Odds stacked against SocGen in Russian roulette

(Full story)

By Lionel Laurent and Matthias Blamont

PARIS | Fri Apr 26, 2013 7:07am EDT

(Reuters) - French bank Societe Generale's (SOGN.PA) estimated four billion-euro ($5.22 billion) bet on Russia must start paying off this year to stop investors urging the bank to cut its losses as the economic outlook darkens.

SocGen has for years held up its investment in Moscow-based Rosbank as a key source of future profits that will offset debt woes in Western Europe and rocky post-crisis financial markets.

Time has not been kind. SocGen has yet to deliver on the billions spent building up an 82 percent stake in Rosbank since 2006, integrating its back-office and technology platforms, shaking up management teams and cutting more than 2,500 jobs.

This year, Rosbank is expected to post a slight profit for SocGen's international retail arm after a 2 million-euro ($2.61 million) loss last year. It will be under pressure to show that this is the start of a sustainable and growing trend.

"This year they've really got to show they can provide some kind of profitability from the integration," said Espirito Santo banks analyst Andrew Lim, who believes Rosbank ideally needs to be making an annual profit of 120 million euros to prove it is on track.

"I have a net income forecast of only 50 million euros for 2013, so it is still not enough in my view," he said. "If they don't prove it this year, the natural conclusion would be to either close or sell these operations."

Deutsche Bank estimates Rosbank will make 8 million euros profit in 2013 while JPMorgan analyst Delphine Lee forecasts 18 million euros. While there is clear potential in Russia, this will be the "make or break year", she wrote in a note.

SocGen books the bulk of Rosbank's income at its international retail division. However, some Russian business including consumer-loan arm Rusfinance is booked at other divisions and is not covered by analysts' Rosbank forecasts.

Rosbank, which has a near five percent retail market share, faces a tough 2013. Russia'seconomy is weakening, loan growth is slowing and the fragmented banking market - heavily dominated by state-owned Sberbank (SBER.MM) and VTB (VTBR.MM) - has already seen a slew of foreign banks leave.

Russia recently slashed its economic growth estimate for this year by a third, to 2.4 percent.

This may make it harder for Rosbank to hit its 2015 targets, such as 25 percent growth in retail loans and 15 percent growth in corporate loans. Last year, the bank's retail loans grew 11.9 percent while corporate loans stayed flat.

Some investors see a sale as the best way out.

"There needs to be a (Rosbank) sale as soon as possible," said Frederic Rozier, fund manager at Meeschaert in Paris, which owned 0.01 percent of SocGen's outstanding share capital at end January according to Thomson Reuters data.

"These kinds of markets can deteriorate really quickly. It is not in SocGen's interest to wait if a good offer appears."

A sale of Rosbank would bring in 2.2 billion euros for SocGen, or one times book value, according to research by JPMorgan, which has estimated that SocGen has spent four billion euros building up its stake in Rosbank.

CULTURE CLASH

SocGen declined to comment for this story but has always publicly praised its Russian subsidiary's potential, seen as a key plank of Chief Executive Frederic Oudea's strategy.

"Growth in Russia is our ambition, without forgetting the fact that we still have a lot more work to do," Deputy Chief Executive Bernado Sanchez Incera said in February.