KUCHING: RAM Rating Services Bhd (RAM Ratings) has assigned an AAA(s)/Stable rating to the Proposed Multi-Currency Islamic MTN Programme of up to RM1 billion in nominal value to be issued by Societe Generale Bank and Trust SA’s (SGBT) wholly owned subsidiary, ALEF II SA – a special-purpose vehicle set up as a funding conduit for SGBT.
SGBT is a wholly owned subsidiary of Societe Generale SA (SocGen or the Group). Concurrently, RAM has reaffirmed SocGen’s AAA/Stable/P1 financial institution ratings, which reflect the group’s strong franchise in retail banking as well as corporate and investment banking in Europe, in addition to its sound capitalisation. SocGen is the third-largest banking group in France by assets, and a global systemically important financial institution.
“SocGen’s maiden sukuk also has the distinction of being Malaysia’s first sukuk to be issued by a French bank,” notes Foo Su Yin, chief executive officer of RAM Ratings. “This milestone is a notable achievement for the global sukuk market and reinforces Malaysia’s position as an international Islamic financial centre.”
The enhanced issue rating reflects the credit strength of SocGen as it is the ultimate counterparty in this transaction. The structure features back-to-back syariah-compliant contracts with its wholly owned subsidiaries, SGBT (the obligor) and ALEF (the Issuer). While SGBT is the immediate counterparty to ALEF, the transaction structure also provides the sukuk holders legal recourse to SocGen.
SocGen’s earnings retention and deleveraging efforts over the last few years have proven beneficial to its capitalisation. The Group’s Basel 3 common-equity tier-1 capital ratio had risen to a healthy 10.1 per cent as at end-March 2014.
SocGen’s asset-quality indicators are, however, still relatively weak, weighed down by its exposure to higher-risk emerging markets in Central and Eastern Europe (CEE) and Russia, as well as the lengthy recovery procedures under French law.
As at end-Dec 2013, the group’s gross impaired-loan (GIL) ratio had increased from 7.2 per cent to 7.7 per cent y-o-y while its credit-cost ratio stayed high at one per cent in fiscal 2013, although the worsening of its asset-quality indicators was partly due to a contracted loan base.
“Given the subdued growth in France and the challenging macroeconomic conditions in CEE and Russia, SocGen’s GIL and credit-cost ratios are likely to remain elevated in the near to medium term, but not expected to deteriorate significantly,” RAM Ratings added.
“Moreover, we expect the group’s capitalisation to provide adequate cushioning in absorbing unexpected losses.”
Notably, SocGen’s involvement in capital-market activities renders its profit performance somewhat volatile, although this is partly balanced by more stable earnings from its French retail-banking operations, it said.
In the meantime, the group’s funding and liquidity profile has improved. While it still relies on wholesale funding that brings about refinancing risk, the Group has considerably reduced its short-term wholesale funding.
“We envisage SocGen’s financial institution and issue ratings to remain intact even though a recently approved EU bank-resolution framework signals an ebb in government support, as we still expect some degree of government support for this systemically important bank,” RAM Ratings concluded.