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Faute de mieux

8 November 2011 By Margaret Doyle

SocGen is making a virtue of a necessity. The French lender has scrapped its 2011 dividend in an effort to boost its capital ratios. In truth, it had little choice. The European Banking Authority reckons SocGen needs an extra 3.3 billion euros to hit a 9 percent capital target by next June. With private investors shunning banks, and the shares languishing almost two-thirds below their February peak, the dividend cut was the only way to avoid a dilutive government recap.

Foregoing the dividend is bitter medicine for investors who have seen the shares plunge almost two-thirds from their February high. Even after the ravages of the financial crisis and a 5 billion euro rogue trading loss, the bank still managed to pay a dividend of 25 cents per share in 2009.

But the alternatives are even less attractive. Equity markets are effectively closed to banks. And with SocGen’s capital hole equivalent to around a quarter of its market cap, issuing shares would have meant accepting the government as a big shareholder. Moreover, the French government – worried about preserving its triple-A credit rating – has little appetite for buying bank stock.

Even with the dividend cut, SocGen will still have to scramble to meet the capital target. At the end of September its core Tier 1 capital was 8.4 percent, using the EBA’s measurement. The bank thinks it can boost that by 52 basis points over the next nine months, and close the remaining small gap by shrinking its balance sheet.

SocGen has already embarked on an aggressive shrinkage plan, focused on its investment bank. It offloaded assets worth 10 billion euros between July and the end of October at a small loss of 121 million euros, with more cuts to come.

Moreover, SocGen’s investment bankers are sharing some of the pain. This year’s bonuses will be well below last year’s. And next year won’t be much better – Michel Peretie, the investment bank head, is pencilling in cost savings of between 5 and 10 percent next year. While investors are hardly leaping for joy, the bounce in SocGen’s shares following publication of its results suggests the news could have been worse.


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