SocGen's booming fixed income brightens profit hit

PARIS (Reuters) - French bank Societe Generale posted a surprise surge in first-quarter bond, currency and commodities revenue on Thursday, boosting confidence in its business model even as profits suffered from the drive to strengthen capital.

Like European peers, France's second-biggest lender is slashing costs, debt and jobs at its key investment banking division to meet tougher global bank capital rules and better resist the fallout from the eurozone's sovereign debt crisis.

Although the push to sell assets and improve solvency came at a cost, analysts noted strong underlying operations such as a 39 percent jump in fixed-income revenue - defying expectations of a drop-off from its strong performance a year ago.

"The results were pretty strong," said Tom Van Kempen, analyst at ING. "Operations were good and there was positive news on capital. Fixed income came as a surprise, they might have reallocated resources to those activities."

SocGen reported a 20 percent drop in net income to 732 million euros ($963 million). Analysts had been forecasting 748.1 million, according to the Thomson Reuters I/B/E/S average of seven estimates. Revenue fell by a less-than-expected 4.7 percent to 6.3 billion euros.

Shares in SocGen gained as much as 4.8 percent in early trade but fell back and were almost flat by 1039 GMT, underperforming a 1.2 percent gain for the STOXX Europe 600 index <.SX7P>.

With investors' focus shifting to Sunday's presidential elections, political uncertainty remains an issue given France's sickly economy and pledges from Socialist frontrunner Francois Hollande to crack down on banks' risky activities.

"France's banks are being treated less well than their peers by the market," said Yohan Salleron, fund manager at Mandarine Gestion. "Clearly we're seeing the political impact here ahead of the second-round presidential vote...It's wait-and-see mode."

FIXED-INCOME SURGE

SocGen and larger rival BNP Paribas , which have been cutting their exposure to the 17-nation euro zone while lending more at home, are treated as proxies for the euro and their share prices have suffered as market fears intensify over Spain's recession-wracked economy.

Although SocGen Chief Executive Frederic Oudea admitted the macroeconomic trends were "morose", he said the bank's first-quarter performance gave him confidence in the future.

Quarterly growth in fixed income, currencies and commodities (FICC) outpaced even traditional heavyweights like Germany's Deutsche Bank and Britain's Barclays . SocGen cited strength in both client demand and the bank's own trading.

When asked whether a victory for Hollande on Sunday could put the brakes on this outperformance, given the Socialists' desire to introduce a functional separation of banks' "risky" activities from their retail units, SocGen Deputy Chief Executive Severin Cabannes appeared to play down the threat.

"We will be able to execute client demands whatever our structure...But there would naturally be a period of adjustment (to bank reform)," he said.

BNP Paribas is set to report results on Friday. Analysts said that these would likely show similar underlying trends to SocGen's, given BNP's leading position in euro-denominated bond issuance.

Citing the rebound in financial markets between January and March - driven by the European Central Bank's unprecedented injection of cheap funds into the banking system - SocGen's Oudea said there had not been a marked deterioration since.

"Overall, April remained pretty good, pretty decent...In credit risk, we see no deterioration," he told CNBC.

CAPITAL BUILD

SocGen sold 6.4 billion euros' worth of loan assets during the first quarter to cut debt, which came at a cost but nonetheless boosted its core European Banking Authority Tier 1 capital ratio - a key metric of banks' ability to withstand losses - to 9.4 percent.

SocGen's corporate and investment bank, which is shedding jobs and loan portfolios to wean itself off volatile wholesale funding markets, bore the brunt of the pain.

Profits at the unit fell 41 percent to 351 million euros, with corporate finance and advisory suffering from losses on asset sales and a drop in activity. SocGen is doing less balance-sheet lending and refocusing its client roster to preserve capital.

CEO Oudea, who took the top job following a 2008 rogue scandal that almost brought SocGen to its knees, has promised to reach an even stricter Basel III Tier 1 ratio of 9 to 9.5 percent by 2013 without raising additional capital.

He had harsh words for Jerome Kerviel, the trader who is appealing against a three-year jail sentence for his role in the scandal, saying he was indulging in a "media offensive" and that SocGen was confident in the outcome of the upcoming appeal.

Since the 2008 financial crisis, SocGen has benefited from its 3,250-plus retail branches in France that balance out its exposure to long-running turmoil on financial markets.

But with the French economy slowing down and unemployment at a 12-year high, the outlook for domestic retail is darkening. Quarterly profits fell year-on-year for the first time since 2010 at the unit.

(Editing by James Regan and Sophie Walker)

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