Breakingviews on Twitter
Search League Tables

Thursday, 18 December 2014

Soc therapy

SocGen short of options to solve biggest problem

Societe Generale looks short of options to solve its biggest problem: it doesn’t make enough money. Full-year results on Feb. 13 indicate that the French bank is improving its capital position, and the threats from strict government regulation have receded. But even after the bank restructures its business, it will take time before it solves its fundamental problem - poor return on equity.

SocGen’s ROE for 2012 was a paltry 7.3 percent, even after discounting some exceptional items. That’s way off its 11-12 percent cost of equity. The master plan to close the gap is to create synergies by merging the business into three main clusters - the relatively profitable French retail arm, international retail and insurance, and investment and private banking. Even then, this would only get SocGen to 10 percent by 2015, according to an insider.

There are some silver linings. SocGen held the line in its second-tier fixed-income business: core revenues were only down 5 percent quarter on quarter. And the French government watered down its bank reform proposals to such an extent that only 1 percent of SocGen’s assets might be ring-fenced, instead of around 17 percent, according to a Mediobanca analyst estimate. Without this, and a similar relaxation of Basel III liquidity reforms, the ROE figure would in future look even flimsier.

SocGen investors could agitate for more radical solutions. The most extreme of these would be a breakup of the bank: fair value could reach 42 euros, about 35 percent more than the current share price, Mediobanca reckons. That suggests a generous valuation for French retail, presupposes that the bank could offload its non-core division, which consumes half its capital, while taking only 5 percent losses on disposal. Another plan - merging SocGen’s investment bank with Credit Agricole’s in order to cut costs - would still leave returns behind those of bigger rival BNP Paribas.

Investors’ best hope is that the bank’s cost of equity will fall as it gets safer. A euro zone recovery sustainable enough to allow SocGen’s two jewels, French retail and equity derivatives, to motor, would help. But the safer bet is that decent returns are still some way off.

Have your say

To have your say, you have to be signed in

Related images

Context News

Societe Generale said on Feb. 13 it would reshuffle its management team and seek cost cuts after swinging to a fourth-quarter loss on the back of a weak euro zone economy and one-off charges.

France’s No. 2 listed bank said that it would restructure itself into three pillars. The clusters will be French retail banking, international retail and financial services, and corporate and investment banking.

Bertrand Badré - who is stepping down to join the World Bank after a year in the job - will be replaced by his deputy Philippe Heim; while Jacques Ripoll, head of its GIMS asset-gathering division, will leave the group.

SocGen racked up a quarterly net loss of 476 million euros compared with a net profit of 100 million for the same period a year earlier. Analysts had been expecting a loss closer to 237 million euros, according to a Reuters poll of eight banks and brokerages.

Net banking income in the fourth quarter of 2012 declined 4.9 percent from the third quarter to 5.1 billion euros. Underlying fourth-quarter return on equity, stripping out exceptional items, was 4.3 percent, down 3.1 percent on the previous quarter.

For 2012 as a whole, group net banking income was down 10 percent on 2011 at 23.1 billion euros, while group net income was 774 million euros, down 67 percent. Return on equity was 1.1 percent, or 7.3 percent if exceptional items are excluded.

At 1145 GMT, SocGen shares were trading at 31.5 euros, down 3.7 percent.

(Launches in a new window)