SocGen unveils plan to cut costs and up revenue

 
Tim Wallace
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INVESTORS were unimpressed by Societe Generale’s plans to cut costs and grow revenues, sending its shares down yesterday.

The giant French bank wants to increase its return on equity to above 10 per cent by the end of 2016, up from 8.4 per cent last year.

To get there is wants to increase its revenues by three per cent each year, and squeeze its costs down from 66 per cent of revenues to 62 per cent.

At the end of 2016 the bank wants to pay investors dividends of 50 per cent of profits, up from 40 per cent now.

Some of the growth will come from cross-selling to clients across countries and business lines – already €5.5bn (£4.5bn), or 25 per cent of its revenues come from this type of sale.

By region the bank’s goals vary. It expects revenue growth in its mature home market of France to be relatively slow at one per cent per year, but to a strong return on equity of 14 per cent.

By contrast banking income internationally should rise by five per cent per year, giving return on equity of 15 per cent by 2016.

Chief executive Frederic Oudea said the plan would “leverage the full potential of organic growth, synergies and operational efficiency” at the bank.

But investors were less happy, sending its shares down 0.93 per cent.

WHY IS RETURN ON EQUITY SO IMPORTANT?

■ A bank’s return on equity is the ratio showing how much money it makes versus the amount shareholders invested in the company.

■ In ordinary times, the higher the return, the happier the shareholders are with the firm’s performance.

■ After the crash it is particularly important – banks might need to raise capital through equity issuance.

■ They want to run their bank with a return on equity of above the cost of capital to show they are a sustainable business which will pay back investors.

■ Societe Generale wants a return on equity of above 10 per cent by the end of 2016, up from 8.4 per cent last year.

■ Most banks do not publish a cost of capital figure, but for large lenders recently it is typically estimated at around 11.5 per cent.

■ SocGen’s goals are similar to those of other banks.

■ Rival French lender BNP Paribas wants a return on equity of 10 per cent by 2016, while in the UK Barclays is aiming for a return of above 12 per cent on its core business lines.