The pressure will have been too great. The massacres in Ukraine, the deployment of the Russian army in the Donbass with a view to a major offensive, a crescendo of sanctions against Putin, even the recent placing of Russia in selective default by the S&P rating…. Societe Generale has finally decided to draw a line under its Russian banking activities.
In a press release issued this morning, the bank announces an agreement to sell its entire stake in its Rosbank banking subsidiary and its Russian insurance subsidiaries to Interros Capital, the previous shareholder of Rosbank, a subsidiary of Interros, main shareholder of Norilsk Nickel, the largest nickel producer in the world.
Former (briefly) Deputy Prime Minister of Boris Yeltsin, in charge of privatizations, the owner of Interros, Vladimir Potanin, one of the richest men in Russia, is one of his oligarchs who still escape sanctions, both European than American. “This agreement complies to the letter with European and American sanctions”, specifies a source of the bank.
An exit option considered from the start
This Societe Generale agreement is “the fruit of several weeks of intensive work”, the statement said, suggesting that the French bank had made its strategic decision to leave Russia in the early hours of the war in Ukraine. She had also been the first French bank to communicate on the financial impact of a possible “expropriation” on March 3.
In the meantime, the bank has been very cautious in its communication, highlighting its responsibility towards its employees and customers in Russia. Until arousing, here or there, criticism of his reserve. But the choice had been made. All that remained was to put it to music and find an “acceptable” buyer.
The closing of this transaction should “Intervene in the coming weeks”. It is the first European bank with a high exposure to Russia to announce its withdrawal from the Russian market. UniCredit bank talks about exit scenarios.
Other French banks, as BNP Paribas or Crédit Agricole have also announced the cessation of their activities which were however limited to the business of investment banking and financing, a scope easier to manage. Nothing to do with Rosbank, which has some 12,000 employees and two million active customers in Russia.
An impact of 726 million euros on the solvency ratio
According to the bank, the impact of this sale of its Russian activities should be around 20 basis points on the CET1 capital ratio (“hard” equity), or 726 million euros. This is therefore significantly less than the impact of 50 basis points (1.8 billion euros), advanced on March 3.
This mainly concerns the impairment of the net book value of the assets sold, which will be “widely” compensated by the deconsolidation of the bank’s local exposure to Russia (15.4 billion euros of exposure “in the event of default”) and the payment of an amount not specified by the acquirer but which includes the repayment of a subordinated debt granted by Societe Generale to Rosbank (500 million euros).
The impairment on the Russian assets amounts to some 2 billion euros, or a net book value reduced to almost zero. A negative exceptional item of 1.1 billion euros, with no impact on the solvency ratio, will also be recorded, linked “to the normative entry into the charge account of the conversion reserve”. Clearly, an exceptional loss linked to the depreciation of the rouble. In total, the bill therefore amounts to 3.1 billion euros.
A decision widely awaited by the markets
These charges and exceptional items will be recorded in the accounts for the first half of the year, closed on June 30. They have already been largely taken into account by the markets: the Societe Generale share has lost since the outbreak of hostilities in Ukraine nearly a quarter of its market capitalization, i.e. 7.7 billion euros evaporated on the stock market on the period.
On Monday morning, the announcement was greeted on the stock market by a rebound of nearly 7% in the stock to 23.3 euros… a long way, however, from certain price targets of 48 euros from certain analysts the day after the publication of the results. 2021. “The Stock Exchange appreciates clear-cut decisions more than half-measures in the face of a conflict that promises to drag on forever”notes a manager.
“The signing of an agreement for the sale of its Russian subsidiary Rosbank is an important step in the right direction. However, this transaction still needs to be approved in the coming weeks and our concerns about consensus downgrades and the risk of French elections remain short-term.”comments Flora Bocahut, financial analyst at Jefferies.
The bank also took care to confirm all of its distribution distribution policy for the 2021 financial year, namely a dividend of 1.65 euros per share (i.e. a yield of 7% at the current price) and a €915 million share buyback program.
A strategy turned towards the East questioned
Leaving Russia is a heavy decision for Societe Generale, which in recent years had redeployed its international retail banking strategy around three countries, Russia, the Czech Republic and Romania (after withdrawing from Poland and the Balkans). And Russia represents (has), by far, its main international asset. These three markets were then hailed by the bank as “engines of growth”weighing some 20% of the turnover of the entire retail banking division of the group, with some 6 million customers (2 million in each of the three countries).
Despite the sanctions imposed on Russia in 2014, following the annexation of Crimea, Societe Generale had always shown its serenity with regard to its subsidiary by highlighting its management ” autonomous “ and standards “rigorous” in terms of compliance.
The Russian adventure for the French bank began in 2006 when the Russian government wanted to attract international investors. It was also the time when the Russian central bank decided to clean up a banking sector that was as corrupt as it was fragmented. Mission largely successful.
Ten years of effort
Despite the country’s bad reputation, Societe Generale, then headed by Daniel Bouton, decided to take up the challenge by first taking 10% of Rosbank and finally acquiring 99.98% of the bank from Vladimir Potanin, all for an estimated total investment of $4 billion. The very high margins generated in Russia have, it seems, swept away the reluctance internally.
The French bank knew the country well, it is true, and was one of the first Western banks to open an office in Moscow in the 1970s. And it knew how to manage unmanageable mores and customs by imposing an iron disciple in its subsidiary and by negotiating the meanders of Russian politics as well as possible, as during the arrest (and dismissal) in 2013 of the boss of Rosbank, since cleared of all charges. In total, it took ten years for the Rosbank subsidiary to be profitable and to become an axis of development for the group.
Alas, the war in Ukraine destroyed all these hopes. And the market “the most promising of the next few years” has become a nightmare, shattering the bank’s strong rise on the stock market and the renewed confidence of investors in the group’s strategy led by Frédéric Oudéa.
This also brings us back to the delicate question of reputational risk, and its cost, linked to a bank’s investments. It is now easy to ask the question of the bank’s presence in Russia, but this theme has never really been addressed before, at least officially, by stakeholders or financial analysts (or even ESG).
The bank even risks a double penalty: it is still very present in the Czech Republic and in Romania, while the countries of Eastern Europe will be the most affected by the war in Ukraine and the string of sanctions that are falling on Russia. The worst is always to be expected.