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An appropriate generalisation

11 Feb 2016 By Dominic Elliott

Societe Generale boss Frederic Oudea is feeling punchy. He hailed the “good” performance of the French bank’s main divisions in 2015, hiking dividends to half of earnings and saying that revenue had been buoyant. Look past that, and what lies beneath is another underperforming European bank.

Return on equity, the number that basically drives bank valuations, was just 4.7 percent in the fourth quarter, owing to unspecified legal provisions of 400 million euros. There are other reasons why Oudea’s triumphalism rings hollow. France’s second-largest listed lender is undecided about whether to cling to the 10 percent return-on-equity target it missed in 2015. SocGen says it has provisioned “cautiously” against oil and gas sector lending, though investors may fret that only two-thirds of those exposures are investment grade, versus around three-quarters at European rivals.

SocGen’s capital position remains too low, though its common equity Tier 1 ratio did improve to 10.9 percent at year-end – just below the unambitious goal the bank had set. It also got close to a full-year revenue target for its wholesale banking unit – but only close. The biggest worry is rising costs. Expenses were up 3.3 percent in the fourth quarter, even as revenue fell. That will make it harder for Oudea to generate more capital.

Investment banking dragged down the whole bank, with a return on equity of just 2.1 percent in the fourth quarter, including investor services. Equities trading revenue fell a third. Like Switzerland’s UBS, SocGen appears to have suffered from a slump in demand for structured derivatives products, which Asian retail investors had previously lapped up. It’s not just SocGen. Gallic rival Natixis, which has lower relative costs, could only manage to crank out an investment banking return on equity of 7.8 percent in the fourth quarter.

SocGen shares have fallen 35 percent this year. If investors thought it would hit its return-on-equity target, and thus deliver the minimum shareholders actually require, its shares would be trading near its book value. They are currently 45 percent below that level. Oudea may feel good, but there’s little in SocGen’s fourth quarter to explain why.


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