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European banks have served up another reminder of why some investors exercise enduring caution towards the sector. The implosion of Asian stock markets and fears of US recession knocked sector sentiment on Monday. Perennial laggards Monte dei Paschi di Siena and Deutsche Bank led share price declines. With the Stoxx banks index down more than a tenth in the past week, the soft landing narrative is in its terminal stages.
Société Générale has underperformed the rest of the sector, both in the past week and since the start of the year. Shares in the French bank fell more than 3 per cent on Monday, despite the announcement of disposals worth about €1bn. These are part of chief executive Slawomir Krupa’s turnaround plan, announced in September last year.
But the deals barely move the needle for Europe’s lowest-returning, lowest-rated big bank. Without benign economic conditions and higher interest rates, more drastic remedies will be required.
The sale of SocGen’s Swiss and UK private banking operations will raise €900mn and add 0.1 percentage points to its CET1 capital ratio. A sale in Madagascar adds another sliver. But the bank reported a CET1 ratio of 13.1 per cent at second-quarter results last week. That remains low compared with peers and not high enough to enable the required major restructuring.
Low profitability is a drag. SocGen expects to generate a return on tangible equity of more than 6 per cent this year. It is still running into hurdles, recently in French retail where it now expects net interest income to be lower. It said that lower lending volumes, and the need to pass on more interest rate rises to depositors, were to blame. Yet the retail divisions of BNP Paribas and Crédit Agricole still managed positive surprises.
This just adds to a lack of investor confidence. SocGen’s shares are now back to sub €20 levels, last recorded during last year’s banking crisis. That its stock is stuck trading at a third of tangible book value a year into this turnaround suggests the market is not buying it.
The underperformance in French retail highlights SocGen’s other problem: an outsized investment bank prone to generating unsavoury headlines. Shrinking it would be costly, potentially necessitating the sale of profitable eastern European businesses.
That would amount to selling the crown jewels to facilitate a car boot sale. No wonder that Krupa or anyone else would be loath to do it. With shares on a one-way journey down, the market may have already made up its mind.
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