The outgoing head of France’s Société Générale has dismissed the risk of the US banking turmoil spreading to Europe, arguing that the region’s stricter regulation has been a “fundamental contrast” that has helped protect the sector.
Frédéric Oudéa, who resigned this month after 15 years at the helm of the bank, said he was “confident that the European banking sector will continue to be extremely sound in the coming quarters”.
In the US, he added: “I think the turbulence could continue.”
“There are many small and medium-sized banks [in the US] which are not regulated in the same way as the eurozone and Europe, where you have stability derived from having a framework that takes into account all these crisis simulations,” Oudéa said after SocGen reported higher profits for the first quarter.
The eurozone’s banking regime has remained fundamentally the same since it was introduced in the aftermath of the 2008 financial crisis, as former President Donald Trump scrapped some stress tests and requirements for smaller US banks with assets up to $250bn. dollars.
Such institutions now have to disregard certain unrealized losses on assets in their capital requirements, particularly in their bond portfolios.
The US has suffered several bank failures in recent weeks, but Credit Suisse and the much smaller UK business of Silicon Valley Bank are the only European lenders to be close to collapse.
Second level European banks they also haven’t experienced the same level of customer withdrawals as US regional lenders, mainly because their deposit bases are less concentrated.
“You’ve seen deposits at some US banks drop 10% in one week. . . look at how exceptionally sticky deposits have been across all the big banks in the eurozone,” Oudéa added. “There is a fundamental contrast here.”
Failed US lenders like SVB and Signature Bank had high levels of clients in the tech sector, many of whom withdrew their deposits at the same time. Regulators have highlighted the interconnected nature of these customers and the role social media plays in spreading rumors about banks’ problems.
The US banking market also has a higher level of competition for deposits from other savings products such as money market funds. More than 340 billion dollars flowed US money market funds in March – the highest rate since the start of the Covid-19 pandemic three years ago – much of which came from regional banks.
Conversely, European banks maintained high levels of liquidity, evidenced by UBS taking over Credit Suisse and HSBC taking over SVB UK, and other lenders, such as UniCredit, boosting yields for shareholders.
“European banks are not showing a combination of large unrealized losses on securities portfolios and highly confidence-sensitive financing models,” S&P analyst Giles Edwards said in a recent report. He added that UBS’s acquisition of Credit Suisse was a unique case due to specific “business and risk management shortcomings.”
Some European banks initially suffered when the tech-focused SVB went bankrupt in mid-March, with investors taking flight even though few were directly exposed to the California-based bank. Since then, retail deposits across Europe have shown little sign of running out.
The heavy outflows Credit Suisse suffered in the days leading up to its bailout by rival UBS in March came primarily from its wealth management arm.
Banks in Europe have less exposure to troubled commercial real estate than their US counterparts, accounting for around 8% of loan books at European lenders, compared to 18% at US banks and 36% for lenders US mid-caps, according to Jefferies.
Oudéa said commercial real estate was “likely a risky sector” in the US, but SocGen said on Friday that its exposure to the sector stood at 3.2% of the total, with most skewed to Europe .
This month, SocGen investment bank head Slawomir Krupa is set to replace Oudéa, who took over as chief executive in 2008 after a rogue trading scandal, if shareholders approve the appointment.
Part of Krupa’s mandate will be to try to revive a share price that has never recovered from the financial crisis, despite numerous restructurings. SocGen’s share price plunged 26% in March and has recovered only partially since then, up 13%.
The increase in interest rates has caused some problems for European banks, although margins should generally increase. In France, for example, limits on the mortgage repricing rate are dampening the benefits for lenders and making it more difficult to offer home loans.
SocGen reported a slight increase in deposits on Friday compared to the first quarter of last year. He said that the origin of mortgages in France has decreased compared to the previous year. Net income grew by 5.7% in the first three months of the year to 868 million euros, exceeding forecasts.
“French short-term retail revenues continue to show pressure,” Barclays analyst Amit Goel said of the results, adding, however, that the bank’s performance was solid in investment banking.
Strong bond trading revenues and lower non-performing loan charges during the quarter helped SocGen offset declining revenues at its French retail bank, an area it said was likely to underperform throughout 2023.
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