February 7, 2019 / 9:08 AM / 8 months ago

Breakingviews - Spluttering SocGen undone by its own complacency

The logo of the French bank Societe Generale at La Defense in Courbevoie near Paris, France, April 21, 2016. REUTERS/Gonzalo Fuentes

LONDON (Reuters Breakingviews) - Frédéric Oudéa needs a new name for his strategic plan, Transform to Grow. Given the Société Générale chief executive’s admission that the French bank must restructure to stand still on shareholder returns, “transform to woe” may be more appropriate. Planned cuts to SocGen’s misfiring trading hub will only go so far. A capital shortfall is a potentially bigger concern.

The immediate problem is the performance of the investment bank: net income more than halved in the final quarter led by a 29 percent decline in fixed-income revenue, underperforming Wall Street peers. Equally concerning is the lower top line of French retail banking, the lender’s bedrock. Despite lending growth of 4 percent in the last three months of 2018, revenue from the division, which accounts for roughly a third of earnings, fell by 5.5 percent, suggesting slimmer net interest margins.

That explains why Oudéa blamed persistently low interest rates for having to lop off 500 million euros in projected 2020 revenue. As European lenders have grappled with this challenge for the past decade, it’s a familiar bugbear. The net effect is a lowering of SocGen’s 11.5 percent return on tangible equity goal to between 9 percent and 10 percent. That’s about the same as the group achieved back when Oudéa launched the lender’s latest strategy in 2017.

That was after SocGen blamed lower-than-expected rates for failing to hit some targets in a previous three-year masterplan. Investors have understandably detected a worrying pattern. Accordingly, they have sent SocGen shares down 38 percent over the past year – underperforming the benchmark EURO STOXX Banks Index.

Accepting the argument that lower-for-longer rates are beyond SocGen’s powers of prescience, a capital shortfall shouldn’t be. A common equity Tier 1 capital ratio of 10.9 percent represents a worrying reduction of 30 basis points from three months earlier. Even if it makes that back assuming shareholders accept a portion of their dividend in shares, the lender remains well below a 12 percent target, itself a low-ball threshold given many peers operate closer to 13 percent.

The market senses worse to come. SocGen shares are valued at half their tangible book value, which theoretically equates to a lender making a 5 percent return, assuming a 10 percent cost of capital. Oudéa can point out that, on an underlying basis, the bank is already making nearly double that and thus should handily meet its new aim. Shareholders, however, seem to be in no mood to give him the benefit of the doubt again.


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