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Rating Action:

Moody's affirms Societe Generale's A1 senior unsecured debt and deposit ratings; outlook remains stable

04 Dec 2020

Baseline Credit Assessment also affirmed at baa2

Paris, December 04, 2020 -- Moody's Investors Service (Moody's) today affirmed the A1 long-term senior unsecured debt ratings, deposit ratings and issuer ratings of Societe Generale (SG) as well as the A1 long-term Counterparty Risk Ratings and its baa2 Baseline Credit Assessment (BCA). Moody's has also affirmed the bank's short-term ratings and assessments. The outlook on the long-term deposit, senior unsecured debt and issuer ratings remains stable.

For a full list of all affected ratings, please refer to the end of this press release.

RATINGS RATIONALE

Affirmation

The affirmation of SG's BCA of baa2 reflects the bank's credit quality improvement in recent years, as evidenced by a decline in its problem loan to gross loans ratio to 3.9% as of June 2020, from 5% at the end of 2017, resulting in a broadly stable cost of risk over gross loans at 25 basis points in 2019 against 19 basis points in 2017. The bank's diversified risk exposure, with no corporate sector representing more than 6% of corporate exposure at default, limits concentration risks that are typical of global investment banks' financing activities. Although exposure to riskier operating environments in Eastern Europe, Russia and Africa explains the higher problem loans level than at some French peers which focus on domestic market, SG demonstrated its capacity to reduce risks in those geographies by focusing on large corporates, secured lending and diversified sectorial growth. In its assessment of SG's risk profile, Moody's also incorporates the risks posed by the bank's sizeable capital markets businesses, which expose SG to market, counterparty and operational risk as well as the potential for increased earnings volatility, as illustrated in the first half of 2020.

The affirmation of SG's BCA also reflects the gradual improvement in its regulatory capitalisation in recent quarters, owing to retained earnings, proactive capital management resulting in reduced risk-weighted assets and, more recently, the 2019 dividend suspension requested by the European Central Bank and other capital relief measures announced by the regulator as part of its Capital Requirement Regulation (CRR) "quick fix" package aimed at supporting banks' lending capacity to the economy in response to the coronavirus health crisis. As of the end of September, SG's common equity Tier 1 (CET1) ratio was 13.2% up from 11.4% at year-end 2017, risk-weighted assets were broadly stable at €352 billion over the period and the Tier 1 leverage ratio increased to 4.4% from 4.3% over the same period. Although the bank's capitalisation and leverage will remain weaker than the median of its global peers, we expect the CET1 ratio will remain above the bank's 12% target and well above its 9.02% minimum regulatory requirement, whilst diversified risk and revenue sources provide resilience to the bank's capitalisation under stress tests.

Similar to other French banks and its international peers with sizeable capital markets operations, SG's BCA is constrained by a high stock of confidence-sensitive wholesale funding on its balance sheet, which exposes the bank to changes in market conditions. However this is mitigated by the diversification of its wholesale funding sources, the lengthening maturity profile of the bank's long-term debt as it materially increases its Minimum Requirement for Own Funds and Eligible Liabilities (MREL) and Total Loss-Absorbing Capacity (TLAC) eligible debt, and a strong liquidity position with a liquidity buffer which covers around 2x the correspondent stock of short-term debt, and a liquidity coverage ratio at 179% as of September 2020, against 140% at the end of 2017.

In line with other global investment banks, with a complex legal structure and global footprint, Moody's has maintained a negative qualitative adjustment for Opacity and Complexity, reflecting increased management challenges and the risk of strategic errors inherent to such complex and global legal structures. In the case of SG, this is offset by a positive qualitative adjustment for business diversification, which reflects its resilience to shocks stemming from any particular geography or business line.

Aside from those considerations on SG's financial profile, Moody's assessment of the volume of loss absorbing debt under its Advanced Loss Given Failure (LGF) analysis has not changed, as the bank will continue to issue more bail-in-able debt, mainly in the form of non-preferred senior debt (€8.2 billion issued as of October 2020), in order to remain above its full 2022 TLAC and MREL requirements. This results in a three-notch uplift in the relevant ratings from the firm's BCA of baa2.

Moody's also continues to assess a moderate probability of French government support for SG's long-term senior unsecured creditors and junior depositors, resulting in a one notch uplift incorporated in the relevant A1 ratings. This reflects the systemic role of SG in the French financial system and its interconnectedness in the global financial markets.

Stable outlook

The stable outlook on SG's ratings reflects Moody's expectation that the bank's H1 2020 profitability pressures stemming from coronavirus-related macroeconomic shocks will gradually recede.

SG's has historically shown lower and declining earnings volatility compared with many of its global peers, thanks to the diversification of its operations. However, the bank's profits were more affected than most peers by the knock-on effects of the health crisis in the first half of 2020. If we exclude the exceptional non-cash goodwill impairment booked in H1, revenues mainly declined because of a 89% drop in equities revenues, as the equity derivative business of the bank, where they have a global leading franchise, was severely affected by market dislocation in March that fueled a rise in hedging costs, drove losses on equity derivative products linked to potential future dividend payouts and increased counterparty defaults linked to hedge fund clients. In addition, SG's cost of risk materially surged in the first half of the year, increasing 2.6x year-over-year, the majority related to ex-ante provisioning reflecting deteriorating macroeconomic scenarios in IFRS 9 provisioning models and management overlays for sectors expected to be most impacted by the coronavirus crisis. Despite resilience in most other businesses and a 6% reduction in operating expenses in the semester year-over-year, the bank reported two quarters of consecutive losses, a first since the 2008 financial crisis.

We expect that the bank's profitability will rebound rapidly. First, our central scenario for a material economic rebound in France and in most geographies where SG has operations should drive a material recovery in banking business, if the second wave of lockdown measures taken this winter is not prolonged. The activity rebound was already indicated in Q3 with an 11% increase in revenue compared with previous quarter, stemming from all businesses, in particular from a normalization of SG's global markets division's performance. SG's cost of risk also dropped in Q3 more materially than at French peers to 40 bps from 97 bps in Q2, thanks to a prudent provisioning approach in the first half of 2020, resulting in provisioning charges for the first nine months of 67 bps, broadly in line with French peers. Although there are risks that phasing out of government support measures or delayed implementation of the European economic recovery programme will lead to increased nonperforming loans (NPLs) and provisioning charges in coming quarters, SG has a relatively low exposure to sectors most affected by the coronavirus crisis, including small and medium-sized enterprises (SMEs) (5% of the bank's exposure at default).

Secondly, the bank has immediately hedged the risk profile of its exotic structured equity derivatives business, whilst deciding to exit the production of the riskiest products, with only a limited impact on capital markets revenues of around 4% whilst maintaining the ambition to retain leadership in this sector.

In addition, the bank has decided to accelerate its cost reduction plan. Further to the previous cost reductions launched in 2019, the bank announced in Q1 a further €600 to €700 million further reduction in 2020 [1] with the intention to bring the group's operating expenses down to €16.5 billion at the end of this year[2], a 5% decrease from 2019, which it was on track to achieve as of end-September (-4.9% decline in operating expenses year-on-year for the first nine months). Beyond 2020, the bank announced in Q2 it will reduce its global markets' operating expenses (10% reduction in operating costs in the first nine months of 2020 year-over-year) by a further €450 million by 2022-2023[3]. Although restructuring costs associated with this plan will moderate the profitability effect in 2021, we expect this target will be achieved with a view to limit disruption to the bank's capital market franchise and revenue generation.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upward pressure on SG's ratings could arise if the group (1) achieves a sustainable improvement in its profitability metrics; (2) reaches significantly higher capitalisation; and (3) reduces its recourse to wholesale funding. An upgrade would also be contingent on the stability of the economic and banking environments where the bank operates and its ability to maintain solid asset quality and a low cost of risk.

Downward pressure on SG's ratings could arise in the case of (1) a material deterioration in operating conditions in the bank's main operating environments, beyond our current expectations, with negative effects on the bank's performance; (2) a material weakening in funding and liquidity; (3) lower regulatory capitalisation or higher leverage; and (4) a material risk management failure or a failure to demonstrate better resilience to shocks than in the first half of 2020 from its diversified businesses; and (5) failure to improve sustainably the bank's profitability and efficiency towards levels closer to the global investment banking peers median.

Although unexpected, the ratings could further be downgraded should there be a significant decrease in the bank's existing stock or planned issuance of bail-in-able liabilities. Although regarded highly unlikely at present, this may lead to fewer notches of rating uplift as a result of Moody's Advanced LGF analysis.

LIST OF AFFECTED RATINGS

Issuer: Societe Generale

..Affirmations:

....Long-term Counterparty Risk Ratings, affirmed A1

....Short-term Counterparty Risk Ratings, affirmed P-1

....Long-term Bank Deposits, affirmed A1, outlook remains Stable

....Short-term Bank Deposits, affirmed P-1

....Long-term Counterparty Risk Assessment, affirmed A1(cr)

....Short-term Counterparty Risk Assessment, affirmed P-1(cr)

....Long-term Issuer Ratings, affirmed A1, outlook remains Stable

....Baseline Credit Assessment, affirmed baa2

....Adjusted Baseline Credit Assessment, affirmed baa2

....Senior Unsecured Regular Bond/Debenture, affirmed A1, outlook remains Stable

....Backed Senior Unsecured Regular Bond/Debenture, affirmed A1, outlook remains Stable

....Senior Unsecured Medium-Term Note Program, affirmed (P)A1

....Backed Senior Unsecured Medium-Term Note Program, affirmed (P)A1

....Junior Senior Unsecured Regular Bond/Debenture, affirmed Baa2

....Junior Senior Unsecured Medium-Term Note Program, affirmed (P)Baa2

....Backed Junior Senior Unsecured Medium-Term Note Program, affirmed (P)Baa2

....Subordinate Regular Bond/Debenture, affirmed Baa3

....Subordinate Medium-Term Note Program, affirmed (P)Baa3

....Backed Subordinate Medium-Term Note Program, affirmed (P)Baa3

....Junior Subordinated Regular Bond/Debenture, affirmed Ba1(hyb)

....Junior Subordinate Medium-Term Note Program, affirmed (P)Ba1

....Preferred Stock Non-cumulative, affirmed Ba2(hyb)

....Commercial Paper, affirmed P-1

....Other Short Term, affirmed (P)P-1

....Backed Other Short Term, affirmed (P)P-1

..Outlook Action:

....Outlook remains Stable

Issuer: Parsifal Limited

..Affirmations:

....Backed Senior Unsecured Medium-Term Note Program, affirmed (P)A1

....Backed Subordinate Medium-Term Note Program, affirmed (P)Baa3

....Backed Other Short Term, affirmed (P)P-1

..Outlook Action:

....Outlook remains Stable

Issuer: SG Option Europe

..Affirmations:

....Backed Senior Unsecured Regular Bond/Debenture, affirmed A1, outlook remains Stable

....Backed Senior Unsecured Medium-Term Note Program, affirmed (P)A1

....Backed Subordinate Medium-Term Note Program, affirmed (P)Baa3

....Backed Junior Subordinate Medium-Term Note Program, affirmed (P)Ba1

....Backed Other Short Term, affirmed (P)P-1

..Outlook Action:

....Outlook remains Stable

Issuer: SG Structured Products, Inc.

..Affirmations:

....Backed Senior Unsecured Regular Bond/Debenture, affirmed A1, outlook remains Stable

..Outlook Action:

....Outlook remains Stable

Issuer: SGA Societe Generale Acceptance N.V.

..Affirmations:

....Backed Senior Unsecured Regular Bond/Debenture, affirmed A1, outlook remains Stable

..Outlook Action:

....Outlook remains Stable

Issuer: Societe Generale Australia Branch

..Affirmations:

....Long-term Counterparty Risk Ratings, affirmed A1

....Short-term Counterparty Risk Ratings, affirmed P-1

....Long-term Counterparty Risk Assessment, affirmed A1(cr)

....Short-term Counterparty Risk Assessment, affirmed P-1(cr)

....Senior Unsecured Regular Bond/Debenture, affirmed A1, outlook remains Stable

....Senior Unsecured Medium-Term Note Program, affirmed (P)A1

....Junior Senior Unsecured Medium-Term Note Program, affirmed (P)Baa2

....Commercial Paper, affirmed P-1

....Other Short Term, affirmed (P)P-1

..Outlook Action:

....Outlook remains Stable

Issuer: Societe Generale Commodities Products LLC

..Affirmation:

....Backed Senior Unsecured Regular Bond/Debenture, affirmed A1, outlook remains Stable

..Outlook Action:

....Outlook remains Stable

Issuer: Societe Generale North America, Inc.

..Affirmation:

....Backed Commercial Paper, affirmed P-1

..No Outlook assigned

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

REFERENCES/CITATIONS

[1] Q1 2020 Financial Results Presentation, April 2020

[2] Q2 2020 Financial Results Presentation, August 2020

[3] Q2 2020 Financial Results Presentation, August 2020

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Olivier Panis
Senior Vice President
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Ana Arsov
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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