Societe Generale , France's second-biggest listed bank, said it would slash bonuses and scrap its 2011 dividend after a tough quarter as it scrambles to meet strict new capital requirements.

SocGen, the first French bank to drop its dividend since regulators announced stricter rules earlier this year, reiterated it would plug an estimated 2.1 billion euros ($2.9 billion) capital shortfall without private or state help.

The bank's commitment to beefing up capital -- even at the expense of profits, which slumped a steeper than expected 31 percent in the third quarter -- boosted its battered shares and drew praise from investors worried about euro zone banks' ability to withstand the sovereign debt crisis.

What is particularly pleasing are the steps taken to strengthen SocGen's balance sheet ... The numbers were below expectations but the stock is trading at really low valuations, said Marco Bruzzo, head of Mirabaud Gestion in Paris, which has 200 million euros under management.

SocGen's shares were up 6.1 percent, at 18.56 euros, at 1149 GMT. The stock is trading at less than half its book value after concerns about SocGen's reliance on short-term funding roiled French bank shares in the summer.

SocGen's third-quarter profits fell to 622 million euros, worse than a forecast for 858 million in a Reuters poll, hurt by writedowns on sovereign debt and financial-market turmoil.

But the bank managed to sell 10 billion euros' worth of toxic assets left over from the last financial crisis at a low cost during the quarter, lifting its core Tier 1 capital ratio to 9.5 percent in September, from 9.3 percent at end-June.

SocGen's priority lies with capital enhancement. We want to be in line with these (capital) objectives as quickly as possible, Chief Executive Frederic Oudea said on a conference call, adding there would be a significant reduction in bonuses paid to employees at its corporate and investment bank.

BROADLY REASSURING

SocGen is primarily cutting debt and selling assets at its investment bank, a crucial driver of profit but which is struggling amid volatile markets. The division's profit slumped 83.5 percent in the third quarter to 77 million euros, with fixed income especially hard hit by the sovereign crisis.

By the end of October, the bank's toxic asset portfolio, which includes mortgage-backed securities, had shrunk to 18.6 billion euros, the bank said. That compares with 32.8 billion at the end of last year and the roughly 13 billion SocGen targets by the end of December 2012.

The numbers were broadly reassuring ... We'd been expecting really bad things from SocGen, said Yohan Salleron, fund manager at Mandarine Gestion with 1.2 billion euros under management. We knew the dividend was going to have to come down.

Both Salleron and Mirabaud's Bruzzo said they still prefer SocGen's arch-rival BNP Paribas -- which has said it can meet tougher capital requirements without changing its dividend -- for its profit outlook and balance-sheet strength.

SocGen's smaller rivals Natixis and Credit Agricole are to report on Wednesday and Thursday. BNP, SocGen and Credit Agricole have all announced asset sales to cut debts.

ITALY NOT GREECE

The bank is eyeing strict cost cuts at its investment bank, the French bank's head of investment banking, Michel Peretie, told an analyst conference call.

(We are) targeting a reduction of costs next year of something between 5 and 10 percent, he said. It's a very strict plan of cost reduction for next year.

French President Nicolas Sarkozy has said compensation must become more reasonable and that banks can no longer depend on the government as a first resort to bail them out.

France has unveiled fresh spending cuts and tax increases to meet its deficit targets and protect its AAA credit rating at a time when eurozone fears are pushing up borrowing costs.

French Finance Minister Francois Baroin said he was glad SocGen was moving to get its house in order.

The fact that they announced they're not paying out a dividend and won't seek public funds is a step in the right direction and is in line with what we've suggested, he told reporters in Brussels.

SocGen's French retail unit performed solidly, with profit up 15 percent, driven by growth in mortgage lending and signing up new customers.

SocGen raised 4.1 billion euros in long-term funding in the third quarter at a spread of 100 basis points, it said.

The bank wrote down the value of its Greek debt holdings by 60 percent, in line with what its larger French rival BNP has done. It also wrote down the value of some consumer-credit activities by 200 million euros.

SocGen is the latest European bank to say it has cut exposure to euro zone sovereign debt. Between September and October its holdings of peripheral euro area debt fell to 3.43 billion euros from 3.65 billion. However, holdings of Italian debt rose slightly, to 1.57 billion euros, from 1.55 billion.

Commenting on the recent spike in Italy's bond yields, CEO Oudea told journalists: Italy is not Greece ... The question is putting into place measures that bring down (its debt).

SocGen is also exposed to Greece via its local subsidiary Geniki, part of an international retail network that saw profit fall almost 40 percent in the quarter.

($1 = 0.727 euro)

(Editing by Dan Lalor, Sophie Walker and Jon Loades-Carter)

BNP Paribas