Societe Generale’s digitally-driven Africa strategy will raise growth and profit potential but increase risk – says Moody’s

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Societe Generale’s growth strategy in Africa, which targets an average annual revenue growth of 8% and a return on equity of 15% by 2020, will be driven by digitisation, local management hubs, and partnerships to develop corporate banking.

While the strategy is positive for the bank’s profitability prospects, credit and operational risk will increase.

The Africa growth strategy of Societe Generale – which differentiates it from most large international banking peers – is positive for its profitability prospects but will increase its exposure to riskier and more volatile operating environments, according to a report published today by Moody’s Investors Service.

“With persistently low interest rates in Europe and challenging global capital markets, Societe Generale will boost its profitability by growing in Africa,” says Olivier Panis, Vice-President and Senior Credit Officer at Moody’s. “The return on equity of the African business was 13.7% compared with around 9% for the group as of December 2018.”

Other European banks have been gradually retreating from Africa because of an inability to maintain material market share, strong franchise positioning, a regional integration, and sufficient revenue-scale to compensate for higher credit and compliance risk taken in this region.

Societe Generale’s expansion will increase the bank’s exposure to weaker operating environments than its domestic markets, reflected in sovereign, banks and corporate ratings that are mostly in the B and Ba rating categories, resulting in higher credit and operational risks and costs.

In most African countries where the bank operates, non-performing (NPL) ratios are above 10% on average for the banking systems versus 3.9% for the French banking system in 2017. Because most asset portfolios in Africa are concentrated in large corporates, NPLs also tend to be more volatile due to a higher level of single-borrower credit exposure, as illustrated by large recent increases in Ghana or Cameroon.

Moody’s notes, however, that these increased risks are partially mitigated by diversified operations and a focus on more stable markets. For example, Societe Generale’s fastest growth in Africa is in West Africa. The bank has a long-standing and leading presence in this region, where Moody’s expects robust economic growth driven by Cote d’Ivoire (8% forecast GDP growth in 2019) and Senegal (6.6% forecast GDP growth in 2019), and fast-improving bank regulations.

The bank also focuses on developing new digital products that will support the diversification of its retail and SME customer base, which will reduce asset concentration risks; and the generation of less cyclical fee revenue.


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