OREANDA-NEWS. Revenue growth was challenging at Societe Generale (SG; A/Stable/a) in 2Q16, says Fitch Ratings. However, lower impairment charges across most divisions and a broadly unchanged cost base yoy helped mitigate the yoy fall in the core divisions' operating pre-tax profit (excluding the corporate centre), which decreased by 12% yoy to EUR1.8bn. The group revised down its guidance for its full-year so-called cost of risk, which includes loan and securities impairment charges and litigation provisions, to below 50bp of gross loans for the full-year 2016, against a previously communicated range of between 50bp and 55bp.

Excluding corporate centre revenues, which include seasonal treasury results and non-recurring revenue, the group's core businesses generated EUR6.4bn revenues in 2Q16, 4% lower yoy and dragged down by a 10% yoy fall in Global Banking and Investor Solutions (GBIS), which had an extraordinarily strong 2Q15. Reported net income increased 8% yoy to EUR1.5bn, benefiting from a EUR662m capital gain on Visa disposal. Excluding revaluation of own debt, DVA and the Visa capital gains, net income was down 18% yoy to EUR938m, resulting in a 8.1% return on equity for the quarter.

We expect domestic retail banking revenues to continue to be challenged, reflecting the persistent negative effect on net interest margins of low interest rates. In 2Q16, International Retail Banking and Financial Services (IBFS) was the largest contributor to operating pre-tax profit with EUR662m (36% of the group excluding the corporate centre).

Operating pre-tax profit in French retail banking fell 12% yoy to EUR592m in 2Q16 as net revenues decreased by 2% yoy (excluding provisions for home purchase savings schemes), reflecting a 3% yoy decline in net interest income, which continued to be negatively impacted by lower deposit margins and mortgage renegotiations in 2015. These effects were partly offset by higher service commissions and marginally higher gross loan balances following a qoq increase in housing loan origination. Operating expenses rose by 3% yoy, reflecting costs associated with branch closures in 2016, predominantly for smaller branches in urban areas. SG expects its cost base in French retail banking to remain broadly unchanged yoy in 2016.

Revenue in GBIS was fairly resilient but 10% lower yoy due to a strong 2Q15, particularly in advisory and equities trading. As a result, operating pre-tax profit for the division fell by 34% to EUR576m as operating expenses remained broadly flat. Global Markets and Investor Services, which house the group's sales and trading operations, delivered resilient performances in fixed income, currencies and commodities and prime services. Loan impairment charges fell qoq in GBIS but remained fairly elevated at 29bp of gross loans in 2Q16, as the cost of risk increased more than threefold yoy to EUR98m in financing and advisory. Following its previously communicated strategy, the group intends to redeploy capital resources into financing activities.

Asset and wealth management revenues were resilient and benefited from the integration of Kleinwort Benson, despite the adverse impact of lower transactional revenues and declining markets.

Revenue performance was more positive in IBFS (+4% yoy at constant scope and exchange rates), driven largely by financial services to corporates, which benefited from strong organic growth in vehicle fleets and the acquisition of the Parcours Group. Revenues in international retail banking rose by 3% yoy at constant scope and exchange rates, reflecting good performance in Western Europe, including consumer finance, but also Romania and Russia. Insurance revenues were 8% higher yoy (at constant scope and exchange rates), partly reflecting higher premiums on personal protection and property/casualty insurance.

SG's fully-loaded Basel III CET1 ratio remained at the lower end of GTUB peers and was unchanged qoq at 11.1% at end-2Q16. The acquisitions of Parcours and Kleinwort Benson, along with RWA growth during the quarter, were fully funded by internal capital generation (after dividend accrual), leading to a stable capital position. The bank's Basel III Tier 1 leverage ratio was 10bp lower qoq, at 3.9% at end-2Q16, reflecting balance sheet expansion and deposit inflows following the UK's referendum on EU membership towards the end of the quarter. Part of the deterioration was therefore seasonal and we expect the bank to continue delivering on its target leverage ratio of between 4.0% and 4.5%.

SG targets a CET1 ratio between 11.5% and 12.0% by end-2018 all else being equal. We expect the bank to deliver on its targets based on its solid earnings generation capacity. SG stated that it intends to publish its Pillar 2 Requirement in December 2016 following the 2016 Supervisory Review Evaluation Process (SREP), which is relevant for the calculation trigger of maximum distributable amounts. SG's phase-in CET1 ratio remained unchanged at 11.5% at end-2Q16, 175bp above its 9.75% 2016 requirement. SG intends to maintain a buffer of 100bp to 150bp above its regulatory capital requirements, but we cannot exclude the possibility that this guidance may change should SREP requirements applicable to 2017 be materially different than for 2016.

SG's liquidity coverage ratio continued to increase to a high 152% average in 2Q16, reflecting the bank's efforts to increase liquidity buffers in New York, which also partly explains the shift in the composition of the bank's liquid asset buffer away from high quality liquid assets and towards central bank deposits. We expect the group to continue adapting to evolving local liquidity requirements.