Societe Generale Unveils Cautious Targets at Investor Day

Investor days—and the fresh financial targets that usually come with it—often flatter to deceive with limited valuation impact. Societe Generale’s, or Socgen's, new targets, however, clearly disappointed investors, and its share price closed the day 12% lower. We agree that its new targets are uninspiring, but such a sharp decline seems like an overreaction. The market was clearly pricing in higher profitability guidance and possibly more aggressive disposals of noncore businesses. The previous management team regularly failed to meet targets, and we believe new management erred on the side of caution in setting out its targets. We believe that in investment banking and leasing, two of Socgen's largest businesses, market conditions are currently at cyclical highs and in normal conditions Socgen’s profitability could be under pressure. The indication that Socgen will limit incremental capital allocation to only its online bank Boursorama and leasing business ALD is positive. These are Socgen's businesses where the possibility of competitive advantages are the most pronounced. Socgen, like many European banks, has been guilty of not aligning its capital allocation with the competitive position of its various businesses. We reflect this in our poor capital allocation rating for Socgen. Over time, a higher allocation to its best operations should translate into an improvement in group profitability.