loans as part of the deleveraging plan, it said on its website. Societe Generale’s earnings were also burdened by a 181 million-euro accounting charge stemming from a rule that requires banks to book a loss if the price of their debt rises.
While investment-banking sales rebounded from the fourth- quarter as the ECB’s three-year loans unlocked fixed-income markets, Deutsche Bank AG Chief Executive Officer Josef Ackermann and Credit Suisse Group AG’s CEO Brady Dougan said that conditions deteriorated last month. BNP Paribas, led by CEO Jean-Laurent Bonnafe, is slated to release earnings tomorrow.
Societe Generale intends to reach a core Tier 1 capital ratio between 9 percent and 9.5 percent in 2013, based on Basel III standards, in part by cutting risk-weighted assets at the corporate and investment bank, or CIB, unit, it said.
European banks are struggling to maintain profitability levels as they cut assets. Societe Generale’s return-on-equity may fall to 5.7 percent this year from 6 percent in 2011 and 9.8 percent in 2010, before rising to 7.2 percent next year, according to the average estimate of 10 analysts surveyed by Bloomberg last month. That measure of profitability was at 6.4 percent for Societe Generale in the first quarter.
“There will be a cost of transformation that we are happy to bear, and which might decrease the return on equity,” Oudea said. “But this transformation is needed precisely to be able to deliver, beyond 2013, a return on equity which will be acceptable and at a right level for our shareholders.”
Societe Generale’s ROE may rise to between 10 percent and 12 percent “after the crisis,” Chief Financial Officer Bertrand Badre told analysts.
Societe Generale, like BNP Paribas, retreated from dollar- linked businesses such as aircraft financing as U.S. short-term funding evaporated last year. Societe Generale is more than halfway in cutting as much as 40 billion euros in risk-weighted assets at the CIB unit, Badre said.
France’s presidential election may also have implications for banks’ profits. Hollande, who called finance his “biggest adversary,” leads incumbent Nicolas Sarkozy in opinion polls.
France’s four largest listed banks may see their 2013 earnings dented by 10 percent under Hollande’s economic program, estimated Jean-Pierre Lambert, a London-based analyst at Keefe, Bruyette & Woods Ltd. Hollande pledged to force banks to split retail and “speculative” investment operations, to tax all financial transactions and to impose a 15 percent increase in levies on bank profits.
French banks have been embroiled in Europe’s debt crisis partly because of their holdings of private and public debt in Greece, Portugal, Ireland, Italy and Spain. Although Societe Generale doesn’t operate any branch networks in Italy and Spain, it owns Athens-based Geniki Bank SA, an unprofitable consumer banking network.
Societe Generale’s international consumer-banking profit, including markets such as Russia, the Czech Republic and Egypt, rose to 45 million euros from 44 million euros a year earlier, the bank said. First-quarter profit at its French retail-banking division was 326 million euros, a 7.4 percent drop from a year earlier, the bank said.
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