Sunday, October 1, 2023

Societe Generale: Societe Generale’s new objectives receive a cold reception on the stock market

(BFM Bourse) – The La Défense bank presented new objectives this Monday morning during a day dedicated to investors. Its revenue and return on equity targets disappoint. The stock, like that of its subsidiary ALD, plummeted on the stock market.

Societe Generale makes value creation the number one priority of its strategy. The Banque de la Défense is organizing an investor day this Monday in which it will try to convince the market that it can catch up with the Stock Market.

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Because from the sixth slide of its presentation, the red and black establishment highlights its stock market discount. Its tangible book value has risen 50% since 2010, when its shares fell 50% over the same period. Thus, according to its presentation, at a price of 26 euros, its share is trading at 0.4 times the value of its balance sheet compared to 0.8 times for its comparables (BNP Paribas, Barclays, Crédit Agricole SA, UBS, Unicredit, HSBC, ING, Santander, Deutsche Bank).

The work ahead of new CEO Slawomir Krupa is therefore substantial.

But at the moment the market does not appreciate the new objectives communicated this morning, before today. Société Générale shares fell 7% around 10:45 a.m. and its long-term car rental subsidiary, ALD, which also met new medium-term targets, plummeted 12.1%.

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Jefferies bank explains that this plan does not meet its expectations. The same goes for the Royal Bank of Canada. “The financial objectives and planned capital distribution based on the presented capital trajectory appear prudent” and “do not imply an upward revision of consensus estimates at this stage,” argues the Canadian bank.

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“Disappointing,” says KBW in the title of its note dedicated to Société Générale’s announcements.

To improve its profitability, Société Générale will significantly adjust its costs. The company is therefore aiming for an operating ratio (expenses divided by net banking income for simplicity) of less than 60% in 2026, down from 66% last year.

To achieve this, the bank’s gross cost base will be reduced by €1.7 billion, thanks in particular to the synergies generated by the merger between the retail banking networks in France of Société Générale and Crédit du Nord (now united under the name ” SG” ), to those generated by the acquisition of the Dutch LeasePlan by ALD, or even to the savings obtained by improving the efficiency of IT structures: this last mechanism alone should generate a gross savings of 600 million euros during the period 2023-2026.

Growth below expectations

In terms of income, Société Générale indicates that its objective is a growth of between 0% and 2% on average each year between 2022 and 2026. This modest increase is explained, in particular, because the bank wants to limit risks, increasing the growth of their RWAs, i.e. risk-weighted assets, by less than 1% annually over the period 2024-2026, on a comparable basis. This figure even reaches zero, excluding Boursorama and ALD.

Jefferies emphasizes that this growth trajectory is disappointing, because the consensus had 2.7% for the period and the establishment itself had 3.6%. The bank calculates, based on certain assumptions, that Société Générale’s medium-term objectives imply an earnings per share of just over 7 euros in 2026, while the consensus forecast 7.19 euros and this even 8.46 euros.

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“The absence of revenue growth surprises us. The objectives of this day dedicated to investors are clearly not what we expected. For us, SocGen should, from 2024, be a story of higher revenue growth than the rest of the sector. , thanks to its more diversified profile”, develops Jefferies.

In addition to the earnings trajectory, Jefferies says it is “negatively surprised” by “the increase in the capital target, the reduction in payout (the dividend payout ratio, editor’s note) and ROTE (return on tangible equity). “.

In fact, Société Générale has also indicated its profitability and solvency objectives. The bank plans to achieve a CET 1 capital ratio of 13% in 2026 according to the Basel IV standard (prudential standards that ensure that banks are sufficiently capitalized in times of crisis). Previously, the establishment was targeting a ratio of 12% in 2025.

More than 8 million customers for Boursorama

Regarding ROTE, a key measure of bank profitability in terms of capital, Société Générale expects a rate of between 9% and 10% in 2026, compared to 2.5% in 2022, excluding the impact of the sale of its activities in Russia. But also in this case Société Générale had previously set a target of 10% in 2025.

“The new objective, although the bank previously aimed at a profitability rate of 10% by 2025, will disappoint expectations that were high. In addition, it is lower than the 12% objective set by its peers,” underlines KBW.

In addition, Société Générale aims to obtain a return for its shareholders (dividends and share buybacks) that represents between 40% and 50% of its published net profit. According to Jefferies, this rate was previously 50% of adjusted profit.

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The last potential source of disappointment: the absence of an explicit commitment to sell assets, as some design offices perhaps expected. “There doesn’t seem to be much tangible around potential asset sales (African assets, securities services),” KBW notes.

As for the subsidiaries of Société Générale, Boursorama aims to reach more than 8 million customers in 2026 (compared to around 5 million currently) and a net profit of more than 300 million euros in 2026. ALD, for its part , aims to achieve at least an exploitation ratio excluding the resale of used vehicles of around 52%. The long-term car rental group is targeting a ROTE of 13% to 15% in 2026.

The bank has also indicated that it wants to reduce its exposure to the oil and gas production sector by 80% in 2030 compared to 2019, with an intermediate step of -50% in 2025.

Not all elements of this plan are judged negatively by analysts. UBS values ​​Société Générale’s commitment to achieving a higher CET1 capital ratio.

Although somewhat disappointed, Jefferies believes that if Société Générale achieves its ROTE objectives while respecting the capital ratio, its shares could experience a significant “re-rating”, that is, an improvement in its valuation multiples.

Obviously the question of execution remains. But “a plan focused on cost control rather than revenue growth (the latter scenario has disappointed in most previous cases) may be considered to have a better chance of success,” Jefferies believes.

Julien Marion – ©2023 BFM Bourse

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