OREANDA-NEWS. Robust performance in Societe Generale's (SG; A/Stable/a) international retail banking and financial services (IBFS) division contributed to overall sound earnings in 1Q16, says Fitch Ratings. This was despite continued moderate revenue declines in French retail banking and challenging market conditions for the investment bank, which also affected peers.

The bank confirmed that it expects loan impairment charges to account for 50bp to 55bp of gross loans in 2016. Loan impairment charges in 1Q16 declined by 9bp yoy to 46bp, largely driven by an improvement at IBFS.

The group's 1Q16 adjusted pre-tax profit fell 18% yoy to EUR1.0bn, excluding fair value of own debt and debt valuation adjustments and a Euribor fine refund of EUR218m. The decline was predominantly caused by a 48% yoy increase in bank levies to EUR427m, partly related to the first-time contribution of certain countries to local resolution funds, notably in the Czech Republic. Excluding the first quarter impact of bank levies as well, adjusted pre-tax profit fell more moderately by 6% to EUR1.5bn. Overall, the bank delivered a sound 9.8% return on equity in the quarter, adjusting for the quarterly impact of bank levies.

SG's revenue fell by 2% yoy at constant scope and exchange rates to EUR6.2bn in 1Q16. This was largely due to a 13% yoy decline in global markets and investor services, which houses the bank's sales and trading operations. The decline was less pronounced than for some global trading and universal bank (GTUB) peers, but highlights the effect of muted client activity on capital markets business, which also negatively affected SG's asset and wealth management unit. SG announced that it is targeting a further EUR220m cost savings in its capital markets businesses by end-2017, adding to an existing EUR850m savings target. Disciplined cost management will be important to mitigate rising regulatory expenses, and SG now targets a 0% to 1% increase in operating expenses in 2016 (excluding the Euribor fine refund).

French retail banking's performance was helped by a 22% yoy decline in loan impairment charges to EUR180m in 1Q16, as operating profit rose by 8% to EUR479m. As a result of persistent pressure on net interest income, revenue excluding non-recurring items and provisions for home purchase savings schemes dropped by 2.2% yoy, despite resilient fee income. Net interest income continued to be affected by mortgage renegotiations in 2015 and tighter deposit spreads. SG expects to limit revenue declines in French retail to 2% in 2016, as a service fee on current accounts will be effective from 1 July 2016, and the bank is increasingly concentrating on sustaining fee-based private banking and insurance revenue. Loan growth continued both for business clients, benefiting from recovering corporate investment, and for mortgage lending albeit at a slower pace than in 2015. Further branch reductions and digitalisation of processes should also help underpin a more flexible cost base.

Pre-tax income in global banking and investor services dropped 30% yoy to EUR498m in 1Q16, predominantly due to loan impairment charges rising almost threefold yoy (EUR140m in 1Q16) largely related to oil and gas exposures. SG does not expect meaningful incremental provisions in the sector, and reaffirmed its guidance that loan impairment charges in the division should come closer to 25bp of gross loans over the year (1Q16: 41bp). Net of the EUR98m quarterly effect of the bank levies and the Euribor refund, the division generated a 10.1% return on equity. Excluding these items, underlying operating expenses fell by 1.9% yoy, but we expect largely front-loaded EUR160m costs to achieve EUR220m savings by end-2017 to weigh on expenses in the near term.

Revenue in global markets and investor services fell 13% yoy to EUR1.5bn but remained the second-largest generator of group revenue after French retail banking. Contrary to most peers, the bank saw a 17% increase in sales and trading revenue from fixed income, currencies and commodities, which partly reflected the sound performance in its rates business. However, this did not offset a 37% fall in equity trading revenues, led by weak demand for structured products, where the bank has a leading franchise in equity derivatives. The latter, coupled with weak transactional revenues, resulted in a 21% revenue fall in asset and wealth management, despite net asset inflows in the private bank and Lyxor.

Performance in SG's international retail banking and financial services (IBFS) division was robust, as pre-tax profit more than doubled yoy to EUR491m in 1Q16 and accounted for 35% of the group excluding the corporate centre (+10 percentage points yoy). Continued business growth in international retail, insurance, equipment finance and fleet management, partly helped by acquisitions, underpinned solid revenue growth (+5.4% yoy to EUR1.8bn in 1Q16). IBFS's results were also largely driven by Russia's improved revenue (+48% yoy to EUR138m) and lower loan impairment charges (EUR58m in 1Q16, a 40% yoy reduction), as loan origination increased relative to 1Q15 but focused on corporate rather than retail clients.

SG's capitalisation remained at the lower end of GTUB peers, but we expect the bank's diversified businesses to contribute to strong internal capital generation, which was seasonally weak due to the impact of bank levies during the quarter. The bank's fully-loaded CET1 ratio increased by 20bp qoq to 11.1% largely on retained earnings, while the Basel III Tier 1 leverage ratio stood unchanged at 4.0%. On a phased-in basis, SG's CET1 ratio stood at 11.5%, 175bps above its 9.75% 2016 requirement pursuant to the Supervisory Review and Evaluation Process (including 25bp in respect of the systemic risk buffer). SG intends to maintain a buffer of 100bp to 150bp above regulatory capital requirements, which will stand at 10.5% by end-2019. The bank targets an 18% total capital ratio by end-2017, which factors in issuance of between EUR3.5bn to EUR4bn per annum of Tier 1 and Tier 2 instruments.