SocGen's Traders Deliver an Invaluable Lesson

(Bloomberg Opinion) -- Global banks, fitter than they've ever been, were going to be the doctors of the economy during the Covid-19 pandemic, Societe Generale SA Chief Executive Officer Frederic Oudea said confidently just a few weeks ago. For now, the French lender is looking more like a patient.

Derivative bets that backfired and a surge in bad-loan provisions pushed SocGen into its first quarterly loss in almost eight years. Now it's having to scramble to deliver yet more cost cuts in 2020. Ending the company's overreliance on volatile trading won't be easy.

SocGen lost 200 million euros ($218 million) on equity derivatives linked to shares and corporate payouts, the bank said on Thursday, confirming a report by my Bloomberg News colleagues. Essentially, the bank's bet went wrong because companies scrapped their dividend payments as economies shut down. The firm's equities-trading revenue — typically its biggest source of trading income —  was effectively wiped out as counterparty defaults and higher reserves for its structured products also took a toll.

Oudea put this all down to the “extraordinary dislocation” of the financial markets in second half of March. BNP Paribas SA, another big French bank, reportedly lost money on similar trades. Yet Wall Street competitors including JPMorgan Chase & Co. and Citigroup Inc. managed to make more money in equity derivatives amid the mayhem of March. This is a reminder of how wild market swings can play out very differently between even the most sophisticated investment banks. Structured trades — complex financial instruments that use derivatives — don't give you a business that you can rely on every quarter.

There was better news for SocGen in fixed income, where revenue rose 32%, in line with peers. While that cushioned some of the trading blow, there was more pain elsewhere.

Charges on two fraud-related cases — SocGen is one of the banks exposed to troubled Singapore oil trader Hin Leong Trading — and provisions for the probable buildup of bad loans cost the firm 820 million euros. All told, it posted a 326 million-euro loss, compared to a profit of 686 million euros this time last year.

To protect profitability for the rest of 2020, the bank is eyeing another 700 million euros of net savings. It will deliver these by banning travel and events, which is not so difficult at present, and by cutting bonuses and freezing recruitment. The bank has promised not to make any new job cuts until September, however, which does limit its room for maneuver on reducing expenses during this particular economic crisis.

At least the bank's capital has held up. At 12.6%, its key common equity Tier-1 ratio still gives SocGen a comfortable buffer before it faces restrictions on how it can use its capital. Even if the ratio fell to 11%, and there were further bad-loan provisions of as much as 5 billion euros this year, that buffer should be preserved, the bank said.

The trouble with SocGen, as I've argued before, is that under Oudea — the longest-standing CEO among Europe's top lenders — it has made strategic missteps that aren't easily reversible. Crucially, having scaled back in asset management, it is less diversified than its rivals. The bank's traders showed in the quarter that they can't always be relied upon, and pressure is building on SocGen's commercial and consumer banking divisions because of rock-bottom interest rates and recession. With more bad loans on the way, SocGen is showing exactly where its weaknesses lie.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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