People have been guilty of writing off SocGen's investment bank too soon. Earlier this year, analysts at Deutsche said the French bank's fixed income trading business was critically small and would therefore be unable to survive in the new era of the giant 'flow monsters'. Worse, SocGen is said to pay badly. There was the Kerviel affair. There were job cuts. If you're an investment banker, SocGen has not been a desirable place to situate yourself.
Suddenly, however, the French bank has proven its detractors wrong. Third quarter results for SocGen's CIB, released yesterday, revealed a return on equity of 12% for the first nine months of the year and a return on equity in the core CIB business of 17%. This is impressive compared with the 10% ROE earned over the first nine months at Goldman Sachs. It's also impressive compared with the 15% investment banking ROE aspired to by UBS.
Moreover, SocGen's diminutive fixed income sales and trading business has whipped those larger competitors who were supposed to be eating its dinner. In the third quarter, year-on-year fixed-income trading revenues were down a mere 20% (allowing for debt valuation adjustments). At Deutsche Bank they were down...48%.
Even better (if you're a trader), as the chart below shows, SocGen hasn't cut risk-taking excessively. This too is contrast to other banks, which have reined in risk dramatically over the past year.
SocGen's investment bankers also have the support of senior management. Unlike Brady Dougan at Credit Suisse, Antony Jenkins at Barclays, or Ross McEwan at RBS, SocGen's CEO has been making positive noises about the investment banking business: "I'm convinced that we have franchises in our CIB (corporate and investment banking) business which are particularly well suited for this new world," said Frédéric Oudéa yesterday. SocGen's equity derivatives business is well structured for client needs and not targeted by regulators, Oudea added. Its fixed income business is as it should be.
And SocGen's move to increase its stake in Newedge, the derivatives brokerage, leaves it well placed to operate in the new world of central clearing. For SocGen, investment banking is a big part of the future, says the FT's Lex Column today: the bank sees regulatory change as a big driver, not destroyer, of profits.
Jean Pierre Lambert, banking analyst at Keefe, Bruyette & Woods, says SocGen benefited from early action in restructuring its investment bank. "After Kerviel, they evaluated every activity in terms of its capital and liquidity consumption," Lambert told us. SocGen is therefore ahead of other banks in deleveraging to meet the European Union's new leverage requirements, says Lambert. "They are doing very well. In fixed income, they are recovering the market share they lost after the Kerviel affair."
Are there any clouds on this sunny horizon? Well, SocGen is unlikely to ever pay in line with big US rivals. There are also mutterings of further job cuts and there may be 'synergies' as a result of the Newedge acquisition. At SocGen, however, job cuts tend to be voluntary and greased by incredibly generous redundancy packages. What's not to like?