Press Release

DBRS Morningstar Confirms Société Générale at A (high); Trend Revised to Stable from Positive

Banking Organizations
April 27, 2020

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Société Générale, S.A. (SG or the Group), including the Long-Term Issuer Rating of A (high) and the Short-Term Issuer Rating of R-1 (middle). The trend on the Group’s long-term ratings has been revised to Stable from Positive while the trend on the short-term ratings remains Stable. DBRS Morningstar has also maintained the Bank’s Intrinsic Assessment at A (high) and support assessment at SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS
The change of the Trend to Stable reflects our view that we expect SG to suffer a deterioration in the quality of its loan book exposures, driven by the outbreak of the COVID-19 and a major global economic slowdown. However, the impact on the Group’s credit profile is likely to be mitigated by its strong diversification, conservative lending standards, and strong balance-sheet. We expect SG’s profitability to weaken as the Group will have to step up loan loss provisioning while loan growth is likely to reduce. These impacts will likely emerge in the coming quarters, whilst the implications for the medium to long-term will depend on the evolution of the outbreak.

We will continue to monitor the performance of the Bank’s asset quality, as well as all measures to support the franchise and customer base. At the same time, we will continue to incorporate the mitigating impact of the unprecedented support measures announced by the French government, as well as several other international authorities and central banks.

The confirmation of SG’s Long-Term ratings at A (high) continues to reflect the Group’s solid underlying profitability, supported by its well-established and diversified franchise as one of Europe’s leading banking groups. The ratings continue to be underpinned by a robust funding and liquidity profile. The confirmation also reflects SG’s strengthened capital base, which continues to be driven by good earnings generation capacity and was recently reinforced by the risk-weighted asset (RWA) reductions in the Global Markets business, as well as optimisation of the international retail presence.

RATING DRIVERS
Any upgrade is unlikely in the short-term given the recent change of trend. However, an upgrade could occur should the Group manage to continue improving its capital position, cost efficiency and earnings generation, whilst limiting the impact on asset quality from the Covid-19 pandemic.

The ratings could be downgraded in case the Bank’s profitability or asset quality were to suffer a material deterioration, potentially as a result of the Covid-19 pandemic. A downgrade could also occur should the Group experience a significant weakening of its capital cushion.
RATING RATIONALE
SG’s ratings are underpinned by its well-established franchise as one of the leading banking groups in Europe with a strong market position in France, its home market. Reflecting a broad business mix and a significant international presence, the Group services its customers through three business divisions: French Retail Banking (FRB), International Retail Banking and Financial Services (IRBFS) and Global Banking and Investor Solutions (GBIS). The Group has accelerated its plans to dispose of non-core businesses, and has significantly reduced costs and RWA in its capital markets activities. In particular, the GBIS division successfully accomplished a EUR 10 billion RWA reduction by 2019, ahead of the 2020 target.

SG’s underlying earnings remained supported by its diversified franchise, albeit they were lower in 2019. This reflected margin pressure in its domestic retail business, and a tough operating environment in capital markets activities, but it also benefited from the growth of its international network and specialised financial services. Like other French banks, SG’s cost efficiency has been weaker than international peers. However, expense control remains an important strategic priority for management. Due to a difficult operating environment in 2019 and in early 2020, SG revised downwards its profitability targets and accelerated the refocusing of its regional and business portfolio, aiming at strengthening the Group’s profitability and capital. Furthermore, we expect the global coronavirus pandemic to lead to weaker lending growth, lower fees and commissions as well as higher loan loss provisions. In 2019, revenues were adversely affected by the restructuring and challenging market conditions in the Group’ capital markets business as well as continued pressure from low interest rates in the French retail division. The reported group net income was down by 21% year-on-year (YoY) to EUR 3.9 billion, reflecting both a decline in the underlying earnings mostly driven by lower revenues, and a more negative balance of exceptional and non-economic items linked to restructuring plan, which netted EUR 813 million after-tax in 2019 (2018: EUR 604 million).

DBRS Morningstar views SG’s risk profile as conservative, benefiting from the strong diversification of SG’s operations. However, as the Covid-19 pandemic outbreak develops, DBRS Morningstar will continue to closely monitor the Bank’s risk profile, while taking into consideration the French government and the European authorities’ support measures. DBRS Morningstar views positively that the improvement in asset quality observed since 2014 continued over the last year, reflecting active NPL reduction and tight origination standards. The share of non-performing loans (NPL) in gross outstandings (including exposures to financial institutions) was 3.2% at end-2019, down from 3.6% at end-2018 and 4.4% at end-2017.

SG’s funding profile remains strong. Customer deposits represented the major part of the Group’s funding at end-2019. The exposure to wholesale funding is mitigated by good access to the markets, well diversified funding sources and strong liquidity. The unencumbered liquid asset buffer was EUR 190 billion, covering around three times the Short-Term funding. The LCR ratio at end-2019 was 119% compared to 129% at end-2018, and the NSFR was well over the 100% requirement at end-2019.

DBRS Morningstar views SG’s capital as strong and its underlying earnings generation capacity as good. The Group’s capital has generally improved in recent years. The Bank had a fully loaded CET1 ratio of 12.7% at end-2019 compared to 10.9% at end-2018, and SREP requirements of 13.4% at end-2019. This improvement was driven by organic capital generation, disposals in CEE and RWA reductions in Global Markets, making SG better-equipped to absorb potential shocks such as the COVID 19 pandemic or the decline in oil prices. The Group has announced the suspension of its 2020 dividend, which combined with lower regulatory requirements, will provide additional flexibility to manoeuvre in the currently uncertain environment. DBRS Morningstar also notes that SG has been actively building up its loss absorption capacity, through issuances of Senior Non-Preferred and subordinated instruments.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The Grid Summary Grades for Société Générale S.A. are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Strong/Good; Risk Profile – Strong/Good; Funding & Liquidity – Strong; Capitalisation – Strong.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (11 June 2019) https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations and DBRS Criteria: Guarantees and Other Forms of Support (22 January 2020) https://www.dbrsmorningstar.com/research/355780/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support

The sources of information used for this rating include Company Documents, Société Générale 2019 Report, Société Générale 2019 Press Release, Société Générale 2019 Financial Data, Société Générale 2019 Presentation, Société Générale 2019 Pillar 3 Report and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

The sensitivity analysis of the relevant key rating assumptions can be found at: http://dbrsmorningstar.com/research/360267

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.”

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Arnaud Journois, Vice President – Global Financial Institutions Group
Rating Committee Chair: Ross Abercromby, Managing Director - Global Financial Institutions Group
Initial Rating Date: July 26, 2001
Last Rating Date: May 23, 2019

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