Societe Generale SA Chief Executive Officer Frederic Oudea said recent policy decisions demonstrate the “commitment of Europe to move forward” and make a splintering of the euro area less likely.
“I never believed very much” in a euro breakup scenario, Oudea said in an interview with Bloomberg Television in New York. “Certainly today the probability is even lower than what it was a year ago.”
Germany’s top constitutional court in Karlsruhe today rejected efforts to block a 500 billion-euro ($644 billion) permanent euro-area rescue fund. The decision hands a victory to policy makers seeking to stem the debt crisis and comes days after European Central Bank President Mario Draghi laid out plans to support bond markets in distressed euro-area countries.
The European Stability Mechanism, which will succeed the European Financial Stability Facility, would work in tandem with the ECB’s bond buying to lower yields for countries such as Italy and Spain. Draghi said last week the ECB was ready to buy unlimited quantities of short-dated government bonds of nations seeking aid.
The steps to shore up the euro bolstered banks since late July, when Draghi stated that he would do whatever it takes to save the currency. Societe Generale surged 59 percent in Paris trading since then, to 24.73 euros, compared with a 51 percent advance in the 28-company Euro Stoxx Banks Index.
European banks, hurt last year by a drought in short-term funding and by losses on Greek government debt, have sold assets to help reach stricter capital requirements, known as Basel III. Societe Generale, France’s second-largest bank, sold about 28 billion euros in corporate- and investment-banking assets in the 12 months through June 30, according to its website.
“The bulk has been done” in adjusting the balance sheet, Oudea said today. “We will make money going forward and we’ll meet our objective to be at 9 percent plus at the end of 2013,” he said, reiterating the bank’s capital goal under Basel III.
Societe Generale is “on target” in refocusing its corporate- and investment-banking business after cutting about 1,600 jobs at the unit worldwide, the CEO said. “It’s behind us, and we should benefit in the second half from the full impact of this cost reduction.”
Oudea said banks need to “be realistic” in their outlook for return on equity, a common measure of profitability. Banks’ ROEs will probably be around 10 percent to 12 percent, Oudea said, without making a specific forecast for Societe Generale.
Return-on-equity levels should cover the industry’s cost of capital, said Oudea, 49. “The model will be very different, very resilient,” he said. “Especially in a low-rate environment, the cost of capital should also go down for those business models.”
Oudea said European companies will rely less on loans and more on capital markets to finance operations and investment.
“There will be less loans in the balance sheet, more bonds, more high-yield to finance the economy,” Oudea said. “Banks which will take advantage of that transformation will be able to show some growth. It will be moderate, but I think at least they should be able to deliver a decent profitability to their shareholders and serve efficiently their clients.”