When a bank changes management in the midst of a crisis, the new boss typically moves quickly to make changes and impose his or her authority. But the new CEO at Société Générale appears determined to stress continuity as much as change.
Frédéric Oudea, who took over the top job in May, says the No. 2 French bank has cleaned up the problems that caused a massive €4.9 billion ($7.5 billion) loss from unauthorized trading earlier this year. But Oudea plays down the trading scandal as an aberration and insists that the bank will pursue a largely unchanged growth strategy. “I am very happy that we have implemented change while preserving continuity,” the mild-mannered, easygoing executive says in one of the first in-depth interviews he has granted since being named CEO in a bid to restore the bank’s tarnished reputation.
Amid demands from investors and even French President Nicolas Sarkozy to resign, former CEO Daniel Bouton, 58, recommended in April that the board name the 45-year-old Oudea as his successor. The move came just one month after Bouton, who still holds the post of chairman, elevated Oudea from chief financial officer to the post of deputy chief executive. Those most tarnished by the trading loss — Bouton and investment banking head Jean-Pierre Mustier — will remain with the bank.
Over a lunch of baby chicken and girolle mushrooms in the CEO’s oak-paneled private dining room on the 36th floor of Société Générale’s glass and steel skyscraper in the La Défense office district of Paris, Oudea calls the trading blunder “an accident that is the sum of a series of unlikely incidents.” He compares it to the crash of a Concorde airliner outside Paris in 2000, which happened when a piece of metal that had fallen onto the runway from another aircraft pierced the Concorde’s fuel tank. “Even in such a controlled sector as the aviation industry, major accidents can take place following a conjunction of unlikely incidents,” he notes.
In the case of SocGen, Oudea says, those incidents included a lack of fraud awareness in a period of rapid growth and heavy hiring; the presence of an alleged rogue trader, Jérôme Kerviel, whose back-office experience enabled him to evade normal security procedures; and poor supervision by Kerviel’s immediate boss. He insists that the loss was a “one-off incident” the bank is taking steps to ensure is never repeated.
Société Générale has implemented measures such as rules designed to prevent traders from making and concealing unauthorized trades, and it has elevated its head of resources, Séverin Cabannes, to the post of deputy chief executive, charged with overseeing the finance and risk departments. The bank also plans to invest €100 million over the next two years in fraud prevention, information technology improvements and training.
Investors appear unconvinced by these efforts, though. The bank’s share price has fallen by 56 percent in the 12 months to late June, exceeding the 46 percent decline for the European banking sector — apparently reflecting concerns that the trading scandal will have a negative impact on SocGen’s highly profitable investment banking division.
SocGen’s investment banking unit saw net profits fall 79 percent, to €139 million, in the first quarter, as the bank took €312 million in credit loss provisions, compared to having added back €29 million in provisions in the same period last year. Revenues fell just 16.6 percent, to €1.6 billion, mostly owing to a decline in trading income.
Overall, SocGen, which also has significant operations in asset management and retail banking, saw net income decline 23.4 percent, to €1.1 billion, on a 6.1 percent drop in revenues, to €5.7 billion, in the worst banking market in a generation. “So far the fraudulent-trading scandal seems to have had a limited impact on Société Générale’s franchise,” says Jean-Pierre Lambert, a banking analyst at Keefe, Bruyette & Woods in London. “But it will still take a few quarters to get some clarity and see if the damage has been contained.”
The first-quarter results have strengthened executives’ determination to stick with growth projections that Bouton made at the beginning of this year, Oudea says. That three-year growth plan — unveiled in February when the bank did a €5.5 billion rights issue to rebuild capital after the trading loss — calls for compound annual revenue growth of 5 to 10 percent in corporate and investment banking from 2006 to 2010. The division’s annual net banking income jumped 56 percent, to €6.9 billion, in the four years to 2006 before falling to €4.5 billion last year, when the bank took €2.6 billion in subprime-related write-downs.
To reach corporate and investment banking growth targets, SocGen is seeking to expand the client base for equity derivatives, particularly among hedge funds and other financial institutions, and to sell more guaranteed products to retail investors. The bank’s already significant activities in fixed income should grow through a greater focus on originating and distributing asset-backed securities for the commodities market, and for what Oudea believes will be a rising flow of infrastructure projects in developed and emerging markets. Cross-selling of the bank’s investment banking and asset management products should help its domestic retail network at least keep pace with France’s GDP growth, he says. And the sale of these products through the bank’s retail operations in the Czech Republic, Egypt, Morocco, Romania and Russia should lead to double-digit annual growth.
Oudea, unlike his immediate predecessor, is taking direct responsibility for managing human resources. “I’ve got to personally make sure people work on projects that interest them and have sufficient scope of action to feel satisfied.”
He’s providing continuity in more ways than one — he shares a similar academic and professional background with his predecessor. Both Bouton and Oudea earned the French equivalent of a master’s degree at the Ecole Nationale d’Administration, the training ground for elite French bureaucrats. Graduation at the top of their classes gave both entrée to the Finance Ministry auditing corps, earning them the lifelong title inspecteur des finances. The two men then served in senior cabinet positions in the Budget Ministry. Bouton left the ministry for SocGen in 1991, becoming CEO and chairman in 1998. Oudea left the ministry in 1995, becoming SocGen’s chief financial officer in 2002. “Having similar backgrounds is just coincidence,” says Oudea. Maybe so, but sticking with both men’s preferred business model has nothing to do with chance. Time will tell if the bank could have used more change than continuity.
