OREANDA-NEWS. Societe Generale's (SG; A/Stable/a) 4Q15 operating results were generally in line with Fitch Ratings' expectations but indicate pressure on revenue generation from persistently low interest rates, particularly in domestic retail banking. SG will therefore have to complete its cost-reduction programme and continue to improve international retail banking performance to reach its 10% ROE target. It reported improved capitalisation, with a 10.9% fully loaded common equity Tier 1 (CET1) ratio and a 4% Capital Requirements Regulation (CRR) leverage ratio. The results have no immediate impact on SG's ratings.

SG reported EUR877m 4Q15 pre-tax profit adjusted for fair-value changes to own debt (EUR39m loss in 4Q15) and for a combined EUR13m gain from debit and credit valuation adjustments. Adjusted 4Q15 pre-tax profit fell 11% yoy, excluding similar items in 4Q14, as the group made higher litigation provisions of EUR400m (4Q14: EUR200m).

Adjusted pre-tax profit for the whole of 2015 reached EUR5.4bn, including EUR600m provisions for litigation and EUR164m from the disposal of asset manager Amundi. SG generated 7% post-tax ROE excluding changes in fair value of own debt and debit and credit valuation adjustments, below the 10% target, which remains but was not confirmed for 2016 due to the difficult operating environment.

SG's capitalisation improved further and its fully applied CET1 ratio reached 10.9% at year-end. This is 40bp above the bank's fully-applied regulatory combined buffer requirement for 2019 set by the ECB. On a phased-in basis the headroom above the requirement was 170bp. SG remains committed to maintaining a CET1 ratio with 100-150bp headroom above regulatory requirements. Its CRR leverage ratio also improved, to 4% at end-2015, reaching the lower end of its end-2016 of 4%-4.5% target. We expect the bank to strengthen capitalisation further through retained earnings. In 2015, SG generated CET1 capital through earnings equal to 37bp of RWA after providing 41bp for a proposed increased dividend payment.

SG announced that after having achieved EUR900m annual recurring cost savings since 2013 it aims to save a further EUR850m annually by 2017. Further cost-efficiency improvement will be important for it to reach profitability targets, particularly as increased regulatory requirements have resulted in a higher cost base.

SG's French retail banking operating profit increased 18% yoy in 4Q15 to EUR483m (excluding provisions for home purchase savings schemes), helped by a 31% yoy decline in loan impairment charges (LICs). Revenue improved due to loan growth, particularly housing loans, which increased 7.8% in 2015. Nevertheless, margin pressure due to lower interest rates on renegotiated housing loans resulted in a 7% decline in net interest income from private individuals. Conversely, net interest income from business customers improved yoy. French retail banking continued to attract new customers, and the bank continues its programme to reduce its branch network by 20% by 2020.

Results in global banking and investor solutions (GBIS) were affected by 4% higher operating expenses in 4Q15, mainly because of foreign-exchange effects due to the stronger US dollar, higher LICs (EUR230m in 4Q15) arising from one large European exposure and provisioning for oil and gas exposures. The division's pre-tax income consequently fell 58% yoy to EUR203m.

Within GBIS, global markets and investor services' 4Q15 revenue fell 8%, due to a 31% decline in equities revenue as investor demand for structured products declined. Fixed income, foreign currency and commodities reported 10% yoy revenue increase, resulting from good performance in the rates and credit segments. The bank benefited from the integration of Newedge, which helped revenue from prime services increase 38% yoy.

Financing and advisory was affected by high LICs, which wiped out operating profit. SG expects LICs in GBIS to remain broadly flat in 2016 after being moderate at 27bp of gross loans in 2015, but they can be very volatile in this business, as in 4Q15. SG disclosed its exposure to oil and gas, which at end-2015 totalled EUR23.5bn. It does not expect material credit losses on its exposure if the oil price remains at USD30 per barrel.

SG's international retail banking and financial services more than doubled pre-tax profit yoy to EUR388m in 4Q15 as 4Q14 included a one-off EUR200m charge for the exit from its Brazilian consumer finance business. Insurance activities continued to perform well, with revenue increasing 11% yoy. Financial services to corporates, including fleet management and equipment finance, posted 10% higher revenue.

International retail banking reported a 4% yoy decline in pre-tax profit excluding a one-off charge in 4Q14 despite a sharp drop in LICs. SG's biggest challenge remains Russia, although its loss there remained modest at EUR22m in 4Q15. The bank expects further losses at its Russian operations in 2016, albeit easily manageable at EUR50m-100m.