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Nouveau regime

22 December 2011 By Margaret Doyle

Radical measures for tougher times. With its share price plumbing new depths, Societe Generale is moving chief financial officer Didier Valet to be head of its investment bank. The division is at the heart of the French lender’s struggle to meet new capital and funding rules. Outgoing CIB chief Michel Peretie did a good job restructuring the division he took over after the 2008 Kerviel debacle. But his remit had clearly been to grow the business and restore it to its former glory. Someone else will now prune it back.

Peretie, a seasoned former Bear Stearns banker, diversified the bank away from its equity derivatives stronghold towards safer and less capital intensive activities like advisory. He also oversaw the disposal of some 10 billion euros of SocGen’s legacy assets between July 1 and Nov. 1 alone. And he implemented reforms designed to prevent a repeat of 2008’s 4.9 billion euro rogue trading loss.

But Peretie’s main brief – to grow the investment bank – didn’t sit well with the group’s struggle to meet new capital and funding targets. The investment bank must pare down to reassure both equity and bond investors. Valet’s skills as CFO may be more suited to these objectives.

He will have his work cut out. SocGen looks like it should just about hit the new 9 percent European Banking Authority capital target at the end of next June, having decided to pass on its dividend. But funding pressures remain intense.

The French lender is already embarked on a fire sale or shutdown of its dollar assets now that U.S. money market funds are shunning European banks. For example, it quit physical energy trading in the United States less than a year after buying core parts of the former Sempra’s trading operation. And it is turning to alternative sources, like its retail customers, to fund the 10-15 billion euros it will need in 2012.

The European Central Bank is helping, offering euro zone banks 3-year money at around 1 percent. But relying on the ECB is not a sustainable business model. Once Valet has steadied the ship, he and his colleagues will have to show that they have a longer-term strategy to make the bank safer and sounder.

 

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