(Bloomberg) – Societe Generale SA failed to deliver on its promise to return half of its operating profit to shareholders, even after its fixed-income brokers presented CEO Frederic Oudea with a bigger-than-expected profit.
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Revenue from the purchase and sale of fixed income and currencies rose 56% in the fourth quarter, beating analysts’ estimates and all previous major rivals. This and a strong performance in Financing and Advisory compensated for the weak performance in Equities and Retail France.
But after the Paris-based company suffered a multibillion-euro blow when it exited Russia last year, it decided to keep more of the profits to bolster capital and about 1.8 billion euros through dividends and buybacks. This represents around a third of the underlying profit.
The decision comes at a time when rivals are trying to reward investors as they emerge from years of negative interest rates and below-average profitability. BNP Paribas SA said on Tuesday it would repay 5 billion euros through buybacks as it spends excess cash from the sale of its US unit. It caps another tumultuous year for Oudéa, which put the finishing touches on its legacy before handing over to investment bank boss Slawomir Krupa in May.
The year “marked a pivotal period for the group” as it adapted to “an uncertain and complex environment”, Oudéa said in a statement. SocGen, he said, “is moving decisively into 2023, a year of transition in many ways.”
SocGen announced the results before the start of regular trading in Paris. Shares have underperformed BNP and an index of European banks over the past 12 months.
Revenue from fixed income trading, traditionally a smaller business for the firm than equities, was up 56% year-over-year. That’s better than the average 28% gain for Wall Street’s biggest firms and the 45% rise for BNP. Equities lagged slightly, down 12%.
SocGen’s finance and advisory unit has weathered the slump in business execution that has plagued many of its peers. The business, which includes transaction banking, saw its revenue increase by 17%.
The lender has proposed a cash dividend of €1.70 per share to be paid out of last year’s profits, as well as a €440 million share buyback. If it had paid out half of its underlying annual profit of 5.62 billion euros, that would have been more than its reported net profit.
Such a move could have been difficult to explain to regulators at the European Central Bank, who have urged banks to exercise caution when deciding shareholder payouts given the many risks to the economy. SocGen provided 413 million euros in loans in the fourth quarter, less than analysts had expected but still nearly five times the amount a year ago.
A company spokesman said the payout decision reflected a desire to balance shareholder rewards and balance sheet strength. A key capital metric, called the CET1 ratio, came in at 13.3%, higher than analysts had expected, assuming full implementation of tougher regulatory standards. SocGen plans to return to its regular payment policy in the coming years, the person added.
Chairman Lorenzo Bini Smaghi, who oversees the executive board that decides on payment proposals, has been among the most vocal critics of the ECB’s de facto dividend ban during the Covid-19 pandemic. Led by the former ECB politician, the board even proposed a payment in 2021 after the lender suffered its first loss-making year in decades. In October, he wrote to the central bank protesting officials’ requests to attend bank board meetings, Bloomberg reported.
Oudea, the longest-serving CEO of a major European Union lender, restructured its equity business after pandemic-related losses, allowing the company to rebound with record profits the following year. Russia’s invasion of Ukraine last year brought another challenge, prompting a withdrawal from the country that resulted in a €3.3 billion loss in pre-tax profits.
To strengthen the bank, Oudéa merged the French distribution networks. But local laws that limit lenders’ ability to raise mortgage rates have made it difficult for French lenders to take advantage of higher interest rates as quickly as their competitors in other countries. Domestic retail sales were down slightly year-over-year, with SocGen forecasting further declines this year.
(Adds context to previous dividend decisions in the last three paragraphs.)
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