Inside SocGen’s succession plan: why the French bank needs a fresh start

In January 2020, as they navigated between meetings at the grand Hyatt Hotel near Moscow’s Bolshoi Theater and the headquarters of Russia’s Rosbank, Societe Generale board members debated an issue that would come back to haunt the French bank.

Should SocGen separate from its Russian subsidiary, unloved by investors but defended by CEO Frédéric Oudéa, and which was finally making a profit?

The push to keep Rosbank won, despite some internal grumbling, several people familiar with the talks said.

But, ultimately, SocGen’s attachment to Russia was to hasten the start of a process to replace Oudéa, one of Europe’s longest-serving bank chief executives, after the invasion of Russia. Ukraine has pushed it into a costly race to exit this year, others close to the lender said.

SocGen, one of France‘s largest banks, is now seeking to resolve a succession dilemma intended to help it draw a line under years of crises, resets and restructurings and capitalize on a recent turnaround in its profits – despite a loss of 1.5 billion euros in the second quarter due to Russia.

Forced back into firefighting mode by the episode after 14 years at the top, Oudéa agreed to step down in 2023, after initially probing directors about a two-year extension, three people familiar with the talks said.

Sébastien Proto could be a candidate for the post of CEO of SocGen, according to relatives of the candidates © Société Générale

SocGen’s Board of Directors, led by Chairman Lorenzo Bini Smaghi, is convinced that a fresh start is needed. She took the unusual step in the island world of French banking, accustomed to carefully choreographed and internal handovers, to open up the search publicly and to look beyond the walls of SocGen. Foreign candidates could even be in the frame, say people familiar with the bank.

“The board insisted on seeing all the best options in the market,” said a person familiar with the process, adding that directors were looking for a clean break from the past that would give them more influence over strategy.

“They think it could change the dynamic of banking ‘jamming’, which has been the case for years.”

Since Oudea took over in May 2008, the stock has plunged 71% and its valuation is among the worst of any major lender in Europe. It has a market cap of €19 billion, similar to a host of regional US lenders and well below €60 billion for French rival BNP Paribas and $109 billion for Goldman Sachs.

Line chart showing Societe Generale's price-to-book ratio (x) versus other banks since early 2020

Over the past four years, the bank has issued several profit warnings and in 2019 had to cut thousands of jobs in its once vaunted trading division, which specializes in financial engineering and exotic derivatives.

A year later, at the onset of the coronavirus pandemic, he had to further limit risk within the unit after the equity sector suffered hundreds of millions in losses when companies abruptly canceled dividends in start of the pandemic.

Due to its declining market share and cheap valuation, it has been linked with numerous suitors, including Italy’s UniCredit, with which it explored a deal in 2018.

With SocGen on a better trajectory, but the turnaround is far from complete, the possibility of an outsider getting the job carries more weight than Parisian bankers had long believed possible. The pool of top five contenders includes two strong internal candidates.

One, Sébastien Proto, a former Rothschild banker hired four years ago and a graduate of the same elite school as Emmanuel Macron, has the important task of merging and digitizing SocGen’s two French banking networks that could place him in pole position, people familiar with said the candidates.

The other, Slawomir Krupa, heads SocGen’s investment banking, another key division.

A pedestrian sits in front of the Societe Generale headquarters in the La Défense business district in Paris, France, Tuesday, March 24, 2020
Headquarters of Société Générale in the business district of La Défense in Paris © Cyril Marcilhacy/Bloomberg

SocGen declined to comment on the process, which is tentatively expected to conclude by October but could be finalized next month. Oudea, who will only have a say as a board member, has expressed a preference for an inside hire, two people said, after he began grooming Proto and Krupa for the job.

The most important task for any successor will be to give SocGen the strategic boost that some analysts, bankers and insiders believe it has lacked in recent years, as some rivals such as the largest national lender BNP Paribas have taken the not on expanding their business with companies across Europe. .

Rising interest rates herald a possible period of greater profitability for the European financial sector, which SocGen will want to take advantage of as it seeks to expand its business in the home market. It will also have to deal with the potential turbulence of dysfunctional energy markets and soaring inflation.

For much of Oudéa’s tenure, overhauls were the result of crises, and a group that was once a pioneer in equity derivatives emerged from the last decade with a leaner investment bank and less of a dominant franchise in this space. .

Line chart of rebased stock prices showing that Societe Generale has underperformed its domestic and European peers

The managing director is credited with certain successes, such as the creation of the largest online retail bank in France by number of customers, Boursorama. He also recently launched a plan to significantly expand SocGen’s auto leasing operations with the acquisition of LeasePlan for €4.9 billion.

As a result, underlying earnings have stabilized and improved in recent quarters, while the repositioning of investment banking has significantly reduced risk and ended a string of embarrassing losses.

Citi analysts said this month that SocGen is now one of their top investment picks “given its strategic progress, corporate and investment banking turnaround,” but that the rise was largely due to its rock bottom valuation.

SocGen stock has never rallied since a notorious fraudulent trading scandal in January 2008, just as the subprime mortgage crisis in the United States began to wreak havoc on banks around the world.

Oudéa – who in the 1990s worked for Nicolas Sarkozy in government – rose to the top following the rogue trading scandal, which cost SocGen 4.9 billion euros and was followed by the departure of another candidate for the post of general manager, Jean-Pierre Mustier.

Mustier, who led Italy’s UniCredit for four years, has not yet appeared, two people familiar with the matter said.

Ten years later, another setback cost another future general manager his chance. When US regulators demanded a scalp following their Libor rate-rigging investigations, Didier Valet, then deputy chief executive, left the bank. SocGen then paid $2.6 billion to settle several French and American cases, including Libor.

Outside the ranks of SocGen candidates, several bankers have cited Jacques Ripoll – a former employee who recently left a senior position at Crédit Agricole’s investment bank – as a strong potential candidate, although he will join the French energy group Eren.

Laurent Mignon, the head of rival French banking group BPCE, was also approached by SocGen as he is seen as having the right qualities for the job. Ripoll and Mignon declined to comment.

Proto’s flaws include that he has never worked in the corporate markets side of the business, and the 44-year-old is still a relatively newcomer to the bank, only recently in a position that involves the supervising large teams.

But he has broad insight into other parts of SocGen’s operations, people who know him said. The former investment banker advised banks such as Crédit Agricole on complex reorganizations.

A non-French candidate was also being considered, two people familiar with the talks said, along with a high-ranking investment banker.

The stakes are high for Oudea’s successor. While recent results inspire optimism, SocGen continues to trade at a “distressed valuation”, said Bank of America analyst Tarik El Mejjad, and to sufficiently increase its capital cushion ahead of tough new regulations Basel IV will require “flawless delivery of its targets”.

“Frédéric did a very good job after taking over the bank at a time of extreme difficulty. But he stayed too long,” says a former SocGen executive close to Oudéa.

“The board needs to find someone younger who can give the bank a new direction. It is clear that some of the company’s problems remain.

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