SocGen’s valuation salvation may lie in a breakup

BRD Groupe Societe Generale SA

29/07/2024 10:58

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Liam Proud
       LONDON, July 29 (Reuters Breakingviews) - Société
Générale  SOGN.PA  is firmly out of favour. Shares in the 19
billion euro French lender trade at one-third of forecast
tangible book value – a 60% discount to the 11-member peer group
detailed in the company’s annual report. The gap is at its
widest in at least a decade. A breakup could help.
    CEO Slawomir Krupa, who replaced longtime boss Frédéric
Oudéa last year, has watched other historically lowly valued
lenders like UniCredit  CRDI.MI  leave SocGen in their wake. The
sector rallied alongside rising rates, while Krupa’s bank
trailed. The share price might improve as investors see
loss-making hedges roll off and sense progress on last
September’s turnaround plan, which involves cutting costs and
boosting capital. But there’s still little to get excited about.
    Click here for an interactive version of the graphic.
    SocGen’s 2026 return on tangible equity (ROTE) target of 9%
to 10% is below the bank’s cost of equity, which is probably
well into the double digits. Analysts think Krupa will struggle
to meet even that meagre goal: the mean ROTE forecast for SocGen
in 2026 is 8.4%, according to Visible Alpha. The bank will
report results on Thursday, and the average ROTE forecast for
the second quarter of 2024 is 6%.
    One problem is that Krupa lacks a high-returning core
business on which to base the strategy. French retail banking is
tough because of regulated savings accounts and other local
diktats, which cap lending margins. The investment banking unit,
dominated by trading, is volatile and historically error prone.
    Another problem is the tension between Krupa’s twin
ambitions of higher returns and higher capital. He wants a 13%
common equity Tier 1 ratio, compared with a 12% historic target.
That’s laudable, but higher capital levels raise the denominator
in ROTE calculations, shrinking returns.
    There’s a way out of the strategic cul-de-sac, if Krupa is
willing to be radical. SocGen has three major listed
subsidiaries in car-finance unit Ayvens  AYV.PA , Czech lender
Komercni Banka  BKOM.PR  and Romania’s BRD Groupe Société
Générale  ROBRD.BX . Together, those holdings have a combined
market worth of 8.2 billion euros, equivalent to 43% of SocGen’s
equity value. The implication is that the stakes’ value is not
showing up in SocGen’s share price, perhaps because investors
simply assign a discounted French banking multiple to all the
group’s assets.
    Offloading the listed stakes would bring two benefits.
First, Krupa would get extra capital to fund a combination of
share buybacks and a deeper restructuring of the core
businesses. Second, SocGen would become a more palatable M&A
target for suitors like UniCredit, BNP Paribas  BNPP.PA  or
Deutsche Bank  DBKGn.DE .
    These moves are tantamount to a breakup, a tough thing for a
new boss to advocate. Krupa would also have been better
suggesting it last September. Yet if he can improve SocGen’s
lowball valuation, there would still be time to set his tenure
on a more promising path.
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    CONTEXT NEWS
    Shares in Société Générale were roughly flat between the
start of 2024 and July 29, compared with a 24% rise for the Euro
STOXX Banks Index over the same period. French banking rivals
BNP Paribas and Crédit Agricole were up 3% and 8% respectively.
    SocGen is struggling to agree a deal to sell its securities
services unit, Reuters reported on June 11 citing sources close
to the matter. Potential bidders were balking at the price the
French lender wants for the business.
    SocGen will report half-year results on Aug. 1.

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Graphic: SocGen’s valuation lags those of its peers    https://reut.rs/4cTM1F9
Graphic: SocGen’s meagre returns on tangible equity    https://reut.rs/4dyQIEz
Graphic: Value of SocGen’s listed holdings vs. own market cap   
https://reut.rs/3A7jXiY
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 (Editing by George Hay, Oliver Taslic and Streisand Neto)
 ((For previous columns by the author, Reuters customers can
click on  PROUD/ 
liam.proud@thomsonreuters.com))