SG CIB had a good 2003 and a promising first quarter, but can it keep up the pace? The firm’s CEO tells Geraldine Lambe about the bank’s plans to do just that

Every bank has certain tenets that characterise its corporate culture. As such, SG Corporate and Investment Banking (SG CIB), the investment banking arm of French group Société Générale, could be summed up by its belief in a focused business model, the cultivation of an entrepreneurial spirit and what the bank calls a “profitable growth strategy”.

In recent years, this triumvirate has served the bank pretty well. In Q1 2004, SG CIB generated E329m net income (up 14.6% on Q4 2003) and a return on equity (ROE) of 36.3% (up from 31.7% in Q4 last year). Its contribution to group profit has risen from 36% in 1999 to 43% last year, while its share of group risk weighted assets has declined from 41% to 30% over the same period.

Jean-Pierre Mustier, CEO of SG CIB since January 2003, says that this has been achieved through the firm’s focus on specific products and geographies. But while SG CIB is not trying to be all things to all people and though many see it as a derivatives specialist – largely based on its dominance of the equity derivatives business and its structuring expertise – SG CIB is more than a derivatives house. It has built a business on three core areas: euro capital markets, derivatives and structured finance.

Unexpected results

The strategy has also brought some unexpected results. On its home ground of course, SG CIB is generally somewhere near the top. According to Dealogic’s figures for the year to date, it is ranked second for bookrunners of French IPOs, for example. Dealogic also ranks the bank second for all euro-denominated bonds for European supernationals. More surprising, perhaps, are Thomson Financial’s 2003 figures, which place SG CIB third for all German corporate euro-denominated bonds and first for all Spanish euro-denominated bonds.

But some analysts question whether this performance is sustainable, particularly in light of a more difficult environment for fixed income, where the bank is clearly strong. Mr Mustier acknowledges that market conditions in 2004 cannot be compared with the “perfect alignment of planets experienced in 2003”. He says banks will have to look for ways to diversify and grow their revenues in an environment characterised by tighter monetary policies, flatter equity markets, interest rates that are trending upwards and corporate bond markets that have seen issuance plummet by around 45%.

There are compensations, however: M&A and financing activities have picked up a little and the credit cycle is also more favourable. February was the first month when there were no defaults in the US and provisioning levels are much lower in 2004 than in 2003. “We will adapt ourselves to the new context and, all in all, I therefore believe that our net contribution to group revenues will be in the same order of magnitude,” he says.

Other analysts suggest that while SG CIB’s business model was successful during 2003, more diversified firms may have an advantage over the next couple of years. Mr Mustier dismisses this doubt, saying that SG CIB will defend its gains by launching new products and improving penetration to maintain revenues. Indicative of the firm’s entrepreneurial approach, he says, SG CIB is pushing 35 initiatives across four pillars: products, countries, clients and synergies. “We do not expect all of them to succeed, of course, but many of them will,” he says.

SG CIB is developing products broadly across its three core areas and plans include developing its high yield offering and increasing its presence in the fixed income flow business, building the flow business across all the derivatives areas and structuring new credit derivatives products, for example.

Bolstering the European position

Geographically, the bank will continue to build its European platform in Spain, the UK, Italy and Germany, with particular emphasis on the latter two markets. There is also an emerging market initiative. “But again, we will only target specific areas. In Asia, for example, we will focus on China, Korea and Taiwan. We will cover capital markets, of course, but especially derivatives and structured finance. It will be about profitable utilisation of resources,” says Mr Mustier.

On the client side, SG CIB will carry on the build-up of its financial institutions group (FIG). More traditionally known for its corporate business, last year was the first in which the bank’s FIG revenues equalled those in its corporate sector. In dedicating more resources, SG CIB will be hiring more relationship and country coverage bankers, and also augmenting its asset liability management capabilities.

Leveraging synergies between different areas of the business has been a crucial element of the group’s strategy for some time, says Mr Mustier, and was a key rationale when SG CIB put together its debt finance business. “It is an easy way to generate extra revenues at no extra cost,” he adds. In 2003, the firm’s management were set a quantitative objective: to increase the level of synergies by 25% between then and 2005. Each business line has been given revenue targets and, more importantly, says Mr Mustier, SG CIB put in place the infrastructure that would enable them to achieve such targets.

Joint marketing efforts and cross-product teams have been formed as joint ventures between different business lines to drive projects. In a bid to increase its hedge fund business, for example, the bank has pulled together around 25 people from the equity, debt and derivatives businesses. Similarly, SG CIB has created a small team to focus on financial sponsors, drawing expertise from M&A and equity and debt capital markets.

SG CIB’s raft of plans do not add up to a hiring spree or a blank cheque book, though. There will clearly be new hires and significant investment in product development, but it will be on “a step-by-step basis; a rational approach – the way we develop all our businesses”, says Mr Mustier. In essence, this is the “profitable growth strategy” that the firm espouses. “We are willing to invest in projects and to ensure support across the business, but growth in spending must translate to the bottom line.”

Société Générale is a very shareholder-driven business, where ROE is a central concept, says Mr Mustier, and it is this that largely dictates SG CIB’s model. Its core European and euro focus is shaped by the economic cost of penetrating other markets. It will exit a business that does not pay off – as demonstrated by the 2002 closure of the Asian equity brokerage that Mr Mustier established in 1996. SG CIB’s Asian plans are now designed to match specific markets and to generate high ROE. “Asia is a very fragmented region, therefore it is not practical or economical to have a single, big platform. SG CIB has individual plans specific to each country’s needs,” says Mr Mustier.

Targeted US offering

The fact that few European firms have developed profitable businesses in the US also explains SG CIB’s targeted offering there. “There are few examples of large-scale success and, where there has been, it has been at huge cost to the shareholders,” says Mr Mustier. Deutsche Bank’s Q1 figures showed adjusted return on average active equity (post-tax) of 15%; UBS, meanwhile, posted return on average shareholders’ equity less dividends of 29.2%.

SG CIB will not compete, therefore, against Wall Street in the US, says Mr Mustier. Instead, it follows a sector and product-based strategy, such as that exemplified by the bank’s subsidiary, SG Cowen – an equity brokerage and M&A firm that solely targets the technology and healthcare sectors – and by continuing to deepen its derivatives franchise.

Europe will remain at the centre of the bank’s model and the sustainability of SG CIB’s revenues. And the potential of the European markets should not be underestimated, says Mr Mustier. “The euro market is very large and growing by the minute. Last year, fixed income issuance in euros was higher than in dollars. We can still develop our penetration there,” he says.

Derivatives advantage

While Mr Mustier is keen to stress that SG CIB is more than a derivatives specialist, equity derivatives are clearly one of the bank’s core competencies and a revenue powerhouse for the firm.

But other banks have shown a great deal of interest in this burgeoning space. Barclays Capital, for example, has stated that, while it has no presence in the cash equity markets, equity derivatives will be a key growth area for the investment bank. So can SG CIB maintain its dominance against growing competition?

Mr Mustier is adamant that SG CIB still has first mover advantage. “There are high entry costs to this business. We have been in it for 20 years and have continually invested in and developed our technology infrastructure. You cannot easily or quickly replicate this environment when you want to get into this area.”

Just as important is the team that SG CIB has built. Mr Mustier says: “The level of skill in our personnel, the depth of our experience and the breadth of our presence constitute our first level of protection from competitors.”

But firms such as BarCap, however, are hiring heavily to capture some of this attractive market. Could SG CIB’s advantage be wiped out overnight by a head-hunting coup? Mr Mustier thinks not. “We have board level understanding and support for the business we have built. We have also trained and developed our teams to build this capability: their goals are closely aligned with those of the firm. When you are in a virtuous circle such as ours – in terms of support and structure from the top to the bottom of the firm and a dynamic environment – it takes more than money to poach personnel.”

Career history Graduated from Ecole Polytechnique and Ecole Nationale Supérieure des Mines. A member of the executive committee of Société Générale.

2003: January, appointed chief executive officer of SG Corporate and Investment Banking

1999: appointed deputy head of global equities and later chief executive officer of debt, currencies, commodities and derivatives

1996: becomes co-head of equity division. In the same year, is moved to Hong Kong to head up SG Securities Asia

1993: took up global responsibility for all equity derivatives activities

1991: appointed head of options activities in Japan

1989: appointed head of options activities in the US

1987: joins SG CIB as a stock options trader

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