Profits to be hit by €1.4bn writedown, SocGen warns
Published 14/01/2010 | 05:00
SOCIETE GENERALE, the second-largest bank in France, warned yesterday that fourth-quarter profits would be hit by a €1.4bn writedown of toxic debt as the value of its investments in US housing loans collapsed further.
The bank, which most analysts thought had put the worst of its losses behind it after announcing a record €4.9bn loss in January 2008 over the rogue trading of Jerome Kerviel, is now expecting only a slight profit for the fourth quarter of 2009. Most analysts had been expecting a profit of about €960m.
The bank, whose former chairman, Daniel Bouton, quit in April last year in the wake of the rogue trading scandal, to be replaced by Frederic Oudea, explained: "Taking into account the contrasted signals coming from the US residential real estate market in the fourth quarter, the group has decided to subject to much stricter assessment the valuation assumptions of CDOs (collateralised debt obligations) of residential mortgage-backed securities."
It said that it was increasing its estimate for losses on these prime and subprime loans and taking extra provisions because the recovery rates of some housing loans had deteriorated from 50pc to less than 40pc.
At the end of December a widely followed survey on house sales in the US showed that a spring and summer recovery in prices had run out of steam.
Many economists believe the number of foreclosures and delinquency rates on mortgage payments will increase this year.
Jaap Meijer, an analyst at Evolution Securities, warned last month that SocGen had the highest exposure to off-balance sheet debt securities -- known euphemistically as "structured credit" -- of any European bank.
He estimated that overall losses from such debt for SocGen, if it was forced to provide for them, could be as high as €7.7bn before tax. He believes many banks have not been conservative enough in estimating their potential exposure.
Meanwhile, at a trading level, the bank said that corporate and investment banking income was expected to be down against the third quarter, reflecting lower investor activity from November.
However, it said that its retail networks in France, Central Europe and the Mediterranean had been resilient. The bank was upbeat about its prospects for 2010.
It said: "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."
Its Paris-listed shares dropped 4pc to €49.53.
Last October the bank raised €4.8bn in new shares to allow it to buy back the French government's stake, taken during a bailout at the height of the credit crisis.