SocGen Considers Shutting $4.7 Billion Prop-Trading Unit

(Bloomberg) -- Societe Generale SA is considering closing its proprietary-trading unit, people familiar with the matter said, a week after French rival BNP Paribas SA decided to shut its operation.

SocGen executives are reviewing the future of the Descartes Trading division, which makes risky bets with its shareholders' funds, said the people, who requested anonymity as the details are private. The bank may decide to close the unit as the business has struggled to make profits, the people said.

The Paris-based lender shuttered the unit's Hong Kong desk towards the end of 2018 and has pulled back from some trading strategies, the people said.

A spokeswoman for SocGen in Paris declined to comment. The bank posted an update Thursday that showed group trading revenues probably slumped 20 percent in the fourth quarter, when a spike in market volatility caught many traders by surprise.

A Grim Quarter

France's third-largest bank said “challenging” conditions led to a decline of about 10 percent in annual revenue from its markets units, sending its shares down as much as 5.4 percent. Its troubles add to a grim quarter for French banks, traditionally renowned for their prowess in complex derivatives and now struggling to navigate increasing risk as the trade war and slowing economies whipsaw markets.

Regulators in France allowed the country's banks to persist with proprietary trading in the wake of the credit crisis, even as the U.S. moved to ban the practice because of the risks it can pose to financial stability. Yet these units had to contend with new rules, costs and higher capital requirements, while volatility in 2018 has forced executives to wonder whether it's worth dedicating any resources to the activity.

Crosstown rival BNP Paribas, the biggest French bank, has decided to close its prop-trading unit, Opera Trading Capital, Bloomberg reported last week. The division struggled to make a profit last year amid market volatility, people familiar with the matter said. Both Paris-based banks had to set up walled-off units housing prop trading to comply with post-crisis French rules.

Limited profits and big consumption of capital make it difficult for the banks to keep their prop-trading desks and many have closed in the past decade, said Samuel Lopez Briceno, a senior analyst at Vanguard Asset Services. “U.S. banks have already done that a lot, driven by Volcker regulation. European investment banks tend to lag them."

A typical bank trader acts as a middleman between buyers and sellers of assets, charging them commissions on each transaction and seeking to profit from swings in prices. By contrast, a prop trader doesn't have clients and instead uses the bank's funds for bets on the market. The practice can be lucrative -- but risky.

Descartes, named for the 17th-century French philosopher, had 4.1 billion euros ($4.7 billion) of assets at the end of 2017, according to filings. The unit had 377 million euros of capital, equal to about 4.5 percent of SocGen's funds for global-markets and investor services activities, the filings show.

The bank has reviewed the performance of Descartes several times since its creation, the people said. The unit, which has staff in Paris and London, has made less than 1 million euros in accumulated profits between 2015 and 2017, according to filings.

The issues at Descartes compound the problems facing SocGen Chief Executive Officer Frederic Oudea, who is seeking to restore investor confidence after the bank paid about $2.6 billion in penalties last year to solve several major probes.

To contact the reporters on this story: Fabio Benedetti-Valentini in Paris at fabiobv@bloomberg.net;Donal Griffin in London at dgriffin10@bloomberg.net;Stefania Spezzati in London at sspezzati@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Marion Dakers, Ambereen Choudhury