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Société Générale Takes $731 Million Hit Thanks To Russia Exposure

The big French bank is the controlling shareholder of the Russian bank Rosbank and has been hammered by a decline in the ruble along with "growing uncertainty concerning the environment and delayed performances."

Posted on May 7, 2014, at 11:59 a.m. ET

Christian Hartmann / Reuters / Reuters

Société Générale, France's third largest bank, said today that it was writing down the value of its Russian business by $731 million thanks to what it described as "the decline in the ruble, growing uncertainty concerning the environment and delayed performances." The bank is a majority shareholder of Rosbank, a Russian bank, and said that it would present a plan next week "to achieve satisfactory profitability in 2016 in a scenario of gradually easing tensions" for its Russian business.

Since the beginning of the Ukraine crisis, Russia's economy has been hit hard and is starting to drag down the European companies with the biggest stake in the country. The MICEX, an index of Russian stocks, is down 10% this year, while the ruble has declined 7% against the dollar and 8.4% against the euro. In March, White House spokesman Jay Carney told reporters, "I wouldn't, if I were you, invest in Russian equities right now — unless you're going short," referring to U.S. sanctions.

While many European companies have large export markets in Russia or extensive financial relationships with wealthy Russian individuals, Société Générale stands out as a major European bank that has rushed headlong into the Russian banking sector, where the biggest players like Sberbank, VTB, and Gazprombank are state-controlled. Société Générale acquired its controlling stake in Rosbank in 2008 and in April bought another 7% of it, bring its total ownership up to 99.4%.

The bank said in a presentation that it remained "committed to Russia" and said that the outlook for Russian banking sector is "positive." Even before the write-down, Société Générale's Russian operations made just under $10 million in profits for the bank. Société Générale said that it had "no material exposure to Ukraine" and that Russia only made up 3% of its global exposure.

While the largest Russian banks and energy companies haven't been hit by U.S. sanctions, Igor Sechin, a close Putin confidante and the CEO of the oil giant Rosneft, was placed on the most recent sanctions list. The stocks of Sberbank and VTB, the two largest Russian banks, are down 22% and 16% respectively this year. Bank Rossiya, which the U.S. Treasury described in a memo as "the personal bank for senior officials of the Russian Federation," has been sanctioned by the U.S. The sanctions made it impossible for Rossiya to do transactions with the dollar and the bank said it was closing its dollar deposit accounts.

Thanks to the Russian write-down, Société Générale's profit of $439 million substantially missed analysts' expectations of $1.19 billion for the first quarter, but Nomura analyst Jon Peace said in a note today that its "underlying pretax profit [was] broadly in line with consensus." The bank's stock is down just over 0.53 euros, more than 1.2% today.