Leopoldo Alvear, CFO of Societe Generale, and member of the Group Executive Committee. Leo joined Societe Generale in January this year, having previously been CFO of Banco Sabadell. So, Leo, first of all, thank you very much for joining us today.
My pleasure.
We have around 35 minutes. We'll try and leave some time for audience Q&A towards the end of that session. I have a handful of questions to walk through, and then we'll go to the audience. I guess to start with, maybe a broader question. You know, last year we were sat together on stage in Madrid, but we were discussing Sabadell at the time. You know, can you talk us through what attracted you to Societe Generale, and then also maybe perhaps what surprised you about the business since joining?
Sure. Okay, thank you very much for inviting me. Pleasure to be here in a different role this year. What attracted me? I thought there was, of course, when Slawomir called me last year, I kind of did my own big bracket due diligence. I reviewed the capital markets day and how things have evolved since then. I think I thought there was, it was a very challenging project with a lot of upside, basically. I reviewed the capital markets day, and I was happily surprised to see that, you know, a number of the things that were stated at that date, you know, September 2023, were pretty similar to what I did in my previous shop, you know, when we both, Hassan and myself, joined in 2021, which was basically, I understood this was the, you know, setting the fundamentals of the bank phase, if you wish.
On the one hand, I saw that we were aiming for a 13% CET1, which, funny enough, was exactly what we did back in Sabadell in 2021. I remember at the beginning there was a little bit of a pushback from the markets, you know, stating why you go higher than others. We did it because we wanted to avoid the potential dilution risk, and it is exactly why Slawomir said it. I think it was a very wise decision. Later down the road, myself, I saw that everybody understood it. Now I think everybody understands it, why we did that in SocGen. I think it was very interesting.
Second, there was a focus on streamlining the risk and the perimeter so that we have now a group which is ready for growth and ready to deliver the returns that we were maybe aiming to. Second is what we already did in the past. It was pretty similar, you know. I looked a little bit at the bank. I thought, yeah, we were on the road to get to the capital. We were not there yet four months ago, but I saw that it was feasibility. I did not think there was an issue of asset quality when I reviewed the numbers. Of course, we are in the risk business and because we are a bank. You know, when you look at the last six years, I mean, cost of risk, if you put aside COVID, have been in the region of mid-20s. It is not the basic issue.
The basic issue was, you know, cost to income there, you know. Of course, everything to be tackled in that regard. That was from the outside, and I thought I could add value to that. That is why I joined. Once inside, what I have seen is that the company is really moving forward. There are a number of things that are in place, a number of projects to streamline the bank, to foster efficiency, cost discipline. One of the reasons why we are very much out of schedule in capital, we are already at 13.4%, while our target was 13% by the end of next year. It is because we have been successful on executing all the divestment program, or most of the divestment program, probably ahead of time and on the higher part of the range, if you wish.
Now we have a very stable, in my mind, perimeter, where everything more or less is its core. That helps a lot. Second, I did not know about BoursoBank, for example. For me, that was a very positive surprise. If you want to start with the financials, I think this is coming from retail. I honestly think this is a jewel. This is something that can be very meaningful in the future, that can really shake up the French market, retail market in the mid-long term, if you wish. Then from a more, if you wish, intangible set of things, I found a very cohesive ExCo team. I mention this because I know it is very difficult to deliver because it is very intangible, but this is very important for me, especially when you are in a road of transformation. Why?
Because on the one hand, it allows you to have all the different views of the entity as per taking the decision. Then it's even more important when executing because, you know, there are no stoppers. Everybody is really on track to deliver. Therefore, everybody is on the same train, if you wish, and decisions can be executed much easier. This was the case in my previous shop, and it was, in my opinion, a big part of the reason why we were able to turn around the shop so quickly in my past experience. I see that it is the same here. There's also a change. I'm seeing that Slawomir has been trying to, and he's making a change on the culture of the bank towards more accountability, towards more, you know, the bank comes first, and that's what we need to focus.
Overall, sorry, long answer. You know, I thought there was a lot of potential before joining the bank. I'm even more reassured now because of the intangibles that I've found inside.
Super clear. There has been a big focus on the capital return outlook for SocGen. Of course, last year you repurchased, I think, nearly EUR 900 million. You know, what are the plans for dividends and buybacks for the rest of 2025? A question we get a lot, you know, what's your latest thinking on interim dividends?
Okay. The first thing is that probably 12 months ago, I'm not sure you were asking this question to the CFO. It is good that now, you know, the pressure on capital is a different pressure. This is a good pressure to have because we already have excess capital. Again, coming back to the fundamentals, I think I've always tried to differentiate between what I think is recurrent shareholder distribution and extraordinary shareholder distribution. On the recurrent side of things, one of the things that we decided in January, or the board decided, was that now that we get into this level of profitability, we could increase, and we increased our payout ratio. Before, we had a range between 40%-50%, we decided to give away 50% for 2024 and to set the new dividend policy at a 50% payout.
That is what we are accruing right now. Why? Because basically with the remainder of 50% of profits, by retaining the remainder of 50% of profits, we can still grow the balance sheet while retaining the capital ratios. Since we are above 13%, which is our threshold, we do not want to build up more capital, and we could use this 50% of profits to build the business while retaining the capital. We are there. This is going to be going forward that. The split between that, we have done more or less 50/50 split between cash and buybacks in the last couple of years. I think there could be space for perhaps a 40/60, taking into account that, you know, we will probably always seek to increase a little bit the cash dividend.
If our profits go up, which is what we're aiming for, we should have that already inside, and we could perhaps change a little bit the split between cash and buybacks. Now, as per the, so that's the recurrent part. As per the extraordinary, our target is to work with 13%. We're already above that. We do not want to hold more capital than 13%. 13% already incorporates a buffer, a management buffer in our view. Basically what we want to do with this excess capital, there are not so many things you could do. You could grow organically, and we're below our expectation in this regard. Out of the CMD, we were targeting to grow CAGR, our RWAs by 1% between 2023 and 2026, and we're below that. I do not think that's going to take a lot. You could also do inorganic growth.
You know, we did last year a couple of a joint venture with AllianceBernstein and an agreement with Brookfield because of bringing into the house either knowledge for different products or new clients. I do not think this is going to be meaningful, to be honest with you. Basically, we will return capital to shareholders. The big question, which is when and how much, the board has already decided that this framework, but we need to have a little bit of stability on the capital ratio. We are at 13.4% out of Q1 2025, and we need to have visibility on the sustainability of this ratio, basically on FRTB.
If FRTB, which would have as of today an impact in the bank of around 40 basis points, is finally postponed to 2027 as it is a proposal right now, which needs to be voted by the commission, the board has already made clear that we will move forward and distribute capital to shareholders. Basically, we are expecting here no new news for, you know, the final confirmation of this postponement. Why would we be ready to distribute now? Because basically we are generating over 40 basis points of organic capital per year. We do not need to keep this capital to front, you know, whatever the bill may be in 2027. First, we need to see whether the bill is 0.40% or less.
In any case, even if it's in the worst case scenario, so today's scenario, we would have plenty of room for maneuver until 2027, and therefore we could distribute capital as soon as this is basically cleared.
One of the numbers I found, you know, interesting, surprising in Q1 was the 4%-5% reduction in costs that you delivered. How sustainable are those cost savings going forward? I guess what's the main driver behind it?
Sure. So basically, I mean, I joined in January, so five months ago. One of the first things I told Slawomir is that we should, we took advantage of changing a little bit the framework on the cost guidance. Up until now, and I fully understand the reasons why, we were talking about gross cost reductions, and I thought we needed to give a little bit more transparency there and clearance to the market so that they could, you know, the analysts and the investors could reach the cost income targets. For the first time, we decided to give a net cost evolution target for 2025. We disclosed to the market that we were aiming to reduce our cost by 1% this year after disposals.
Basically because of the large amount of disposals and changing the perimeter that we did last year, our guidance this year, both in terms of income evolution and cost evolution, have been after disposals. In other words, if you have some revenues in 2024, then you reduce what's coming from what we're not going to have because of the disposal that we made. On this new pro forma number, we're going to go 3% and in cost the same, - 1%. One of the reasons why we think we are going to, and this should lead us, sorry, to a 66% cost to income target by year end. We ended up last year at 69%. This includes, among other reasons, the reduction on the cost to achieve.
In order to achieve the 60% cost to income that we were aiming to achieve in 2026, we needed to invest between 2023 and 2026, EUR 1 billion. EUR 650 million were invested already in 2024. The remainder, the broader part of the remainder, EUR 350 million will be invested this year. That brings down around EUR 300 million for this year in costs, which is part of this -1% . We will have another EUR 300 million less next year. For 2025, we are very much in Q1, we ended at 65% cost to income. We think we are in line to achieve our targets. Now, the reduction year on year of the costs, it is not recurrent. Why is it not recurrent? We did some - 4.4% instead of the -1% that we are aiming for the full year.
This is driven by the fact that last year we had a big CTA impact, like around EUR 280 million, which we did not have this year. Out of the full EUR 300 million-EUR 350 million less of cost that we are going to have this year, Q1 accounted for a part of that. We are very much on track to meet the target, but Q1 was a little bit special in that regard. Moving forward to 2026 and the next step, because when I look at consensus, I think consensus is there in 2025. We are aiming for an 8%+ return on tangible equity, which is based on a 66% cost to income, and consensus is there. For next year, our target is to aim for 9%-10% return on tangible equity based on a 60% cost to income.
I'm coming down from 66% to 60%. There are a number of moving parts. Consensus is right now at 61%-62%. On the one hand, because we have not been able to be so transparent on 2026, because we're a little bit far away. On the second hand, because I think we need to keep on delivering on a quarterly basis, based on, again, on my experience. You know, we've been delivering for three quarters in a row. We need to keep on delivering every single quarter, and that will make consensus come up to believe that we can deliver on the guidances. Even today, if we look at 2026, there's a number of moving parts which should help us reach this new target. On the income side, there's going to be a mathematical effect.
Basically, most of the disposals happened in 2024. Basically, we will not have this, you know, restatement of the revenues. 2025 revenues will be the base for 2026, and on top of that, we can increase. On the revenue side, still we will have contribution coming from BoursoBank. We had one of the targets that we set out of the CMD was that we expected BoursoBank to reach EUR 300 million of net income by next year. If you gross that up by taxes, that is basically MBI because it is a lower cost of acquisition of clients. That is a significant amount in terms of revenue increase only because of the change in Bourso. On top of that, we will see whether we have a broader increase of revenues. Honestly, we are forecasting with a zero plus GDP growth for 2025 and 2026.
I wouldn't expect, we're not being ambitious. We have not been ambitious in that regard. On the cost side of things, there's a number of moving parts. On the one hand, we won't have the EUR 350 million of cost to achieve of this year. That's - 350 year- on- year because we include the cost to achieve in the cost base. Second, we will still be benefiting from the mergers of the retail networks. They hit the peak of the mergers in the last part of last year. We're still seeing something this year. We're going to see something next year. Also, we're going to see quite a lot coming from Ayvens. Ayvens is in the middle of the merger of LeasePlan and ALD.
That is not, it's a little bit more complicated than merging two entities because we're present in 40+ geographies. So it's 40+, you know, legal entities merging plus the platforms plus just not to avoid any fun at all, they're turning into a bun. You know, so it's a complicated merger. One of the targets that they're aiming to achieve, it's cost to income again. They're bringing down cost to income from 59 last year to 57 this year and to 52 next year. A lot of synergies will come on that front. Finally, or not finally, there's a number of other cost projects, among them IT. IT, it's a multi-year program, if you wish, but should help achieve certainly this reduction in costs next year.
All in all, with all these measures that I mentioned, I probably, we're probably talking about, you know, not EUR 1 billion difference between revenues and costs from 2025- 2026. And then again, this is just, you know, the end of this phase I of the foundations of the plan, of the bank. In my view, this should drive us to whatever a 9%-10% return on tangible equity. Obviously, this is not our final goal. I think from their own words, there's nothing that prevents us from increasing our return on tangible equity. Of course, this return will be, you know, driven by a further reduction of cost to income.
We're probably never going to, never, we're never going to reach the cost to income of the Italian or Spanish banks because it's different, we're a different animal, if you wish, both in terms of mix of businesses, but it's also different mix of loans, more fixed than floating and so on and so forth. Certainly, I think there is much more space for improvement 2026, beyond 2026 in the cost to income ratio and to break that down certainly from 60%.
Super clear. And then, you know, obviously we've talked a little bit about the first quarter, but a lot happened immediately after the end of the first quarter. If we turn to credit costs, have you seen any deterioration in the loan book, you know, since the start of April? And then you have quite a lot of provisions on performing loans. So just how do you think about that trending forward and how do you think about cost of risk trending over the rest of this year, for example?
On that regard, let me get back to my previous due diligence, if you wish. I understood that, I mean, looking at the last six years, there's been a lot of stability on the cost of risk side of things. Of course, again, we're in the risk business because we're a bank and at some point any bank can have single names, if you wish. It is pretty stable. Why is it pretty stable? In my mind, because we have a high quality and diversified business. On the one hand, on the lending side of things, 80%+ of our credit loans are investment grade. When I look at the different weight of the sectors, the top five, our top five sectors account for less than 15% of the loan book. It is quite diversified.
On the markets business, we have significantly reduced the volatility of the business by reducing, you know, 30% the RWAs, but 70% the stress test. We decided to have a less risky and less volatile business. I think this whole framework has driven, you know, to the stability of cost of risk. Q1, we had 23 basis points, if I recall correctly, which is in the lower part of the range of 0.25%-0.30%, which is our guidance for both 2025 and 2026. Now, coming back to your answer, we've seen zero as a quality issues so far, zero. I honestly believe if you ask me, and of course, none of us know, or at least I do not know what's the final framework going to be with regards to tariffs and so on and so forth. We will see where that ends.
I think it's difficult that we see, you know, impact on the name to name basis in 2025 because there's not going to be time, basically. This doesn't mean that if there is a bad scenario, we won't see that in 2026 and 2027, and we might see banks doing overlays in the meantime. My point is that from a, you know, diversified standpoint, I don't think we're going to see a lot of, you know, single names in this year because we're just not going to have time. In Q1, we had a very good recurrent cost of risk, and it was actually so good that we did a little bit of a top-up and overlay on S1 and S2 provisions because there was a lot of uncertainty in April, if you know, obviously, with the markets.
The recurrent part was really good, and on top of that, we had some reversals from single names, so we made an overlay in that regard. We are definitely strong on our S1 and S2 provisions. When I look at the overall stock, it accounts for probably north of two times the cost of risk of a year. It is a good place to be, in my view. Again, in the coming quarters and so far, I do not have any reason to believe that our guidance will change. We are of course expecting to see whether there will be changes on the framework. You know, from a GDP standpoint, from a macro standpoint, we have been relatively conservative. We have always thought about the zero plus growth. Nothing, you know, that is going to change massively the mixes or the volumes or whatever.
I do not have any reason to believe right now that the guidance of our cost of risk in the 25-30 basis point space would have a change this year. Again, for 2026- 2027, we will see where the final framework leads us. But, you know, taking into account the last six years, it has been pretty stable in that regard.
Absolutely. Okay. So just my last question before I open up to audience Q&A, and it's about, you know, French retail private banking insurance. There was a 16%-17% increase in revenues in the first quarter. What were the main drivers behind that? And I guess, how should we think about the outlook for French NII for here? And a little bit of a follow-up to that, you know, in this business, you talked about the cost to income ratio versus peers in Spain or in Italy and the different business mix, but also considering BoursoBank as well. What's the right cost to income ratio for you to try and run this division at?
Sure. So starting by the quarter, if you wish, I think, again, one of the reasons why we said our revenues were going to grow 3% overall for the bank this year after disposals, it's because last year we had a big impact out of short-term hedges in the French retail around -EUR 400 million . So year on year, we'll have less cost, if you wish, less EUR 400 million negative . A significant part of that, like EUR 270 million, happened in Q1. Again, that's why our revenues grew, you know, 10% year on year on the overall basis. It is driven also by the fact that out of these EUR 400 million, EUR 270 million were accounted in Q1. It is included within our forecast, but it is not going to be every quarter the same. The remainder, EUR 130 million or so, should come through in the second quarter.
My point being, the 16% increase is not recurrent. Now, on top of that, one of the things that I discovered when I joined the group, it's, and I thought it was interesting because we're very much focusing on French NII all the time. When I look at the revenues of retail in France, it's 50% split between NII and fees, which to me was a good surprise because it's not the case in Spain in general. It's probably two-thirds, one-third. This brings a lot of stability, both when you go up, but certainly when you go down. On top of that, I'm seeing that the fees are growing like 5%-6%. It's a healthy growth, if you wish. I do not see a lot of pressure. Of course, there's pressure and competition, but they're still growing and still growing significantly.
Now, on top of that, for the year, as per the NII now, I think we disclosed a few moving parts. On the one hand, it's the hedges. So it's EUR 400 million less of costs, if you wish. On the second hand, we have the regulated deposits, Livret A, and other sorts, which are coming down, obviously, as rates come down. And that was a burden when rates were going up while, you know, our assets were fixed. It was a bad situation for French retail in general, while Spain or Italy were benefiting from, you know, floating rates going up on the loan books and probably a lower deposit bidder in the French context. It was quite different.
All mortgages were fixed, so they were not benefiting from the rates, but the possibility was going up on the one hand because regulated deposits were going up, on the second hand because, you know, the loan to depositors are not as homogeneous as in Spain, for example. There is a variety of situations, and therefore there is more demand for volumes of deposits as opposed to Spain. In any case, we have the short hedges coming down. We have Livret A coming down. In terms of volumes, we have forecasted with a 0%+ growth in GDP and therefore a 0%+ plus growth in deposits, +1% perhaps. In loans, more or less the same. I would say probably in consumer finance and SMEs and corporates, 0%+ plus.
In mortgages, we're going to grow a little bit more, but basically because of internal reasons, because last year we decided not to be in the space because the margins were deeply negative, driven by competition. We wanted to protect margins at that stage. Since January, the margins stabilized, and we launched a new campaign on mortgages to regain the market share that we lost last year. We're going to see an improvement in mortgages. We haven't seen it in Q1 because between the application and the origination, it takes the best part of three to four months. We should start to see that in Q2. It's not so much driven by a change in the framework, but because we were not in that space.
All in all, certainly we shall see, you know, an improvement in this space because of the different moving parts that I mentioned. Going forward, and you mentioned, how does this compare to Spain and Italy? I think, for example, I do not think we will be able to have our French retail franchise, any French retail franchise will not be able to be as profitable, strictly French retail franchise. Okay. It depends on the perimeter and what you add there. I do not think we will be able to be as profitable as Spanish or Italian retail. Why? Because it is a different framework. On the one hand, you have all fixed loans, so that prevents you from taking advantage of that or disadvantage. On the second hand, you have a number of regulated deposits and assets, which is different again to Spain and Italy.
On the other hand, you have a significant part of the market which is dominated by non-listed banks. At some points, they may have different objectives, not only return on tangible equity, if you wish. Once said that, I certainly think this is a business that could deliver double-digit returns in the long run, I mean, in the middle and long run. Because our aim here is to be at 60% cost to income also to group and French retail for next year. I think there's a number of things that we can still do on the cost side of the business. We have done a lot of things on the front end. The bank has already reduced like 20% of branches in the last 10 years. We did that. Probably we did that when no one else was doing it.
That, you know, meant that we lost clients and we lost MPS. It is not going to be a main focus going forward. We think we have the footprint. Of course, there will be minor, you know, fine-tuning there and all these branch with three employees here is not profitable, but nothing major. I think our focus is going to be much more on the back end and on the digitalization of the full, you know, framework. When I compare to Spain, for example, I certainly think there is a space for, you know, more cost reduction and more digitalization, which should ease time in the front end, commercial time on the front end. I mean, I look at the back offices and it is true we have done a huge effort. We have brought them down from 20 to 11, but I was working with one.
I think there's a space for further, you know, concentration in that space. When I look at the time that our managers are putting into, you know, anything like, you know, putting a mortgage in place, it's a long period. There's a lot of things that I've done in the past and, you know, that we're in the progress of doing here that should deliver, you know, a lot of easing of time to recover MPS, which is very important and therefore commercial activity. My point being, I think there's a lot that can be done on this space. Don't get me wrong, this will take time. Retail is very slow. Retail is detail. I have a lot of experience on retail. You have to focus on three things.
Once you have mastered those three things and you move to the following three things and to the following three things and to the following three things, you can do 20 things at the same time. If I may put an example, in my previous shop, when I joined, we had 0% return on tangible in 2020. When I left last year, the bank made, I think it was 15. Last one on board was retail. And was it because we did not start working on retail from day one? Nope. We started working on retail in day one. But it takes time. You know, it is a huge container ship, which takes a long time to maneuver. Now it is very stable when you reset. I think there is a space for certainly, sorry for the very long answer, reaching certainly double-digit returns in the long term.
Okay. I think that's a good note to see if there's any questions from the audience. Yeah. Towards the front here, we have one. Yeah. Thank you.
Thank you. Very simple question. Any sort of guidelines in terms of when do you expect to have clarity on FRTB? Can we expect, you know, an official delay to January 2027? Can we expect that before Q2 results?
I'm afraid that's not in our hands. I think there's a proposal right now at the commission. It needs to be voted. I honestly don't have the date or the framework. I've read something about the end of June, sorry, but I don't have any more insight than what you may have. Now, the message I'd like to convey, which is what I tried to do before, is that once that's clear, the board has already made the discussion. We will have to review it after the FRTB. If it goes to 2027, we don't need to retain the capital for 2027 because we're generating more than that every year. We will be ready to move forward.
Of course, then, as you very well know, there's this technical issue in buybacks, which we need to submit to the ECB, and they have up to four months to basically make a decision. They don't need to take the full four months, but we don't know how long it will take. My point being, we don't need to wait to 2026 to make a formal decision at all. Okay.
Could you talk about pros and cons for simplifying the structure of the bank further geographically? It kind of stalled when you hit the 13% CET1, and I guess there's some possibilities out there for further simplification.
Sure. I think in general terms, we have already addressed, you know, the biggest, biggest part of our divestment program. When Slawomir came on board, he decided to basically streamline the perimeter so that we were going to focus on the real core strategic assets. I think, as I said before, one of the reasons why we stand where we're standing capital is because we've done it ahead of time, if you wish. I would, from a capital standpoint, think that we have completed, you know, the vast majority of it. When I look at the perimeter of the bank, you know, we have streamlined very significantly our presence in Africa. What's left, where we have a presence there, is around EUR 3 billion of RWAs in the context of EUR 400 billion+ . It is not material, again.
When I look at Eastern Europe, we have two retail franchises there in the Czech Republic and in Romania. We are honestly very happy with them. We think they're part of the core of the bank for a number of reasons. On the one hand, they are number three, number two, number four in their market share. So they're sizable franchises. They are very profitable, high teens to 20%. They have a lot of capital, again, in the 20% region. They're growing and they have no asset quality. From a macro standpoint, the Czech Republic is very close to Germany, so we are happy there. In Romania, now that we were happy before, we're even happier now because they're part of the European Union. They're going to have flows. They have a lot of synergies with the bank, which is another very important factor.
We use our factories in CAB to serve their clients. On top of that, we wish they help us, you know, have a stability between retail and wholesale in the bank. For me, they are a core part of the bank. Of course, France is core. The other big subsidiary would be Ayvens. On Ayvens, this was a subsidiary which was making, sorry, before the merger, mid-teens returns. We believe there is no reason to believe why there should not be at that range once they complete the merger. Actually, their target for next year is to be at 13%-15%, still with a 52% cost to income. Probably there is even space for improvement after this first phase. Again, it is a very clear example of a core part of the group.
On top of that, we have very large synergies between our corporate clients and Ayvens. All in all, I think we have streamlined the vast majority of it. I would not expect in the short term, certainly big movements that could have any impact on capital.
Okay. I think in the interest of time, we can draw it to a close there, Leah. Thank you again for coming in.
Fantastic. Thank you very much.