The pressure will have been too great. The massacres in Ukraine, the deployment of the Russian army in Donbass with a view to a major offensive, a crescendo of sanctions against Putin, even the recent placement of Russia in selective default by the S&P rating… Societe Generale has finally decided end its Russian banking activities.
In a press release issued this morning, the bank announces an agreement to sell its entire stake in its banking subsidiary Rosbank and its Russian insurance subsidiaries to Interros Capital, the former shareholder of Rosbank, a subsidiary of Interros, the main shareholder of Norilsk Nickel, the world’s largest nickel producer.
Boris Yeltsin’s former (briefly) deputy prime minister in charge of privatizations, Interros owner Vladimir Potanin, one of Russia’s richest men, is one of his oligarchs still escaping sanctions, both European and American. “This agreement complies to the letter with European and American sanctions”, specifies a bank source.
An exit option considered from the start
This Société Générale agreement is “the fruit of several weeks of intense 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.
Meanwhile, the bank has been very cautious in its communication, stressing its responsibility towards its employees and customers in Russia. Until arousing, here or there, criticism of his reserve. But the choice was made. All that remained was to put music on it and find an “acceptable” buyer.
The closing of this transaction must “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 He talks about exit scenarios.
Other French banks, such as BNP Paribas or Crédit Agricole have also announced the cessation of their activities, which however were limited to the investment banking and financing business, an area that is easier to manage. Nothing to do with Rosbank, which has about 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 (equity “hard”), or 726 million euros. This is therefore significantly less than the impact of 50 basis points (1.8 billion euros), advanced on March 3.
Corresponds mainly to the impairment of the net book value of the assets sold, which is “widely” offset by the deconsolidation of the bank’s local exposure to Russia (€15.4bn “in case of default” exposure) 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 of the Russian assets amounts to about 2,000 million euros, or a net book value reduced to almost zero. An exceptional negative item of 1,100 million euros will also be recorded, with no impact on the solvency ratio, linked “to the normative income in the debit account of the conversion reserve”. Clearly, an exceptional loss linked to the depreciation of the ruble. In total, the bill amounts to 3,100 million euros.
A long-awaited decision 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. The markets have already taken them into account to a great extent: the Societe Generale share has lost almost a quarter of its market capitalization since the outbreak of hostilities in Ukraine, that is, 7.7 billion euros evaporated in the stock market. values in the period.
On Monday morning, the announcement was received on the stock market by a rise of almost 7% in the price to 23.3 euros… very far, however, from certain price targets of 48 euros from certain analysts at day after the publication of the 2021 results. “The Stock Exchange values forceful decisions more than half measures in the face of a conflict that promises to last forever”says 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 French election risk remain short-term.”says Flora Bocahut, financial analyst at Jefferies.
The bank was also in charge of confirming its entire distribution distribution policy for the 2021 financial year, specifically a dividend of 1.65 euros per share (that is, a return of 7% at the current price) and a share buyback program of 915 million euros.
A strategy turned towards the East questioned
Leaving Russia is a difficult decision for Société Générale, which in recent years had redistributed 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 hailed by the bank as “engines of growth”which represents 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, after the annexation of Crimea, Société Générale has always shown serenity with respect to its subsidiary, highlighting its management “autonomous” and standards “rigorous” in terms of compliance.
The Russian adventure of the French bank began in 2006 when the Russian government wanted to attract international investors. It was also the moment 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 poor reputation, Societe Generale, then headed by Daniel Bouton, decided to take on 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 sky-high margins generated in Russia have apparently eliminated domestic reluctance.
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 handle unmanageable uses and customs by imposing an iron disciple on its subsidiary and negotiating the meanders of Russian politics as best as possible, such as during the 2013 arrest (and dismissal) of the head of Rosbank, since cleared of all charges. In total, the Rosbank subsidiary took ten years to become profitable and become a development hub for the group.
Unfortunately, the war in Ukraine destroyed all these hopes. and the market “the most promising of the next few years” has turned into a nightmare, shattering the bank’s strong rise in the stock market and the renewed confidence of investors in the strategy of the group led by Frédéric Oudéa.
This also brings us back to the sensitive issue of reputational risk and its cost, linked to a bank’s investments. It is now easy to raise the question of the bank’s presence in Russia, but this issue has never before been addressed, at least officially, by stakeholders or financial (or even ESG) analysts.
The bank even risks a double sanction: it is still very present in the Czech Republic and 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 expected.