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Société Générale celebrated its 160th anniversary in May. Long-suffering shareholders will say that the years have not been kind to the French bank. Its share price has performed poorly this year, when European bank shares have soared. Despite trading at about 30 per cent of its tangible book value, opportunities to spark an improvement in its valuation have come and gone over the past year.
One trigger for change was a new chief executive. Slawomir Krupa took over from its overly long-serving CEO Frédéric Oudéa last year. Whatever concerns shareholders had about Oudéa have transferred to his successor, an internal appointment. Meanwhile the chair, Lorenzo Bini Smaghi in place since 2014, will probably remain until 2026.
Krupa’s first strategic plan last September went down badly. He cut profitability targets such as return on equity below the previous 10 per cent. The share price, after a brief rebound, is still underperforming.
Another positive push might have come from SocGen’s investment banking business, given the revival in capital raising and deals activity. At 13 per cent of revenues, SocGen’s equity business has more than twice the weighting of its larger French peers, BNP and Crédit Agricole. Analysts have been more optimistic about SocGen’s potential on equities and fixed income revenues. But investors, faced with conservative guidance from Krupa, have shrugged.
That SocGen wallows at dirt-cheap levels suggests deeper problems, or that the narrative from top executives lacks persuasion. Costs are stubbornly high relative to income at about 70 per cent. Though Krupa sees this falling under 60 per cent in 2026, market consensus has the metric above 63 per cent at that point. That is well above the European mean near 50 per cent.
SocGen is not helped by its relatively slim capital buffers. Investors tend to ascribe higher valuations to banks with higher leverage ratios, notes Jefferies. SocGen’s leverage ratio — the amount of common equity tier one capital held against all assets (including off-balance sheet items) — is at 4.2 per cent. This compares with European banks on average at 5.4 per cent.
Couple all this with SocGen’s low return on equity, sub 8 per cent for the next few years according to Visible Alpha’s estimates, and its lowly valuation makes perfect sense. The bank’s commitments to shed non-core assets add up to less than 5 per cent of its risk weighted assets by year-end.
At the very least this process must accelerate. Management must do a better job of communicating any positive changes to come. Otherwise, what is on offer is barely a facelift for an increasingly decrepit business.
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