May 3, 2012 / 6:40 AM / 5 years ago

SocGen's booming fixed income brightens first-quarter profit hit

View of Societe Generale bank's headquarters in La Defense near Paris February 16, 2012.Charles Platiau

PARIS (Reuters) - French bank Societe Generale (SOGN.PA) posted a surprise surge in first-quarter bond, currency and commodities revenue on Thursday, boosting confidence in its business model even as profits suffered from the drive to strengthen capital.

Like European peers, France's second-biggest lender is slashing costs, debt and jobs at its key investment banking division to meet tougher global bank capital rules and better resist the fallout from the eurozone's sovereign debt crisis.

Although the push to sell assets and improve solvency came at a cost, analysts noted strong underlying operations such as a 39 percent jump in fixed-income revenue - defying expectations of a drop-off from its strong performance a year ago.

"The results were pretty strong, said Tom Van Kempen, analyst at ING. "Operations were good and there was positive news on capital. Fixed income came as a surprise, they might have reallocated resources to those activities."

Shares in Socgen rose 4.3 pct to 18.80 euros in early trade. The stock is up 4.8 percent year-to-date, slightly better than a 2.5 percent gain for the STOXX Europe 600 index .SX7P.

SocGen and larger rival BNP Paribas (BNPP.PA), which have been cutting their exposure to the 17-nation eurozone while lending more at home, are still treated as proxies for the euro and their share prices have suffered as market fears intensify over Spain's recession-wracked economy.

BNP Paribas is set to report results on Friday. Analysts said that these would likely show similar underlying trends to SocGen's, given BNP's leading position in euro-denominated bond issuance.

"We expect a relief rally from these results, and anticipate a positive read-through for BNP Paribas that reports 1Q12 tomorrow," said Nomura analyst Jon Peace.

Citing the rebound in financial markets between January and March - which was driven by the European Central Bank's unprecedented injection of cheap funds into the banking system - SocGen Chief Executive Frederic Oudea said there had not been a marked deterioration since.

"Overall, April remained pretty good, pretty decent...In credit risk, we see no deterioration," he told CNBC.

CAPITAL BUILD

SocGen reported a 21 percent drop in net income to 732 million euros ($963 million). Analysts had been forecasting 748.1 million, according to the Thomson Reuters I/B/E/S average of seven estimates.

Revenue fell 4.7 percent to 6.3 billion euros. This was better than the Thomson Reuters I/B/E/S average estimate of 6.2 billion.

The bank sold 6.4 billion euros' worth of loan assets during the first quarter to cut debt, which came at a cost but nonetheless boosted its core European Banking Authority Tier 1 capital ratio - a key metric of banks' ability to withstand losses - to 9.4 percent.

Although the focus on capital hit investment banking earnings the hardest, SocGen has also started to feel the pinch at its 3,250-plus retail branches in France, which saw profits fall year-on-year for the first time since 2010.

The French economy is slowing down and unemployment is at a 12-year high.

French banks face additional uncertainty at home as French voters head to the ballot box on Sunday, with frontrunner Socialist candidate Francois Hollande pledging to regulate banks further and crack down on their risky activities.

BONDS, COMMODITIES SURGE

SocGen's corporate and investment bank, which is shedding jobs and loan portfolios to wean itself off volatile wholesale funding markets, bore the brunt of asset sales and cost-cutting.

Profits at the unit fell 41 percent to 351 million euros, with corporate finance and advisory suffering from losses on asset sales and a drop in activity. SocGen is doing less balance-sheet lending and refocusing its client roster to preserve capital.

One bright spot, however, was the division's bonds, currency and commodities trading unit, which posted revenue growth of 39.2 percent year-on-year.

Although French banks are not seen as strong in this field as they are in equity derivatives, SocGen said it had benefited from growth in flow banking and rates.

"The fixed-income revenues were really, really strong, but it's difficult to assess if it was driven more by client activity or by trading income. There's a question of sustainability," said one analyst who requested anonymity.

By contrast, Germany's Deutsche Bank (DBKGn.DE) and Britain's Barclays (BARC.L) - which are much bigger in fixed income, currencies and commodities (FICC) than SocGen - saw this business line's revenue shrink 8 percent and rise 9 percent respectively.

Editing by James Regan and Sophie Walker

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