SG reduces structured product risk profile as losses bite

The French banking group wants to maintain its global leadership role in equity structured products and remain a major player in investment solutions while reducing the risk profile on equity and credit structured products. This would decrease the sensitivity of global markets’ revenues to market dislocations.

This refocusing will have an impact on revenues of between €-200m and €-250m, according to the bank. The third priority for the group is to improve the profitability of its global markets division by reducing the breakeven point through a net cost reduction of around €-450m by 2022-2023.

Although the French bank’s second quarter and H1 2020 performance was marked by the Covid crisis, with ongoing unfavourable market conditions for structured products in April and May, the rebound in activities from mid-May was very encouraging, according to Frédéric Oudéa (pictured), chief executive officer.

In April and May, structured product activities continued to be impacted by the cancellation of dividend payments which led to a loss of €200m – a still strong correlation and strict production constraints. These activities saw a gradual recovery from mid-May.

Listed product revenues were significantly higher than in Q2 2019, driven by flow investment solutions (notably due to the integration of Commerzbank’s equity markets & commodities activities). However, this increase, combined with the strong performance of equity flow activities, was not enough to offset the losses recorded on structured products at the beginning of the quarter.

According to SRP data, Société Générale issued more than 110,000 structured products in the first quarter of 2020, up 200% from the prior year quarter (36,649 products), making it the most active issuer globally.

The vast majority of products issued in Q2 2020 were indeed listed flow and leverage certificates, predominately on the exchanges of Frankfurt and Stuttgart in Germany.

In its domestic market France, the bank sold 241 structured products worth approximately €1.1 billion (Q2 2019: €1.4 billion from 171 products). The products, which were distributed, among others via Adequity, DS Investment Solutions, Irbis Finance, Oddo & Cie and i-Kapital, included 129 structures linked to a single index, of which the Euro iStoxx Equal Weight Constant 50 (22 products) was the most frequently used.

A further 47 products were tied to a single share, including Total (17 products), Unibail Rodamco and Bouygues (five each) while another 53 products were linked to a mutual fund (Solys Euro Evolution I Fund).

Other European markets where the bank was active were Italy (€65m from 26 products), Germany (€11.4m from 25 products), and the UK (£36m (€40.8m) from 21 products).

Outside Europe, it was the manufacturer behind 261 products (US$932m) targeted at private investors in Taiwan. In Japan, the bank issued nine products (US$64m) which were distributed via local securities firms while in Hong Kong SAR it launched 1,332 warrants and callable bull bear certificates.

As of 30 June 2020, the group’s consolidated balance sheet included debt securities issued of 136.3 billion (end-December: €125.2 billion) and an outstanding for hedging derivatives of €12.7 billion (€10.2 billion).

The parent company adjusted 2020 funding programme includes approximately €13 billion of vanilla debt while the annual structured notes issuance volume, at €19 billion, is in line with amounts issued over the past years.

The group identified only €3 billion in senior non-preferred debt for further issuance prior to year-end, as it is ‘already well advanced’ in its funding programme. As of 17 July 2020, €11 billion worth of structured notes has been issued by the bank with an additional €0.55 billion issued by subsidiaries.

Click the link to read the full second quarter 2020 results, presentation, and consolidated financial statements.