SocGen reboots Asia banking

Structuring equity and infrastructure exposures for Asian banks and institutional investors underpins Société Générale’s RoE goals.
Philippe Heim, SocGen CFO
Philippe Heim, SocGen CFO

Société Générale has capital to allocate to business growth and is keen to increase its loan book for Asian bank and investor clients, said Philippe Heim, the bank's Paris-based chief financial officer.

He said increasing SocGen’s corporate and investment banking (CIB) activity in Asia is an important part of the executive committee’s goal to achieve a 10% return on equity for shareholders, up from the 8.3% RoE achieved in fiscal 2013.

Many banks were humbled in the wake of the financial crisis and Heim acknowledged that SocGen is a “mid-sized” global financial institution.

“We are not in the same league in terms of size as JP Morgan, Deutsche Bank or Citi,” Heim told FinanceAsia while visiting Hong Kong. “But we are efficient and profitable,” he said, citing 2013's core CIB post-tax RoE.

But if pre-crisis SocGen sought vainly to rival all-singing, all-dancing peers, today it could be argued that other banks are starting to look more like SocGen, carving out lucrative niches and avoiding costly adventures in other fields.

Boosting the share price
European banks have become more focused entities as they exit or pare back equity capital market businesses (in the case of Royal Bank of Scotland) and/or fixed income (Barclays, Credit Suisse, UBS) and commodities trading (Barclays, JP Morgan, Morgan Stanley).

Only Deutsche Bank retains an ambition to be a universal bank – at the cost of diluting shareholders, forcing it recently to seek a €1.75 billion capital injection from Qatar – while in the eurozone, BNP Paribas remains a big competitor.

SocGen’s stock price values it at 0.8x price to book. That puts it in line with its French competitors but lags other rivals. “The share price is still cheap,” Heim said. “It should converge [with the industry norm] if we meet our 10% RoE target for the next three years.”

The CIB division, incorporating global banking and investor solutions, is at the heart of the growth plan: it must achieve a RoE of 15% (that includes its Lyxor investment platform and private banking operations). “From June 2011 to last year, we cut our cost base,” Heim said. “Now we must stay fit.”

No execution build for bonds
For some time now, SocGen’s Asia business has been focused on equity derivatives, structured products and infrastructure financing. It maintains a flow business in fixed income that is modest in size, geared to providing a global capability in rates, credit and foreign exchange for major European clients.

Asia Pacific CEO Hikaru Ogata affirmed the bank has no major plans to expand that. Fixed income accounts for about 25% of the capital market division’s revenues in Asia, well below industry norms; with other banks ramping up IT budgets to compete for shrinking revenues in a fixed-income space that is going electronic, there is little point to putting capital behind executing trades of Asian bonds, he said.

However, the firm formally acquired Newedge in May and intends to leverage the broker’s derivatives clearing business as more fixed-income instruments are forced to move from bilateral transactions to exchange-traded, or centrally cleared, infrastructure. This is SocGen’s play on emphasising its post-trade, clearing and collateral management business and letting other banks fight over execution.

Similarly, although retail and wealth-management operations play a big role in SocGen’s eastern European, Russian and African operations (and retail in France is a huge part of SocGen’s business), the firm does not have a plan to invest heavily in this area for Asia Pacific.

“You are limited to where you have, for lack of a better word, intimacy,” Heim said.

Expanding Asia CIB
But in Asia corporate banking will expand. Heim cited research by the World Bank predicting the world will spend €60 billion ($90 billion) over the next 15 years on infrastructure, largely to meet its resource and energy needs – and most of that spending will be in Asia Pacific.

“In 2011 we had to scale back from Asia and deleverage but now we are adding more people and more capital,” Heim said. “It is time to return.”

Whereas the bank’s model has been to distribute the loans it originated, removing them from its balance sheet, it will now keep more of them on the balance sheet, because it can allocate more capital. That implies less securitisation and more traditional lending, along with the bank’s known capabilities as a financial engineer.

Ogata told FinanceAsia that while SocGen has developed corporate relationships in Asia for the past few years, it is now just beginning to tap new segments among Asian financial institutions, such as regional banks in Japan.

For example, Japanese banks have a huge appetite to earn better yields by diversifying their asset holdings. This reflects a shift in their own lending activity abroad. Many Japanese banks no longer want to keep buying Japanese government bonds. Structuring exposures to infrastructure or other alternative assets can prove attractive.

“They’ll take a stable 50 basis point yield,” Ogata said. “Even 30 basis points for one year is very good when the 10-year government bond is yielding only 60 bps.”

Over time China will also be an important market, the firm's executives hope. SocGen had initially believed the way into the market was to set up an onshore lending business. This proved difficult, not just because of competition or the bank’s internal problems, but because of local regulation that, for example, jacked up foreign banks’ loan-to-deposit ratios. Smaller players couldn’t attract enough deposits to make the business worthwhile.

Today SocGen’s China business is cross-border.

Ogata noted that around half of the world’s letters of credit are written for Chinese counterparties. Local banks can’t finance all of the needs of Chinese companies, nor can they meet the entirety of the country’s infrastructure demands.

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