OREANDA-NEWS. Fitch Ratings has affirmed Societe Generale's (SG) Long-term Issuer Default Rating (IDR) at 'A' and its Short-term IDR at 'F1'. Its Viability Rating (VR) has been affirmed at 'a' and its senior debt at 'A'/'F1'.

A full list of rating actions is available at the end of this rating action commentary.

The rating actions have been taken in conjunction with Fitch's periodic review of the Global Trading and Universal Bank (GTUB), which comprises 12 large and globally active banking groups. Fitch's outlook for the GTUBs is stable as we expect the stable outlook for the groups' commercial banking and wealth and asset management businesses in 2016 to mitigate pressure on earnings from capital markets activities, particularly in fixed income trading.

As globally active universal banks, the 12 GTUBs are among the most affected by evolving regulation, which is bringing capital and resource constraints to some businesses. This means that business models are being adjusted. Specific changes and their timing vary by bank. In the medium term, we believe that the GTUBs with the strongest franchises in their core businesses, sound business models and clear strategies are best placed in this environment, and these company profiles are an important rating factor for many of the GTUBs.

KEY RATING DRIVERS
IDRS, VR AND SENIOR DEBT
The ratings reflect SG's solid and performing franchises in selected businesses. This includes French retail banking, European commercial banking, euro-denominated bond activity and equity derivatives. SG's business model generates cross-selling opportunities: the bank has, for instance, established itself as a leading player in the euro corporate bond market, where it has natural synergies with its large French corporate customer base.

While SG's corporate and investment banking franchise, which generated 38% of 9M15 operating profit excluding the corporate centre, introduces some earnings volatility and uncertainty to the group's overall profitability, the bank has demonstrated its ability to generate satisfactory returns in this activity. SG's operating profitability has been improving notably as performance at its specialised businesses has more than compensated the still modest risk-adjusted profitability in its international retail banking business.

Similar to peers, SG's profitability will likely continue to suffer from low interest rates and moderate demand for credit in its domestic retail business, although the recent uptick in corporate lending was confirmed in 3Q15, and the housing loan portfolio rose 5% yoy at end-3Q15. We believe that SG's profitability targets (10% post-tax ROE and 62% cost-income ratio by 2016) are achievable but will continue to depend on the performance of the bank's global markets business, the main contributor to earnings volatility, and developments in higher-risk markets such as Russia.

SG's ratings also factor in a weaker asset quality than similarly rated peers. In line with other French banks, SG's higher impaired loan ratio than peers partly reflects the bank's policy in its domestic market not to write off impaired loans before they are fully resolved, which contrasts with a generally swifter write-off policy at US banks. Nonetheless, this is also due to poor asset quality in some of its international retail banking operations. The bank's unreserved impaired loans remained material at end-June 2015 (24% of its Fitch core capital), but this is decreasing as SG's capitalisation improves. Additionally, tail risk involved in holding unreserved impaired loans that depend on the realisation of collateral should decline with the gradual improvement in the outlook for several countries where SG is active, notably France.

SG's poor profitability in international retail banking largely relates to the bank's Russian operations, where it posted a EUR157m net loss in 9M15. While uncertainties for the Russian economy remain, we believe this exposure is manageable for the group as it represented a moderate 2% of its exposure at default at end-September 2015, and SG has been cautiously managing down its exposure.

A key positive driver for the VR is management's continued focus on strengthening the bank's liquidity and capital, which are sound. SG reported a 10.5% fully-applied common equity tier 1 (CET1) capital ratio and a 3.9 % CRR leverage ratio at end-September 2015. Both are in line with those of similarly-rated European peers. SG revised its capital targets in 2Q15 to a 4%-4.5% leverage ratio and close to an 11% fully-applied CET1 capital ratio by end-2016.

The Stable Outlook on SG's Long-term IDR reflects our expectations that the bank will continue to generate adequate risk-adjusted profitability and report sound capital and liquidity.

SUPPORT RATING AND SUPPORT RATING FLOOR
Similar to peers, SG's Support Rating and Support Rating Floor reflect Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the French sovereign in the event that the group becomes non-viable. In Fitch's view, the EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) are sufficiently progressed to provide a framework for resolving banks that is likely to require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support.

In the EU, BRRD has been effective in member states since 1 January 2015, including minimum loss absorption requirements before resolution financing or alternative financing (eg, government stabilisation funds) can be used. Full application of BRRD, including the bail-in tool, is required from 1 January 2016.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid securities issued by SG are all notched down from its VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably.

Subordinated lower Tier 2 debt is rated one notch below the VR for loss severity, reflecting below-average recoveries.

Legacy Tier 1 securities are rated four notches below the VR, comprising two notches for high loss severity relative to average recoveries, and two further notches for non-performance risk, reflecting that coupon omission is not fully discretionary.

Low trigger contingent capital Tier 1 instruments are rated five notches below the VR. The issues are notched down twice for loss severity, reflecting poor recoveries as the instruments can be written down well ahead of resolution. In addition, they are notched down three times for very high non-performance risk, reflecting fully discretionary coupon omission.

SUBSIDIARY AND AFFILIATED COMPANY
The Long-and Short-term IDRs and Support Rating of SG's French specialist car financing subsidiary Compagnie Generale de Location d'Equipement are based on an extremely high probability of support from SG, if needed. Compagnie Generale de Location d'Equipements's Long-and Short-term IDRs are equalised with those of SG and its Long-term IDR has the same Outlooks as the parent's. This is because we view this entity as a core subsidiary given its importance to and integration with its parent.

Societe Generale Acceptance N.V., SG Option Europe and SG Structured Products Inc. are wholly owned financing subsidiaries of SG whose debt ratings are aligned with those of SG based on an extremely high probability of support, if required.

RATING SENSITIVITIES
IDRS, VR AND SENIOR DEBT
Negative pressure on the ratings could come from a decline in risk-adjusted profitability, potentially arising from asset quality erosion, or if the bank fails to maintain sound capital and leverage ratios in line with similarly rated peers. The VR would also come under pressure if conduct risk leads to a sizeable unexpected loss materially eroding capitalisation.

Fitch does not expect to upgrade SG's ratings in the near term, and an upgrade would be contingent on a substantial strengthening of the bank's company profile and a material improvement in asset quality ratios.

SUPPORT RATING AND SUPPORT RATING FLOOR
An upgrade to SG's Support Rating and upward revision to its Support Rating Floor would be contingent on a positive change in the sovereign's propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital ratings are primarily sensitive to a change in the VR of SG. The securities' ratings are also sensitive to a change in their notching, which could arise if Fitch changes its assessment of the probability of their non-performance relative to the risk captured in the issuers' VRs. This may reflect a change in capital management in the group or an unexpected shift in regulatory buffer requirements, for example.

SUBSIDIARY AND AFFILIATED COMPANIES
The ratings of Compagnie Generale de Location d'Equipements are sensitive to changes in SG's IDRs and could also be sensitive to changes in its strategic importance to the rest of the group.

Societe Generale Acceptance N.V., SG Option Europe and SG Structured Products Inc.'s ratings are sensitive to the same factors that might drive a change in SG's IDR.

The rating actions are as follows:

Societe Generale
Long-term IDR: affirmed at 'A'; Stable Outlook
Short-term IDR: affirmed at 'F1'
Viability Rating: affirmed at 'a'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Commercial paper: affirmed at 'F1'
Long-term debt: affirmed at 'A'
Short-term debt: affirmed at 'F1'
Market-linked securities: affirmed at 'Aemr'
Lower Tier 2 notes: affirmed at 'A-'
Hybrid capital instruments: affirmed at 'BBB-'
Additional Tier 1 capital: affirmed at 'BB+'

Societe Generale Acceptance N.V.
Market-linked guaranteed notes: affirmed at 'Aemr'
Senior guaranteed notes: affirmed at 'A'
Short-term guaranteed notes: affirmed at 'F1'

SG Option Europe
Senior notes: affirmed at 'A'/'F1'

SG Structured Products Inc.
Senior guaranteed notes: affirmed at 'A'

Compagnie Generale de Location d'Equipements
Long-term IDR: affirmed at 'A'; Outlook Stable
Short-term IDR: affirmed at 'F1'
Support Rating: affirmed at '1'