SocGen profit warning rekindles toxic asset fears

SocGen profit warning rekindles toxic asset fears

Paris: Societe Generale issued a profit warning on Wednesday following a new 1.4 billion-euro ($2 billion) hit from risky assets, highlighting concerns that the worst of the financial crisis may not be over.

SocGen, France’s second-biggest bank by market capitalisation, said it was only expecting to report a “slight profit" for the fourth quarter of 2009.

This would be well below analysts’ expectations of a net profit of around €960 million, according to Thomson Reuters I/B/E/S estimates, and SocGen shares fell sharply.

The profit warning served as a reminder that toxic assets are still a problem for the international banking industry although some analysts said SocGen has been lagging others in facing up to the issue.

“We have consistently said that SocGen was the only bank left that still had a significant loss to take in structured credit," said Arturo de Frias of Evolution Securities.

Evolution has a “sell" rating on SocGen.

SocGen said the impact from risky assets comprised writedowns on collateralised debt obligations (CDOs) linked to residential mortgage-backed securities, changes in the mark-to-market valuation of credit default swaps (CDS) and the revaluation of financial liabilities.

While domestic and international retail banking operations performed well during the fourth quarter, the bank had lower corporate and investment banking division revenue, SocGen added.

SocGen shares were down 3.8% at €49.71 by 1113 GMT, making SocGen the biggest loser on France’s blue-chip CAC 40 index.

The DJ Stoxx European banking sector index was down 0.8% amidst some concerns that other banks may also announce new writedowns, although rival banking stocks did not fall as much as SocGen.

BNP Paribas, France’s biggest bank by market value, was down 1.5% at €57.60 while Credit Agricole was down 0.1% at €12.91.

Financial Sector Worries

In December the European Central Bank raised its estimate of writedowns from banks in the eurozone, while analysts expect that America’s top banks may suffer a fall in profits due to lower debt trading volumes.

“The banking sector is not the best sector for investors to be in at the moment," said GSD Gestion fund manager Christophe Gautier, whose firm is “underweight" on financials.

However, Societe Generale was upbeat about its prospects for 2010. SocGen plans to centralise around €37 billion worth of toxic assets into one single legal entity which could help it reduce losses from this area.

“Thanks to strong customer franchises, with significant growth potential, a robust financial structure and a new management team, Societe Generale is in a favourable position to go into 2010 with confidence," it said.

The bank added that its fourth-quarter results would include a €0.6 billion capital gain from the merger of its SGAM asset management division with the fund management arm of rival Credit Agricole to form a new firm called Amundi.

SocGen has been battling back since it announced a €4.9 billion trading loss in January 2008, which it blamed on unauthorised deals made by former junior trader Jerome Kerviel.

The Kerviel losses briefly reignited speculation that SocGen could face a new bid from BNP Paribas, although SocGen has vowed to stay independent. BNP has a current market capitalisation of around €68 billion, while SocGen’s stands at €37 billion.

SocGen is also embroiled in a legal suit with the former chief investment officer at its U.S. asset management unit TCW and, along with other banks around the world, faces a clampdown on its bonus payments.

SocGen shares have risen around 2% so far this year, slightly underperforming a 4 percent gain in the European banking index. The stock rose 44% last year, well below BNP Paribas’s 90% gain.