(Bloomberg) -- Societe Generale SA's backlog of litigation for past misconduct eclipsed demand for structured products and better results from consumer banking in eastern Europe.
France's third-largest bank increased provisions in the second quarter by 300 million euros ($354 million), the bank said Wednesday, citing unspecified legal disputes. SocGen's 963 million-euro settlement with Libya in May was already covered and didn't hit the bottom line or its capital position.
French lenders have become some of Europe's best performers in recent years, drawing on their prowess with derivatives used to structure products, where Chief Executive Officer Frederic Oudea had a stint in his early years at SocGen. While that business helped shore up trading revenue during a quiet market, the bank was forced to set aside more funds for alleged past misconduct, including a U.S. probe into violations of trade sanctions.
“We have these litigations, we'll try to put that behind us as quickly as possible,” Oudea said in an interview with Bloomberg Television. For now, “there is no significant development” on any outstanding legal cases, he said.
Higher legal charges contributed to a 28 percent drop in second-quarter net income to 1.06 billion euros, in line with the average of six analyst estimates compiled by Bloomberg. The stock declined as much as 4.9 percent to 47.71 euros and was trading down 4.1 percent to 48.12 euros as of 12:38 p.m. local time, among the worst performers on the Bloomberg Europe 500 Banks Index.
“It's not a particularly bad set of results but expectations had gone pretty high,” said Jonathan Fearon, who helps manage 280 billion pounds ($331 billion) at Standard Life Plc and doesn't own SocGen shares. “There's not enough to move the stock on today.”
Capital Strength
The bank's common equity Tier 1 ratio, a measure of financial strength, rose to 11.7 percent at the end of June from 11.6 percent three months earlier, supported in part by the initial
public offering of its car-leasing unit ALD SA.
Societe Generale's capital level “would have been flat ex-disposals,” said Omar Fall, an analyst at Mediobanca Securities in London who has a hold rating on the stock. “There's no capital raising risk here but the dividend outlook is not straightforward.”
Chief Financial Officer Philippe Heim described the bank's capital level as “very comfortable” during a call. The lender reiterated that it aims to pay half of its profit as dividends.
Equities, Bonds
Societe Generale slightly trailed expectations in equities and beat them in fixed income, contrary to the pattern at BNP Paribas SA and HSBC Holdings Plc. Those banks reported some of the smallest drops in trading revenue during a weak quarter across the securities industry.
“The economic perspectives are better, so I think we can still see activity on the corporate side” and “on the markets we have had very low volatility also because probably people were waiting for some elections,” Oudea said. Flow and volume may improve now that European countries including France have new governments in place, he said, without being more specific about revenue prospects. Oudea is working on targets for 2020 that he plans to present in November.
SocGen's equity-trading sales fell 3.3 percent to 549 million euros, compared with the 559 million-euro average of analyst estimates compiled by Bloomberg. Revenue from buying and selling bonds, currencies, commodities and other debt products fell 6.8 percent to 586 million euros, less than estimated.
“The results were tainted by several exceptional elements,” said Alex Koagne, an analyst at Natixis SA who recommends buying SocGen shares. “The mix is difficult to read and the market doesn't like that.”
Robust revenues from structured products failed to offset by “soft cash and flow derivatives” in the equities business, Societe Generale said. Demand for products structured on fixed income was sustained but activity around rates declined, it said.
Russia, Romania
Societe Generale's profit rose 11 percent after stripping out exceptional items, including gains from acquisitions and disposals.
Profit from international retail banking and financial services jumped 30 percent to 568 million euros as the Russian business returned to profit and net income from Romania more than doubled. In Russia, its biggest emerging market, net income reached 31 million euros in the second quarter, with provisions “substantially lower,” the bank said.
Societe Generale gets less than 40 percent of its revenue from global banking and investor solutions, a business that includes trading as well as private banking and lending to large corporations. French retail banking generates more than 30 percent, as does revenue from financial services and international networks.
At home in France, revenue contracted under pressure from record-low interest rates. Income from domestic consumer banking fell about 2 percent to 2.05 billion euros in the second quarter, as the unit's profit slumped 11 percent.
--With assistance from Caroline Connan and Chris Malpass
To contact the reporter on this story: Fabio Benedetti-Valentini in Paris at fabiobv@bloomberg.net.
To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Cindy Roberts
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