Weighing up whether to join SocGen's growing fixed income business

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The Financial Times reports that SocGen is hiring for its U.S. and Asian fixed income businesses. It wants to recruit for credit in Europe and for rates and currencies in Asia and the U.S.

This sounds like good news - Barclays, UBS, Morgan Stanley, Credit Suisse are all cutting or expected to cut fixed income headcount. SocGen seems to be throwing laid off bankers a lifeline.

The French bank has several things in its favour.

Three reasons to work for SocGen's fixed income business

1. It already has an excellent return on equity 

Return on Equity (RoE) is the watchword for banking chief executives. Low RoE has become the catalyst for culling fixed income businesses at places like Morgan Stanley and Barclays. At SocGen, however, the corporate and investment bank achieved a return on equity of 12% overall and of 17% in the core businesses for the first nine months of 2013. This gives the bank some leeway when it comes to growing its capital-hungry fixed income business and compares to a full year RoE of 11% at Goldman Sachs and a full year return on equity of just 3% in Morgan Stanley's institutional securities business. 

2. The CEO sounds committed and keen 

As we reported in November, SocGen's CEO Frédéric Oudéa, has been sounding very committed to SocGen's investment banking activities. The French bank has shown a consistent continued appetite for taking risk and Oudea said in November that the corporate and investment bank was well-suited to the new regulatory reality and well-positioned to increase profitability. At the time, Oudea also said that SocGen's fixed income business was 'as it should be'. Now he reportedly wants to take market share from less bullish rivals.

3. SocGen has already put its house in order

While banks like Morgan Stanley are still busy cutting their risk weighted assets and Barclays and Deutsche have some heavy de-leveraging to do, analysts at JPMorgan point out that SocGen has finished de-leveraging, almost finished cost cutting, and has cut its legacy assets. Jean Pierre Lambert, an analyst at  Keefe, Bruyette & Woods in London, said SocGen is benefiting from some harsh restructuring after the Kerviel affair, when it scrutinized the capital consumption of every business area.

Three reasons to avoid SocGen's fixed income business

1. Its market share is tiny

Yes, SocGen may be building a fixed income sales and trading platform, but it's doing so from a tiny base. In the third quarter of 2013, revenues in its fixed income currencies and commodities business were a mere €517m. This compared to €1.9bn at Deutsche Bank. Its market share is thought to be around 3%. 

2. This isn't the first time SocGen's promised to hire in fixed income 

SocGen wanting to grow its fixed income business is nothing new. The French bank declared its intention of hiring 1,200 fixed income bankers back in 2010. Whether it actually made all those hires is unclear, although its fixed income revenues have been creeping up gradually.

3. It's still poorly capitalized 

This is the main reason to avoid SocGen's nascent fixed income build. In the third quarter, the French bank's Basel III core tier one capital ratio was 9.9%. This compared to 11.6% at UBS and 10.8% at BNP Paribas. “To compete in fixed income you need a big balance sheet and not too many concerns over your capital strength,” said James Chappell, analyst at Berenberg told the Financial Times. 

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