DBRS Morningstar Confirms Société Générale’s Issuer Ratings at A (high)/R-1 (middle); Stable Trend

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 all ratings remains Stable. DBRS Morningstar has also maintained the Bank’s Intrinsic Assessment at A (high) and the support assessment at SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of SG’s Long-Term ratings at A (high) continues to reflect the Group’s well-established and diversified franchise as one of Europe’s leading banking groups. In addition, the ratings continue to be underpinned by robust funding and liquidity metrics. The confirmation also takes into account SG’s robust capital base, with ample buffers over regulatory requirements and a total loss-absorbing capacity that has been reinforced in recent years.

The rating action also reflects the asset quality improvement SG has demonstrated in recent years, as well as the Group’s conservative risk profile and strong balance-sheet. DBRS Morningstar notes, however, that state guaranteed loans and loan moratoria are likely artificially suppressing past-due loans, and preventing the deterioration of traditional asset quality metrics. Therefore, new NPLs are expected to materialise in 2021 with the end of the support measures.

The ratings also take into account the major economic disruption caused by COVID-19, which affected the Bank’s profitability in 2020. Whilst SG generally generates solid earnings thanks to its strong degree of diversification and lower volatility compared to its global peers, the Group reported its first loss since the 2008 financial crisis, primarily related to the sharp drop in the result of the Corporate and Investment Banking (CIB) segment resulting from the market dislocation in H1 2020, on top of higher levels of cost risk induced by the deterioration in economic conditions. Despite this, the Group experienced a solid recovery in H2 2020 in all business lines, boosted by its continued commitment on cost reduction. The confirmation of the ratings also incorporates DBRS Morningstar’s expectation that 2021 profitability will be more in line with previous years, with cost control as a key driver in the current challenging environment.

RATING DRIVERS
Over the longer term, if the Group substantially improved its capital position as well as its profitability and efficiency metrics, whilst maintaining solid performance in its international businesses and its current risk profile, the ratings would be upgraded.

A downgrade of the ratings would arise from a sustained decline in the Group’s profitability or a significant deterioration of its capital cushion. A downgrade would also occur if weaknesses materialise in the Bank’s risk management.

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 Banking and Financial Services (IBFS) and Global Banking and Investor Solutions (GBIS). In response to the COVID-19 crisis, the Group has accelerated its cost reduction plan, meeting its target to reduce its cost base by EUR 700 million. In addition, SG announced additional cost reductions of EUR 450 million by 2022-2023 in its Global Markets division as well as a EUR 450 million decrease in French Retail Banking to be achieved by 2025. The Group is also in the process of selling its asset management business, Lyxor, to Amundi

Whilst SG generally generates good underlying earnings, supported by its diversified franchise, 2020 results were affected by the COVID-19 crisis, especially in H1 2020. SG reported a EUR 258 million loss in 2020 compared to a EUR 3.2 billion profit in 2019. This was mainly driven by a sharp drop in results from the CIB division as a result of market dislocation in H1 2020, revenue pressure and higher provisions resulting from the deterioration in economic conditions, partially mitigated by strong cost reductions on the back of the Group's cost savings plan. Nevertheless, DBRS Morningstar notes the Bank experienced a recovery in H2 2020. We expect pressure on net interest income to continue due to the low interest rate environment, but the cost of risk to revert to lower levels in 2021. We also expect SG to continue managing its cost base efficiently on the back of the additional cost savings initiatives announced in 2020, especially as the cost-to-income ratio (as calculated by DBRS Morningstar) was above peers at 75.6 % in 2020 vs 71.9% in 2019.

DBRS Morningstar views SG’s risk profile as conservative, benefiting from strong diversification. DBRS Morningstar notes the lower than average exposure to the corporate and SMEs sectors compared to other European investment banks, which limits the Group’s concentration risk. Whilst the Group has generally demonstrated a good track record in managing its market risk related to its capital markets activity, SG remains vulnerable to earnings volatility, as demonstrated in H1 2020. DBRS Morningstar notes the improvement in asset quality observed in recent years, reflecting a reduction in non-performing loans (NPL) and tight origination standards. The share of NPLs in gross outstandings (including exposures to financial institutions) was 3.3% at end-2020, down from 4.2% at end-2017. The Group has not experienced any signification deterioration in asset quality as a result of the COVID-19 crisis, with limited impact from expired moratorium as of end-2020. However, we expect NPLs will rise after the support schemes expire.

SG’s funding profile remains strong. Customer deposits represented the major part of the Group’s funding at end-2020. 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 243 billion, covering around three times the Group’s short-term funding. The LCR ratio at end-2020 was 149% compared to 119% at end-2019, and the NSFR was well over the 100% requirement at end-2020.

DBRS Morningstar views SG’s capital as solid and its underlying earnings generation capacity as good, and notes that the Group’s capital has generally improved in recent years. The Bank had a fully loaded CET1 ratio of 13.2% at end-2020, compared to 12.7% at end-2019. SG also reported a fully-loaded total capital ratio of 18.9% at end-2020. This provides the Bank with ample cushions of around 420 bps and 560 bps over the SREP regulatory requirements for CET1 and Total Capital. The fully loaded Basel 3 leverage ratio was 4.7% at end-2020. DBRS Morningstar also notes that SG has been actively building up its loss absorption capacity, through issuances of Senior Non-Preferred and subordinated instruments. The Group’s TLAC ratio (including 2.4% of Senior Preferred debt) was 30.9%, well above the 2020 and 2022 FSB requirements of 19.5% and 21.5%, respectively. The MREL ratio was also in excess of the future requirements, at 28.5% of RWAs. The Group is seeking to resume payments to its shareholders in 2021 in line with the ECB's latest recommendations on dividends.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 (June 8, 2020) https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. and the DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021) https://www.dbrsmorningstar.com/research/372344/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support.

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

The sources of information used for this rating include Société Générale 2020 Report, Société Générale 2020 Press Release, Société Générale 2020 Annual Financial Data, Société Générale 2020 Annual Results Presentation, Société Générale 2020 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.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/377406

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

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: April 27, 2020

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