February 9, 2017

SocGen Gets Stress Test Joker With Asset Shuffle

by Breakingviews

Societe Generale is rebalancing with aplomb. The French bank said on Thursday it would buy the remaining 50 percent stake of insurance joint venture Antarius from Aviva for 500 million euros. It will also list part of its car leasing business, ALD Automotive. The deals make sense for a bank that wants to grow both businesses. There may also be a secondary benefit – for its balance sheet.

Chief Executive Frederic Oudea has already shaken up the business portfolio. By the end of 2015, Societe Generale had finished the effective swap of its stake in funds house Amundi for the half of broker Newedge owned by domestic peer Credit Agricole. If that bet on investment banking over asset management appeared a tad risqué, its latest tilt is more obviously prudent.

Insurance is flourishing. Societe Generale grew the revenue from this business by 7 percent in 2016. Logical, then, for Oudea to try to increase its share of the bank’s bottom line from nearly 9 percent in 2016, especially since low rates are hurting French retail banking revenue. Wells Fargo may have briefly made cross-selling a dirty term. But the strategy is working for groups such as Societe Generale, which can sell insurance products to retail banking customers, and vice versa.

Selling a stake in ALD also makes strategic sense. As driverless vehicles become a commercial possibility, giving the division its own currency in the form of listed stock may smooth the route to partnerships with carmakers or tech giants such as Google.

The rebalancing could also give SocGen an advantage when it comes to European balance sheet assessments, notwithstanding its solid showing in 2016. The stress tests that are used to set capital requirements can be kinder to insurance businesses than traditional banking activities, according to one of Europe’s top banking executives and a senior credit analyst. This may be partly because insurance specialists are thin on the ground among the regulators running the tests. Banks, meanwhile, sometimes complain that car leasing isn’t treated as a fully-collateralised lending business when it should be. Happy coincidence perhaps, but Societe Generale may find itself holding a stress test joker after its latest asset shuffle.

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