SocGen’s valuation salvation may lie in a breakup
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.
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
Editing by George Hay, Oliver Taslic and Streisand Neto
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