OREANDA-NEWS. November 10, 2015. Fitch Ratings says that Societe Generale's (SG; A/Stable/a) 3Q15 results benefited from improved revenue in French retail banking and lower loan impairment charges (LICs) in its international retail banking business.

SG's performance in capital market activities was weak in 3Q15 as is the case with most of its global trading and universal bank (GTUB) peers. This dented SG's operating profit and highlighted the bank's reliance on such business to meet the group's profitability targets through the cycle.

The results have no immediate impact on SG's ratings.

SG reported EUR1.5bn 3Q15 pre-tax profit adjusted for changes in the fair value of own debt (EUR447m gain in 3Q15) and for a combined EUR123m charge for debit and credit valuation adjustments. This was up 11% yoy and down 19% qoq, excluding similar items in comparative quarters and a EUR200m litigation provision in 2Q15. SG reported 8.6% post-tax ROE in 9M15, excluding the items mentioned above as well as provisions for litigation and home purchase savings schemes, a notable way off the bank's 10% target for 2016.

SG reported a 15% yoy rise in its French retail banking operating profit (excluding provisions for home purchase savings schemes), which generated 40% of the group's 3Q15 operating profit excluding the corporate centre. Part of the increase was driven by lower LICs, which, at 42bp of customer loans in 3Q15 on an annualised basis, were slightly below the bank's 2016 45bp-50bp target. In addition, revenue in the division continued to improve in 3Q15, notably due to higher lending volumes - up 3% yoy at end-3Q15. This compares well with performance seen at most other French banks.

While most of the increase in the loan book related to housing loans (+5% yoy at end-3Q15), new loans for corporates rose 23% yoy, which, if it continues, could partly offset future pressure on the net interest margin. The latter still benefited from the cut in the regulated savings rate in August 2015 and a high level of early repayment penalties on housing loans (booked under interest). But continued housing loan repricing at a faster-than-average pace is likely to lead to pressure on lending margins in the coming quarters.

Performance in SG's global banking and investor solutions business, which includes its global markets, financing and advisory and wealth management businesses, declined after a solid 1H15, as market conditions in 3Q15 were difficult in a seasonally weaker quarter. The division's pre-impairment operating profit was also down 31% yoy at constant scope and exchange rate, as revenue in the global market and investor services business, the main profitability driver of the division, declined 16% yoy.

Revenue in fixed income sales and trading was particularly weak and declined 23% yoy in 3Q15 due to difficult market conditions, notably in rates and credit. The decline is in line with most, but not all, GTUB peers, some of which managed to benefit from a pick-up in their rates and foreign exchange businesses. Revenue was somewhat more resilient in equities sales and trading, which declined 6% yoy, broadly in line with peers, as higher volatility in 3Q15 led to good volumes in flow products, partly offsetting lower performance in structured products.

The financing and advisory business continued to generate satisfactory performance, with good control over costs - 64% cost-income ratio in 3Q15. Similar to some of its peers, SG has been using its balance sheet more intensively in this business, as loans increased 12% yoy. LICs can be very volatile in this business, and trended upward in 3Q15 but remained modest at 17bp of customer loans in 3Q15, moving towards SG's through-the-cycle 25bp target, after several quarters of particularly low levels.

The insurance and financial services businesses, which are part of the SG's international retail banking and financial services (IBFS) division, continued to report steady growth in operating profit in 3Q15. They together contributed a fifth to the group's operating profit excluding the corporate centre in 3Q15. Revenue increased 8% yoy in insurance as appetite for life insurance products gained traction in France, where the bank's outstandings stood at EUR82bn at end-3Q15 (up 4% yoy). In financial services to corporates, the cost-income ratio improved further to 48% in 3Q15 (52% in 3Q14) as both fleet management and equipment finance posted higher revenue and cost rose at a slower pace.

The international retail banking part of IBFS is less profitable than the insurance and financial services to corporates activities, but this business benefited a decline in LICs both yoy and qoq.

SG's main challenge in international retail banking remains Russia, where the bank posted a EUR20m net loss, significantly lower than the EUR137m loss in 1H15. We expect SG to continue to manage its exposure to Russia cautiously, as highlighted by the 14% yoy contraction in loans at end-3Q15 at constant exchange rate, although the bank will remain sensitive to any lack of gradual recovery in the country - Fitch expects the Russian economy to grow 0.5% in 2016, following an estimated contraction of 4% in 2015.

Excluding Russia, operating profit improved almost in all regions, notably in the Czech Republic and Africa and Mediterranean basin, the two main drivers of the division's profit. The bank's Romanian subsidiary continued to improve its profitability, which however remains low. SG generated an acceptable 14% post-tax ROE in international retail banking in 3Q15, excluding contribution from Russia (13% in 9M15).

SG's CRR leverage ratio improved 12bp qoq to 3.9% at end-3Q15 as the bank issued further additional Tier 1 debt, and we expect the bank's adequate capital generation capacity and leeway in its leverage exposure to help improve the ratio towards its 4%-4.5% target by end-2017. SG's full-applied CET1 ratio improved 18bp qoq to 10.5% mainly on retained earnings. The bank announced that the planned disposal of its 20% stake in asset manager Amundi should lead to a 22bp to 26bp improvement in its CET1 ratio by end-2015. SG's CET1 ratio benefits from the treatment of its insurance subsidiaries under the 'Danish compromise', but this benefit is set to diminish, to 15bp, following the sale of Amundi.

The bank acknowledged that regulatory initiatives could result in increased risk-weighted assets but believes that its ability to generate capital equal to about 35bp of RWA annually after dividend payments and allowing for growth should enable it to meet these requirements. SG maintains a heathy liquidity profile; its Basel III liquidity coverage ratio was 137% on average in 3Q15.