Class of 2019: Societe Generale
Investors have rewarded cuts but restructuring may soon recommence, sparking fears of collateral damage in businesses it still cherishes.
A halt to the retreat?
After a chastening year of cuts upon cuts, Societe Generale can hope for little more than the same in 2020.
Long-term difficulties came to a head early in 2019, as horrendous results in its global markets division gave way to a rapid retrenchment. By late in the year, it had laid off 1,600 people in corporate and investment banking, saving about €500 million.
Exiting over-the-counter commodities and proprietary trading has helped SocGen offload €8 billion in risk-weighted assets, mainly in fixed income. It has made further use of securitization as a capital-relief tool.
The speed with which SocGen carried out these cuts surprised the market.
“We have delivered the measures we announced at the beginning of the year and done it faster than expected,” says Séverin Cabannes, deputy chief executive and head of global banking and investor solutions. That has caused its shares to outperform peers in the latter half of the year, after trailing them earlier in 2019.
Yet SocGen is still one of the worst-performing big banks in Europe, with a market capitalization below Italy’s UniCredit. The French bank’s 2020 target for return on tangible equity is between 9% and 10%. Its cost of equity is about 12%, according to Berenberg. Consensus return on equity next year is about half that.
After the sector’s worst year in global markets since 2008 (when SocGen’s revenues were slightly better than peers in equities but much worse in fixed income), the fundamental questions about its business remain. More cuts are expected from the bank’s next three-year plan due in late 2020, particularly in the investment bank and French retail.
Chief executive Frédéric Oudéa told Euromoney in 2019: “As bank chief executives, we need to be inspired by industrial chief executives. I’m inspired by family companies, by their ethical and cultural approach.”
But if talk of industrialization or digitalization is the cloth, one question will be whether cuts go far enough.
Another question is how even the best businesses can thrive against a backdrop of prolonged or permanent austerity.
Barclays’ hopes for more cuts at SocGen, not yet properly factored into other analysts’ expectations, prompted it to recommend investors start buying the stock in November. By contrast, UBS downgraded its recommendation to neutral in October (only halfway through the share-price rise that occurred mid year) because of the potential damage to SocGen’s future competitiveness from being stuck in restructuring mode.
Rumours of sales go so far as Lyxor, one of Europe’s biggest exchange-traded fund providers, which only recently integrated an acquisition from Commerzbank. More likely to go may be the UK private bank, three years after SocGen bought Oddo’s BHF Kleinwort. It completed the sale of its Belgian private bank to ABN Amro in February.
Top management recognize, perhaps belatedly, that investors today favour banks with stronger capital, as the haziness about future capital requirements has not cleared, especially in Europe.
“In this environment you need to demonstrate the flexibility to generate additional capital and be seen by the market as safer,” Cabannes says, pointing to continued uncertainty around Basel III and other reforms.
As common equity tier-1 rose to 12.5% in the third quarter, up from 11% at the start of the year, SocGen has been among the big European banks generating most capital in 2019, according to Cabannes. However, investors seem to have little hope that the bank will be able to reward them through a step up in growth of revenues and profits.
Is the market wrong?
Africa and emerging Europe underpin much of SocGen’s belief in its future.
“We have the benefit of exposure to emerging markets,” says Philippe Heim, deputy chief executive in charge of international retail banking. “This is a key differentiating factor for us.”
But it is hard to compare SocGen with peers such as BBVA and Santander – European banks that post healthy returns thanks to large emerging-market businesses. SocGen’s big market shares outside Europe are in far smaller economies than the likes of Brazil, Mexico and Turkey.
Although the firm stayed out of the 2019 auctions of various Deutsche Bank equity derivatives businesses, the Commerzbank acquisition included an equity derivatives portion. It could only afford that through the sale of sub-scale banks in the Balkans and Poland.
Early in 2019, the talk in the market was that SocGen would pool its cash equities business with a platform co-owned by other banks, as Crédit Agricole and Natixis have done recently. Now Cabannes says SocGen remains an equities house and is committed to the full chain, including research, equity capital markets and execution.
Nor is the bank “giving up” on fixed income, Cabannes contends. Rather, it is refocusing on where clients have appetite and where he considers SocGen is sufficiently differentiated from its competitors.