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A French Bank Hits The Road


French tourists strolling through Prague's historic center may get a sense of d?jà vu when they pass a branch of Komercni Banka, the Czech Republic's third-largest bank. From the square red-and-black logo to the slick posters and brochures advertising consumer loans, life insurance, and Internet banking, the branches look like clones of French bank Société Générale (SCGLY). That's no coincidence. Since taking a 60% stake in Komercni two years ago, Société Générale has carefully rebuilt the bank in its own image. "Why reinvent the wheel when we have a successful business model?" says Alexis Juan, a veteran Société Générale retail-operations executive who now heads the Czech bank.

It's all part of 139-year-old Société Générale's new plans to become a global retail-banking power. To some, the humdrum business of providing loans and checking and savings accounts may not seem like a supercharged growth vehicle. But SG, France's No. 2 bank by market capitalization, is proving otherwise. By aggressively cutting the cost of its retail operations while peddling an ever-growing range of services to customers, it has become one of Europe's best-performing banks. Its retail strength was showcased most recently on Nov. 6, when Société Générale exceeded most analysts' estimates by reporting that net income during the first nine months of this year rose 79% over the same period last year, to $2.1 billion. "Our results reflect four or five years of work, focusing on customer satisfaction," Chief Executive Daniel Bouton says.

STARTING YOUNG

The key to Société Générale's retail success is getting customers to sign up for not only bread-and-butter banking services such as mortgages but also other financial products, from car insurance to mutual funds. This kind of cross-selling has long been the holy grail of retail bankers, but France is one of the few countries where it has caught on with customers. The average French Société Générale client, for example, buys more than seven different products. Other French banks, such as BNP Paribas, are adept at cross-selling, too. But, says Cedric Durant des Aulnois, a London-based analyst at Lehman Brothers Inc. (LEH), "Société Générale is the best. They're especially good with younger people, capturing them when they're young to cross-sell products later on." Indeed, customers in France stay with SG an average 18 years.

Now Société Générale wants to export this formula to emerging markets. Komercni is one of four former state-owned banks it has acquired over the past four years across Central and Southern Europe, including Banca Romana pentru Dezvoltare in Romania, SKB in Slovenia, and Expressbank in Bulgaria. This month, SG will open two branches in Moscow, reentering the Russian retail-banking market for the first time since the Bolshevik Revolution. It is also investing in holdings in the Middle East and Africa, some of which date from French colonial times. Revenues from retail banking outside France are expected to top $1.8 billion this year, 10% of Société Générale's total sales -- up from 8.5% three years ago. And thanks to relatively high interest rates in emerging markets, aftertax return on equity from foreign retail operations averages more than 30%. That's about twice the figure for the bank overall and better than the 20% return from French retail operations.

Komercni, SG's biggest foreign acquisition to date, offers a case study of this strategy. After plunking down $1.36 billion for majority control of the now publicly listed bank, Société Générale brought in a team of 30 French managers for a top-to-bottom overhaul of the bank, which operates in Slovakia as well as the Czech Republic. They used radio and television ads to plug mortgage, consumer, and small-business loans, boosting loan volume more than 60% over the past year. They also introduced new products, including a popular line of life insurance, dubbed Vital. Today, Komercni's 1.2 million customers buy an average 3.4 financial products, twice the rate when SG took over. And nearly half the bank's customers use online and telephone services that the French introduced. "I can check my account through the Internet from my home computer. For transactions, I use their telephone service," says Vojtech Cerny, 22, a customer at a Komercni branch near Prague's Wenceslas Square.

Société Générale also has squeezed costs hard, cutting 1,000 positions from Komercni's workforce of 9,600. An additional thousand job cuts are planned over the next year. French managers centralized functions such as accounting and information technology. Under its former state ownership, CEO Juan says, "this bank was a kind of Afghanistan. Each regional manager had his own territory and his own power." Such efficiencies have sliced operating costs 25% since early 2002. The improvement mirrors SG's experience in France, where return on equity from retail banking has risen from 16.3% to 20% over the past four years. The savings have come even more quickly at Komercni, Juan says, because unlike France, the Czech Republic does not have strict anti-layoff laws.

BIG-BIZ REBUFF

Societe Generale still faces some bumps on the path to international growth. There's no guarantee that other foreign acquisitions and restructurings will go as smoothly as in the Czech Republic. Even at Komercni, the bank's nine-month results reported on Oct. 31 saw a 2% decline in profits, to $224 million, on sales of $600 million. Record-low interest rates are partly to blame. But because Czech interest rates are still higher than those in Western Europe, Komercni has been hard-pressed to attract big corporate customers. For example, Sazka, the privately owned Czech lottery company that is mulling a loan to build an ice-hockey stadium, says it would rather borrow in euros because the rates are lower.

Moreover, there aren't any choice banking properties left to buy along Europe's eastern and southern fringes. Germany's HVB, for example, owns Poland's third-largest bank and has more than 3 million customers across Central and Eastern Europe. Where opportunities still remain, the ratio of risk to return is much higher. Russia, although potentially a bigger market than Eastern Europe, is extremely volatile. To limit its exposure, Société Générale initially will offer a tiny range of services there, such as checking accounts and small consumer loans. At the same time, the bank says it sees strong growth potential in Africa, where it has long-standing retail operations in Egypt and in several North and West African countries. But most of these holdings are so small the bank will be hard-pressed to reach peak efficiencies.

Still, Société Générale sees plenty of growth opportunities ahead. "Sure, there are risks," says Didier Alix, head of retail banking. "But the returns are better, too." French vacationers can expect to see the bank's distinctive logo popping up more and more often. By Carol Matlack in Paris, with Sean Gallup in Prague


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