Closer coordination with private banking and the integration of its brokerage are part of the strategy for a leaner, more focused Société Générale, its deputy head of corporate and investment banking tells Philip Alexander.

When Christophe Mianné became deputy head of Société Générale Corporate & Investment Banking (SG CIB) at the start of 2012, his immediate priority was balance sheet rationalisation amid the fall-out from the eurozone crisis. Scarce dollar funding in particular needed to be focused selectively on key business lines only, while the escalating Basel regulations put a fresh premium on the use of capital. Mr Mianné pushed SG CIB teams to operate an originate-to-distribute model more familiar to US than European banks.

The eurozone crisis has abated, and the context for European banks has improved significantly. If anything, European banks are finding themselves underlent after several years of deleveraging. SG CIB continues to distribute a substantial share of its origination and has all the teams and competencies required to increase the share it distributes. But the distribution is no longer essential to deal flow.

“For a bank of our size, it means being able to finance the largest deals and projects, with a higher final take than we would have had 12 to 18 months ago, while still making sure we maintain diversification and manage the risks on large credits,” says Mr Mianné.

“At the same time, we are happy with the relationships we have with our institutional investor partners, with whom we work on certain transactions when it makes sense,” he adds.

The other vital element of the change of strategy in 2012 was the selection of certain core business lines as key growth areas. This was not just about funding constraints, but more broadly about the post-crisis environment of reduced trading volumes and lower deal flow in equity capital markets and mergers and acquisitions. As Mr Mianné succinctly puts it: “In this market, if you are average, you are not profitable, and boards will not continue to support investment banking operations. You have to focus on your strengths, and we have many.”

Playing to its strengths

Those strengths include equity derivatives, commodities finance and project finance globally, as well as rates and structured finance in Europe. The bank has been hiring staff to work on financing merchant traders, an area that was under pressure during the 2011 liquidity squeeze. Mr Mianné says demand for energy and infrastructure projects in emerging markets and beyond will remain strong, and good results enable SG CIB to organically increase the capital it can make available for financing. He is also particularly proud of the bank’s ability to compete in this segment even in the US. SG CIB won the mandate as sole financial advisor to the Sabine Pass natural gas liquefaction plant in Texas that reached financial close in 2012, in the face of competition from US players.

The bank is also beginning to compete in US credit markets. Having always enjoyed a decent market share in trading and origination for euro-denominated credit, SG CIB has built its dollar business over the past two years and is a primary dealer in the US.

“We are a credible investment-grade distribution force in dollars, and [we are] now slowly moving into high yield, where we are winning dollar mandates such as the inaugural high-yield dollar bond for Puma Energy. Moreover, we are also winning dollar mandates from European sovereigns, such as Spain,” says Mr Mianné.

Owing to its traditional strength in equity derivatives, the bank has steered clear of large inventories of long-dated swaps, preferring well-collateralised securities financing and lending. That has left it in a good position to cope with new regulations on swaps that make non-collateralised or uncleared trades far more expensive on the balance sheet.

“Our speciality has been funded equity products with margin calls, rather than 20-year swaps without CSAs [credit support annexes]. That allows us to grow cautiously without a heavy weight of the past on our shoulders,” says Mr Mianné.

One of the new areas that plays to SG CIB’s structuring skills is longevity hedging for pension funds. The bank entered this market with some style in December 2013, arranging a deal for Dutch insurer Aegon that effectively creates a structure for syndicating longevity risk to reinsurers and capital markets investors. Using out-of-the-money index options, the investors will assume Dutch longevity risk (the risk of pensioners living longer than expected) and US mortality rate risk in return for interest payments.

Closer integration

A crucial element of SG CIB’s strategy to build its offering in core products is the decision over the future of Newedge. Société Générale announced the buy-out of the multi-asset brokerage and clearer, previously owned 50:50 with Crédit Agricole, in November 2013, with a structural integration process starting in April this year. David Escoffier, previously SG CIB’s deputy head of markets, has already been appointed CEO of Newedge.

Part of the decision was in Crédit Agricole’s hands. Newedge no longer fitted its own strategy, and an underinvested independent broker stood little chance of prospering in an environment of lower trading volumes. But SG CIB also has plans to find synergies with its own markets and custody activities, to use Newedge’s strengths more productively than was possible in the standalone model.

Mr Mianné says the bank is working on how it will combine Newedge’s execution and clearing activities with the SG CIB’s current markets activities in foreign exchange, commodities, fixed income and equities, while preserving Newedge’s agency model. Already in March, Newedge made hires on the over-the-counter (OTC) clearing and energy desks in the US.

“Newedge would help to build on our fixed-income flow activities and our US sales presence. And we will improve co-operation in general. In future, Newedge would offer a broader range of cleared OTC swaps to its existing clients, and will take on new clients via SG CIB. Overall, the two offers are very complementary, and we want to offer the best of both worlds to our clients,” he says.

The focus on prime clearing services (listed and OTC clearing, prime brokerage, financing and execution) and Newedge’s much-admired cross-margining capabilities between bonds, equities, listed and OTC derivatives meets evolving client needs. In particular, intelligent solutions that can tie in with an efficient use of collateral are vital, as regulators push more swaps products onto central clearing. In the US, custodian specialist Bank of New York Mellon announced in November 2013 that it was closing its US swaps clearing business, because delays in implementing regulations had caused the business to underperform in a crowded market. But Mr Mianné says clearing is an essential business line for a full-service investment bank.

“After the Lehman crisis, everyone assumed that regulation would now favour simple, listed futures markets, and that more complex products would disappear. The first assumption was right to some extent, but futures markets are challenged in terms of margins. And the second assumption was exaggerated: there is still demand from clients for straightforward structured products where they add value. From our point of view, if you are going to be in OTC products, then you have to offer clearing alongside execution,” he says.

Open architecture

Société Générale is also looking to generate more co-operation between its investment bank and its private banking arm, while maintaining an open-architecture approach. This means offering clients the most suitable products and the best pricing, without undue preference for other parts of the parent bank.

“For standardised retail structured products, we offer best execution as we would with plain vanilla equities. On the other hand, no client would ask for securities financing and then request that we tendered out to other providers. Between those two, there are tailor-made trades that we design for clients, and they know that we would propose the solution and then go to several banks for the best pricing,” says Mr Mianné.

Geographically, he hopes the bank can build on a good year in Asia in 2013, which was stimulated partly by Japan’s expansionary fiscal and monetary policies that drove activity on Nikkei options. SG CIB is carefully building out its equity derivatives line in the US as well, focusing first on expanding the institutional investor client base to ensure that the demand is there before making any dramatic increase in the product suite. He is confident that US and European equities can weather the impact of the US tapering its quantitative easing programme. But he is keeping a close eye on emerging markets.

“Whenever there has been excess liquidity in the system, when that reaches the end emerging markets have suffered, and that issue could affect those markets for the whole of 2014. The fundamentals in some emerging markets are very sound, but those with current account deficits will need to reform to resolve the structural problems. Even China is a cause of some concern, but the government there has the ability to intervene quickly if needed,” says Mr Mianné.


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