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Russia Woes Could Hurt Profitability Targets of Société Générale's Local Unit
From the Wall Street Journal of Mon, 22 Dec 2014 14:37:46 EST
A file photo of a sign outside the headquarters of Société Générale in the La Defense business district of Paris.
A file photo of a sign outside the headquarters of Société Générale in the La Defense business district of Paris. Bloomberg

PARIS—Russia’s economic woes could force Société Générale to push back profitability targets in the country by several years, people familiar with the matter said, once again vexing the French bank’s two-decade-old bet on the former Soviet bloc.

Rosbank, Société Générale’s Russian unit and the country’s largest foreign-owned lender, faces a host of difficulties: the sharp drop in oil prices is leading many corporate clients to put large investment projects on hold while a further slide in the ruble against the dollar could destabilize Russia’s retail-banking market.

In addition, Société Générale has to abide by a set of sanctions the West adopted after Russia annexed Crimea and supported breakaway movements in Eastern Ukraine. Those sanctions effectively prevent Rosbank from dealing with many large Russian defense and energy companies at a time when the deteriorating business climate is likely to cause a spike in loan defaults.

The setbacks could wear off the patience of Société Générale, which has poured billions of euros into restructuring its Russian business and strained to reshuffle its local management team following the detention of a top Rosbank executive on bribery charges last year.

The people familiar with the matter say the French bank has no plan to leave Russia and is pinning its hope on a resolution of the military conflict in Eastern Ukraine in the first half of next year as well as on a rebound in oil prices. They also note that Russia accounts for only about 6% of the French bank’s net income.

But with the ruble having declined some 50% this year, they say Société Générale’s goal of increasing the return on equity of its Russian operations to 14% by 2016, from 12.7% in 2013, is in jeopardy.

“It will take another two to three years to hit that target,” one of the people said.

Société Générale’s misfortune in Russia highlights the challenge European banks face in chasing growth outside their safer but stagnating domestic markets. Slower growth in Asia has taken a bite out of U.K.-listed Standard Chartered PLC’s earnings this year, while Banco Santander SA disappointed investors after the Spanish bank faced slower-than-expected growth in Brazil, one of its key markets.

“Banks with a significant exposure to emerging markets aren’t better off,” says Nomura analyst Jon Peace.

In 1993, only two years after the collapse of the Soviet Union, Société Générale was among the first foreign banks to obtain a full banking license in Russia. Through its unit called Banque Société Générale Vostok (BSGV), the French lender initially focused on investment banking and decided to stay in the country even during Russia’s 1998 financial meltdown.

By the middle of the last decade, Russia again became an attractive economy: energy and mining giants thrived on high commodity prices, while Moscow was able to pay down Soviet-era debt; a newborn middle class had a seemingly insatiable appetite for Western consumer goods.

In 2006, Société Générale bought 20% of Rosbank to gain better access to this promising, fast-growing market, with an option to increase its stake by another 30%. “We didn’t want to buy the business in blind faith,” says Didier Hauguel, co-head of international banking and financial services at Société Générale.

Rosbank, which then belonged to the Interros group, a conglomerate controlled by Russian business tycoon Vladimir Potanin, was saddled with a huge staff. Every senior manager had his own bodyguard, and any loan demand would have to go through a gauntlet of bureaucrats, says the person familiar with the matter.

Société Générale became Rosbank’s majority shareholder in 2008, raising its stake to about 58%, before gradually bringing it up to 99.4%. It was only in 2010, however, that the French bank started reorganizing its Russian operations, merging Rosbank with BSGV.

By 2013, Rosbank’s entire top management had been renewed, and Société Générale hoped its perseverance would start paying off. In April of that year, the bank invited a dozen French journalists to Moscow to introduce the new team and discuss its ambitious plans in Russia.

But just days before the planned trip, Russian police broke into the office of Rosbank’s Chief Executive Vladimir Golubkov, and detained him on accusations that he had accepted a 5 million ruble ($159,000) kickback. Mr. Golubkov has denied the accusations.

Société Générale dismissed Mr. Golubkov and hired the chairman of TransCreditBank Dmitry Olyunin to replace him.

In the long run, Russia may still offer growth opportunities for the French bank. “But until now, Société Générale has ran into one problem after another,” says Natixis analyst Elie Darwish.

Write to Noémie Bisserbe at noemie.bisserbe@wsj.com



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