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Running to stand still

10 May 2021 By Christopher Thompson

Société Générale’s effort to overtake pace-setter BNP Paribas is off to a sluggish start. The bank run by Frederic Oudea wants to cut costs to improve returns at its volatile investment bank. Unchallenging targets imply a more radical overhaul may be needed to improve his shares’ discount to those of rival Chief Executive Jean-Laurent Bonnafé.

On Monday, Oudea released a long-awaited revamp of his capital markets division to lukewarm applause. Through a combination of growing advisory revenue by a modest 3% per annum and ripping out 450 million euros in costs, Oudea targets a return on equity above 10% by 2023.

Taking the mid-point of Oudea’s goals suggests the division would generate some 7.8 billion euros in revenue in over two years’ time. Subtract projected underlying costs of 5.6 billion euros and tax the remainder at SocGen’s 24% rate, and that suggests net income of 1.7 billion euros. That would equate to a healthy-enough 11% return on equity, using the division’s average allocated capital over the past three years, well ahead of the sub-1% ROE in 2020 after losses at the cornerstone equities derivatives unit.

Still, Oudea’s belt-tightening is based on the debatable premise that SocGen can become more efficient and avoid losing revenue at the same time. Moreover, without specific numbers on risk-weighted assets, it’s hard to see to what extent Oudea plans to de-risk the volatile trading unit which blew up last year. A 2023 revenue goal of roughly 5 billion euros for the latter is only about 200 million euros less than its pre-pandemic top line, implying any restructuring will be relatively modest.

Lastly, Oudea’s aim of costs equating to around 71% of revenue by 2023 is already behind BNP, which reported a 65% efficiency ratio last year. True, the latter was flattered by booming capital markets revenue. But reaching 71% would still place SocGen broadly where BNP was before Covid-19.

A 3% rise in SocGen shares on Monday suggests investors think Oudea’s revamp is at least achievable. Still, shares trading at less than half tangible book value, versus BNP valued at three-quarters, imply the need for deeper repairs.

 

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