Investment banking head gives Société Générale a new direction

When Didier Valet moved from being Société Générale’s chief financial officer to take over the bank’s investment banking operations in 2012, much was due to change within the French financial institution.

A sluggish recovery in the eurozone, volatile emerging markets as well as ever-higher regulatory barriers, forcing banks to hold more capital, were putting pressure on the profitability of banks. “Since the crisis, our industry has become much more selective,” says Mr Valet, whose official title is head of corporate and investment banking, private banking, asset management and securities services and global investment management and services. “You need to have superior capabilities to compete in each market,” he adds.

With this philosophy, Mr Valet has reformed SocGen’s investment banking model. He anticipated that the new conditions would last and started the transformation of the bank’s corporate and investment banking business earlier than many of his peers. In doing this, Mr Valet was driven by the aim to position the business mix towards a focused multi-specialist model, while creating greater synergies within the group – in terms of revenues and resources – and establishing SocGen as a resource-efficient wholesale bank.

A whole new investment bank

SocGen’s aim to create a more focused business did not only mean that an emphasis was put on activities in which the bank was strong, such as equity derivatives and cross-asset solutions, but also led to de-risking. Its value at risk was significantly lowered, costs were put under strict control and some business lines, including SocGen’s North American physical gas and power trading business and its private banking operations in Asia, were exited.

In the process of redirecting the investment bank, Mr Valet also spearheaded the integration of the bank’s wealth management and securities services operations, together forming a division called global banking and investor solutions (GBIS), which meant the bank was able to net €1.5bn of revenue synergies.

“We are bringing strong corporate and investment banking and wealth management capabilities to French and international retail clients, while at the same time giving privileged local market access to our international clients,” says Mr Valet. “It was a natural choice driven by a simple rationale: those businesses are complementary by essence, serving the same clients and operating in the same geographies.

“This organisation enables us to have a fully [intersecting] client approach, with a centralised coverage, but also the ability to develop integrated product solutions, typically between our capital market activities and our private bank.”

SocGen’s GBIS operation was introduced in September 2013 and Mr Valet says: “We strongly believe that there is growing convergence across those businesses, be it between global markets and investor services or asset and wealth management which regroups the private bank and Lyxor. Having them under one roof is a way of more rapidly capturing the joint development opportunities that will arise from this convergence.”

Reorganisation impact

It is still too soon to judge the impact of the business changes through SocGen’s annual results. However, GBIS net banking income increased by 10.9% from 2012 to 2013 to €8.71bn, at a constant exchange rate and adjusted for changes in the group structure. The cost of risk within GBIS fell by 13%, with the same adjustments made, to €548m, but the cost-to-income ratio still edged up to 73.6% from 73% previously. GBIS contributed €1.34bn to SocGen’s group income in 2013 on an allocated capital basis of €10.68bn. In 2012, SocGen had allocated an average of €13.2bn to the then equivalent of GBIS while it only contributed €761m to the group’s income.

“Since last year, we have developed the synergies between our different activities further within GBIS, making sure that we capture each revenue or cost opportunity,” says Mr Valet.

“Typically, we have dedicated market teams working jointly with our financing and advisory teams to systematically provide hedging solutions in our financing deals. We have also strengthened the links between our private bank and our market teams to further promote our structured products with great success.”

2016 targets

Despite these positive trends, Mr Valet knows that there is no room for complacency. SocGen's 2016 targets for its investment banking operations are aiming for GBIS net banking income of €9.7bn, a compound annual growth rate of 3%, a cost-to-income ratio of 68% and post-tax return on equity of 15% on a 10% normative capital allocation.

“We will grow without losing our focus, which means remaining selective and demanding in terms of development,” says Mr Valet about how he plans to achieve these targets, adding that the bank aims to develop further on its existing strengths.

To follow through with this, SocGen aims to grow its client footprint, especially among financial institutions and corporates. “We have the potential to expand our leadership position in equity derivatives in Germany, Asia and the US and we will invest selectively in fixed income in order to further develop areas of expertise to support the credit disintermediation,” says Mr Valet.

Within its financing and advisory business, SocGen sees its strengths – apart from in equity-linked products – in the European debt capital markets as well as export finance and global natural resources finance, all of which contributed to the bank’s 14% return on equity excluding non-recurring items and legacy assets in its financing and advisory business in 2013.

In 2014, SocGen was especially strong in Europe, the Middle East and Africa equity-linked issuance, euro-denominated corporate investment-grade bonds and dollar-denominated financial institution group (FIG) bonds, according to Dealogic. In bookrunner rankings as of mid-November, SocGen took the third spot in the first two categories and the fourth in dollar FIG issuance.

Going forward, SocGen is looking to explore new pockets of growth in emerging markets and is seeking to expand its US dollar and sterling fixed-income businesses. It also sees opportunities for targeted growth in the high-yield bond market as well as in its client franchise in Asia and the US. For that, the bank is ready to apply a further €12.3bn of risk-weighted assets by 2016 – a step away from the bank’s capital-lite 'originate-to-distribute' model, as the additional investments are expected to contribute to the financing and advisory part of GBIS’s aim to reach €600m in additional revenues by 2016.

Newedge brings new edge

The last piece of the SocGen puzzle was its purchase of the 50% of futures broker Newedge that it did not previously own from Crédit Agricole. The takeover, agreed in September 2013 and finalised in May 2014, allows SocGen to bring primary market activities and post-market trading closer together.

“The fact that we have market activities, Newedge expertise as a leading broker, and securities services under the same roof is rare, and helps create synergies,” says Mr Valet. “We can be a one-stop shop from execution to clearing and custody.”

While the full integration of Newedge within SocGen’s market division is still ongoing, the first revenue synergies have been recorded and the first mandates were won. Once businesses are fully incorporated, SocGen will establish a prime services department, offering clients services such as cross-asset clearing, repo and equity finance, agency lending and electronic execution.

“We feel Newedge is a good platform to clear more over the counter products as requested by regulators, which is a market we would like to expand in,” says Mr Valet. “It will also enable us to develop an equity prime brokerage offering, which we aim to establish in the next few months.”

For 2016, Newedge’s financial targets are set at return on equity, including transformation and integration costs, of 13% on a cost-to-income ratio of 90%. After the full integration in 2018, the cost-to-income ratio is expected to fall to 85%, while SocGen targets returns of more than 15%.