Remember the days when being a European bank was a sales and marketing pitch? Nowadays, you have to answer for what’s going on, on your home turf.
“When bad things happen in Europe all the French banks have tended to get dumped in the same basket,” said Ashley Wilkins, deputy CEO for Societe Generale, Asia-Pacific. “But we’ve been deleveraging fast; in fact, two-thirds of our 2013 balance sheet reduction target in corporate and investment banking was met by end of Q3 2011.”
“Why now?” asked Wilkins. “We take the view that it’s only going to get tougher [to deleverage], so do it now, do it early.”
That means Societe Generale’s corporate and investment bank has shed €40 billion ($53 billion) as of the end of September 2011 and will achieve a €30 billion to €40 billion reduction in risk-weighted assets by 2013.
Of course, banks across the world have been deleveraging since the financial crisis. European banks are expected to have to write down some of the $270 billion of goodwill from pre-financial crisis purchases. In mid-November UniCredit, Italy’s biggest lender, took a $10 billion impairment charge after a series of acquisitions at home and in Eastern Europe. Austria’s Erste Group Bank took a charge of €939 million ($1.26 billion) on its businesses in Hungary and Romania in October.
Societe Generale’s third-quarter profit fell about 31% from last year thanks in no small part to a €239 million euro write-down related to Greek government bonds and a €200 million charge on some consumer-finance businesses. The French lender decided not to pay dividends for 2011 so that it could shore up its capital position.
To put that in perspective, however, Societe Generale’s bigger rival BNP Paribas reported about a 72% drop in third-quarter profit, as the company set aside more than €2 billion in Greek sovereign debt provisions.
Specialists say that European banks could unload up to €3 trillion of loans to raise capital ratios and meet new rules. For many banks, that means they will cut back in project finance and rethink client relationships.
“A number of businesses are under review,” said Wilkins. “Shipping, aerospace, real estate, particularly if they have heavy US dollar use, are all under review. But we’re still focused on our core franchises, such as equity derivatives, natural resources and energy and infrastructure.”
“And we remain committed to project finance and commodity trade finance in the natural resource and energy space — in fact we think that it represents around 75% of our growth potential, and that’s powering away.”
Wilkins pointed to deals completed this year, such as the Mong Duong II Power Project in Vietnam, which is expected to be the nation’s biggest private sector power plant. In total, 12 foreign banks were on that project, including BNP Paribas, Credit Agricole, HSBC, ING, Mizuho, Natixis, SMBC, Societe Generale, Standard Chartered, Unicredit, CIC of France, and DZ of Germany. South Korea’s Eximbank and the Korea Trade Insurance Corporation are providing commercial guarantees and political risk cover, together with the lenders.
But SG has also been involved with other deals during the past year, acting as lead arranger and bookrunner for a revolving credit facility in favour of Arcadia Energy, the Singapore subsidiary of Arcadia Group, and mining financing for Newmont Nusa Tenggara in Indonesia. And Wilkins pointed to closed mandates in Australasia, such as the $14 billion financing for PNG LNG. He also noted that the bank continues to be focused on advising, “which doesn’t use up liquidity”.
He said there are other projects in the natural resource and energy space under way — particularly in Australasia. “[They are] too early to announce, but I promise our ambition in the natural resource and energy space is unaltered.”
Realistic
But he remained cautious too. “I can’t sit here and say that Asia isn’t going to be affected. It will be.”
Europe, he said, will have low or no growth for the next five years. America has “big, deep-seated problems and next year will be pretty gruesome in the run-up to the various elections worldwide.” That means Asia has to lead the growth.
And so Societe Generale is building its business in Japan and Korea, as well as Singapore and Malaysia, including the expansion of its platform in the Japanese government bond market after obtaining primary dealer status there earlier this year and it has recently opened representative office in Malaysia.
But in addition to focusing on markets with potential, Wilkins said the way deals are structured and placed in the market is changing. Indeed, the conditions may make it easier to do things that were difficult in the past, such as getting institutional investors involved in more projects. “Before, institutional investors used to have a default view of buying treasuries or sovereign debt. Now, they are looking beyond that,” he said.
Of course, Societe Generale isn’t alone with this playbook. But what matters is which banks will be in the position to build, selectively underwrite and have the credibility to attract investors. “If you are in a power drive situation for 2012, you are going to be in a good place.”
