Company Reports

No-moat Societe Generale reported a 22% lower group net income for first-quarter 2024 compared with the respective period of 2023. In addition, a significant increase in the cost of risk amounted to EUR 400 million or 27 basis points, which is in line with the group’s guidance for 2024. However, this amount is slightly higher than the average cost of risk in 2022-23. The cost/income ratio of 75% appeared to be slightly lower than in the previous quarter. Operating costs were hit by transformational charges, which should result in a lower efficiency ratio of 71% for 2024 as guided by an ambitious 60% in 2026, which we do not see as feasible yet. Societe Generale needs to report higher efficiencies to prove it can reach these goals. An additional contribution to decreased net income came from a EUR 84 million loss after the disposal of Societe Generale’s Moroccan business, which was announced earlier in first-quarter 2024. We keep our fair value estimate of EUR 29.30/share, which we updated recently.

We increase our fair value estimate slightly for Societe Generale by 3% to EUR 29.30 per share, from EUR 28.50 per share. Our medium-term revenue estimates are in line with guidance and we expect a recovery in 2024 revenue as we don't expect further losses from Societe Generale’s interest-rate hedging program. Societe Generale’s 2026 cost/income target of below 60% looks aggressive, especially given the higher cost base that we expect from agreed salary increases. Societe Generale looks cheap compared with the sector, although its profitability is also materially below that of its rivals. Societe Generale’s lower profitability constrains the potential for higher dividend payouts and share buybacks; which is in sharp contrast to many of its peers who offer high shareholder distribution yields.

Societe Generale, or SocGen, has not been able to generate a level of profitability ahead of its cost of capital since 2006, and we do not anticipate any changes that will position the bank to outearn its cost of capital on a consistent basis. Cost-cutting can potentially improve profitability, but there is also an inflexion point where further cost-cutting will result in damage to the franchise.

No-moat Societe Generale reported another uninspiring set of results to close out a disappointing 2023. Net interest income remained under pressure as the regulated nature of French savings deposits and Societe Generale's interest-rate hedging program prevented it from sharing the upside presented by higher interest rates. However, Societe Generale is guiding toward a strong recovery in net interest income during 2024, provided the regulated interest rate on French deposits does not increase and the forward interest-rate path broadly materializes. As we expected, the normalization of second-hand vehicle prices continues, placing pressure on the margins of Societe Generale's consumer finance business. Despite a strong performance in equity trading, its revenue from securities trading remained under pressure due to weakness in trading fixed-income securities.

Societe Generale, or SocGen, has not been able to generate a level of profitability ahead of its cost of capital since 2006, and we do not anticipate any changes that will position the bank to outearn its cost of capital on a consistent basis. Cost-cutting can potentially improve profitability, but there is also an inflexion point where further cost-cutting will result in damage to the franchise.

Societe Generale, or SocGen, has not been able to generate a level of profitability ahead of its cost of capital since 2006, and we do not anticipate any changes that will position the bank to outearn its cost of capital on a consistent basis. Cost-cutting can potentially improve profitability, but there is also an inflexion point where further cost-cutting will result in damage to the franchise.

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.

The regulated nature of French interest rates on retail deposits and mortgages continues to weigh on no-moat Societe Generale's earnings. It reported operating income of EUR 1.7 billion for second-quarter 2023, 29% lower than it reported a year earlier. Revenue declined by 5% as regulated interest rates prevented Societe Generale from seeing the same revenue uplift that most of its European peers have enjoyed. As we anticipated, the income from securities trading also declined as market volatility declined. Market volatility tends to support higher securities trading income as clients need more hedging solutions and bid-ask spreads tend to widen. Quarterly operating expenses increased by 3% year on year. Societe Generale will be pleased that it managed to keep cost increases below inflation. We maintain our fair value estimate for the stock at EUR 25.50.

In contrast to most of its European peers, Societe Generale reported lower revenue for the first quarter of 2023 compared with the same period a year earlier. Revenue declined 5% year on year due to net interest margin compression. Lower operating expenses and loan-loss provisions negated the decline in revenue, leading to a 6% year-on-year increase in operating profit.

Stress has returned to the European banking system less than a week after a solution for Credit Suisse had been announced. Shares in European banks have traded down through March 24 around midsingle digits, with Deutsche Bank taking the brunt of it, down 15% at its lowest point intraday. We maintain our fair value estimates and moat ratings across our European banking coverage. Allianz remains our Best Idea. Admiral is one of our top picks

With Credit Suisse shoring up liquidity, concerns around a banking crisis spreading in Europe have been firmly planted. While we expect that the next days and weeks will remain volatile, we do not currently see a liquidity crisis spreading through the European banking system. The issues at Credit Suisse are idiosyncratic in nature and we believe containable for now even in a worst-case scenario. With capital and liquidity levels high across the board, asset quality still good, and regulators much better equipped than 15 years ago to quell any sparks, we believe European banks are solid. The major caveat being that developments are currently happening at a rapid pace and views we form today may be stale tomorrow. We believe investors are best placed in European banks with a greater retail focus and a sound profitability outlook. We would highlight BBVA, Handelsbanken, ING, and Lloyds.

We do not believe investors should view the collapse of U.S.-based Silicon Valley Bank as a read-through of the health of European banks' balance sheets. Nevertheless, banks remain highly reliant on the confidence of depositors and other funders. It would be foolish to say there is no contagion risk for European banks, especially if other global banks run into trouble. The current uncertainty could also push up the cost of funding and increase the rate at which European banks pass on higher interest rates to depositors. But we believe it is vital for investors to take note of the contrasts between European banks' and SVB's balance sheets.

No-moat Societe Generale reported second-quarter operating income of EUR 2,390 million, up 19% versus the same period a year ago. Income generation of EUR 7,065 million (up 13%) outpaced operating expenses of EUR 4,458 million (up 9%) resulting in the solid operating income performance. The group also booked a loss on the disposal of Rosbank and its insurance subsidiaries in Russia worth EUR 3.3 billion, which plunged the quarter's net result to a hefty loss of EUR 1,482 million. That said, underlying performance was solid and we maintain our fair value estimate of EUR 25.50 per share.

No-moat Societe Generale reported a net profit of EUR 0.84 billion for the first quarter of 2022, an increase of 3% year on year. Higher operating expenses and loan-loss provisions were more than offset by a 17% increase in net banking income. This was reflected in its EUR 1.4 billion operating income, up 14% compared to the first quarter of 2021. We maintain our EUR 25.50 per share fair value estimate.

The direct exposure of European banks to Russian and Ukrainian clients is insignificant. According to the Bank for International Settlements, claims on Russian counterparties from the major developed European countries' banks amount to 0.7% of the European banks' total claims reported to the BIS.

No-moat Societe Generale finished 2021 strongly, reporting a net profit of EUR 1.8 billion for the fourth quarter, significantly ahead of the EUR 470 million it booked a year earlier. This result brings Societe Generale to fiscal 2021 net profit of EUR 5.6 billion, which is not only an impressive recovery from the coronavirus-induced loss-making position Societe Generale found itself in 2020, but also 74% and 46% ahead of the prepandemic 2018 and 2019 fiscal years respectively. While substantially lower loan provisions played a significant role in this, revenue is also higher than prepandemic levels. At the same time, costs are lower, leading to preprovision profits improving by 18% and 12% compared with 2019 and 2018, respectively. The outlook for 2022 is going to be more challenging. Societe Generale is more reliant on income from trading securities than most of its European peers, and 2021 was a very favorable year for trading revenue. Societe Generale’s high level of operational gearing will amplify any normalization of trading revenue.

We assess Societe Generale’s capital allocation as Poor. SocGen finds itself in a tricky situation. Its profitability has materially lagged its cost of capital for an extended period now, and reinvesting in its existing operations is likely to lead to the same result. Divestment of some noncore businesses could improve profitability marginally, but SocGen’s core businesses’ profitability is also below par. The logical course of action for a nonfinancial firm under these circumstances would be to return capital to shareholders aggressively. SocGen, however, has one of the weakest balance sheets of the European banks we cover, and it will need to maintain its current level of capitalisation to meet regulatory demands. We maintain our economic moat rating of none and our EUR 25.50 fair value estimate.

No-moat Societe Generale struggled during the recent ECB stress test. Its 2023 common equity Tier 1 ratio under the adverse scenario of 7.5% is well below the 9% regulatory minimum common equity Tier 1 ratio it would need to keep to pay dividends still. Only two European banks that we cover fell further below the MDA threshold. Under the adverse scenario, Societe Generale’s common equity Tier 1 ratio shrunk by 5.6 basis points from the 13.2% it reported at the end of 2020. This decrease is among the steepest of the European banks that we cover. If we compare Societe Generale’s operational performance under the base and adverse scenarios, credit quality held up well, but the decline in revenue was the greatest out of all the European banks we cover. We maintain our no-moat rating and our EUR 25.50 per share fair value estimate. The stress test result cast doubts over a view that the firm has excess capital. Societe Generale’s poor performance under the stress test further supports our very high uncertainty rating and the higher cost of capital we use to value its shares.

No-moat Societe Generale continued with its recovery from the disastrous first half of 2020 when steep losses in equity trading and high loan loss provisions combined to push it into a loss-making position. For the second quarter of 2021, Societe Generale reported a net profit of EUR 1.4 billion compared to the EUR 1.3 billion loss it suffered a year ago for the second quarter. The second half of 2020 will pose a more challenging base. We maintain our EUR 25.50/share fair value estimate and our no moat rating.

Societe Generale, or SocGen, has not been able to generate a level of profitability ahead of its cost of capital since 2006, and we do not anticipate any changes that will position the bank to outearn its cost of capital on a consistent basis. Cost-cutting can potentially improve profitability, but there is also an inflexion point where further cost-cutting will result in damage to the franchise.