SocGen shares slide after cautious 2016 profit outlook

Societe Generale posted lower-than-expected fourth-quarter net income on Thursday after it set aside €400 million for litigation costs and warned it may not hit a 2016 profit target.

Shares in France’s second-biggest bank slumped 13 per cent after the results. Some analysts said the fact it did not confirm its return on equity (ROE) target for 2016, along with the higher-than-expected provisions, had hit its shares.

“The increase in capital requirements and the economic and financial environment mean that it is not possible to confirm the ROE target of 10 per cent,” the bank said in a statement.

The bank’s ROE for 2015 rose to 7.9 per cent from 5.3 per cent.

European banks have had a rough start to 2016 with share prices at multi-year lows as investors worry about contagion in the financial sector from falling oil prices and the slowing Chinese economy.

Societe Generale is cutting its retail network costs and restructuring loss-making Russia operations in a bid to improve profitability but, along with other banks, it is struggling to hit its targets as litigation and regulatory costs rise.

“The revision of the 2016 return on equity target is considered as a profit warning,” a Paris-based trader said.

The bank also disappointed the market with the provisions and higher-than-expected costs, although it sought to reassure investors about its exposure to oil and gas sector.

Conservative provisioning

SocGen has been conducting an internal investigation into dollar transfers made on behalf of entities based in countries subject to US sanctions, linked to talks with the US Office of Foreign Assets Control.

The French bank said total litigation provisions stood at €1.7 billion by the end of 2015, but did not offer a precise explanation for the increase in the fourth quarter.

Credit Agricole, France’s third-biggest listed bank, agreed last year to pay $787 million for moving hundreds of millions of dollars through the US financial system in violation of sanctions against Iran, Sudan, and other countries.

In 2014, BNP Paribas paid a record $8.9 billion in penalties and pleaded guilty to criminal charges over sanctions-busting.

SocGen’s net profit rose to €656 million in the fourth quarter from €549 million a year ago, below the average forecast in a Reuters poll of €663 million. Net profit for 2015 rose 50 per cent to €4 billion, the highest since 2010.

French retail banking had a strong quarter thanks to rising loan demand and deposit growth, while sluggish international retail and lower fixed-income trading pushed overall revenue down 1.2 per cent to €6.05 billion.

Analysts had expected a decline of more than 5 per cent.

The bank’s net cost of risk rose about 30 per cent to €1.16 billion. It said it had made “conservative provisioning on a European player” and had “cautious provisioning on oil and gas”.

Reuters