SCGLF - Societe Generale: Positive Quarter Buy Reiterated

2023-05-12 17:57:27 ET

Summary

• Profits beyond expectations and no drop in deposits. Solid liquidity coverage ratio.
• Strong balance sheet and positive CET-1 ratio development.
• 2023 outlook is confirmed and so is our valuation.

Since our latest update called ' Time To Enter (Again) ', Société Générale Anonyme ( OTCPK:SCGLF , OTCPK:SCGLY ) ("SocGen") is up by another 9.28%.

Here at the Lab, we suggest our readers check our previous EU banking publications. In particular, in a very challenging environment (SVB and Credit Suisse crisis), we decided to increase our EU financials exposure supported by Macro to Micro takeaways. Details are provided in ISP , BNP , UniCredit, Erste Group Bank Credit Agricole, and KBC Group's analysis.

Today, SocGen just released its first quarter figures and there was a better-than-expected net profit development. In numbers, net income reached €868 million and is up by €821 million recorded in the same period of 2022. This result was above FactSet consensus estimates. Looking at the aggregate level, this positive outcome was due thanks to credit to loan loss provisions and lower costs. While revenues were a little weaker than previously forecasted, especially those of the retail business in France, which will probably remain subdued for 2023, the Corporate Investment Banking division surprised Wall Street analysts' expectations.

Q1 results

Looking at the details, revenue decreased by 5.3% compared to a year ago to €6.67 billion. The bank recorded the largest drop in revenues in retail banking in France with a minus 11% on a yearly basis. This was largely due to an increase in interest rates on regulated savings plans and the impact of lending rates. SocGen reiterated that 2023 will be a year of transition for its French retail operations, as the benefits of positive interest rates on deposits have been temporarily offset by short-term hedges. Hence, French retail banking's net interest margin would decline this year by around 15%-20% compared to 2022. However, the numbers did not disappoint the FactSet consensus expectation - revenue and net income were set at €6.7 billion and €470 million respectively.

Source: SocGen Q1 results presentation

Going to our upside, the bank balance sheet showed an improvement in liquidity with a liquidity coverage ratio higher quarter on quarter. LCR ratio is aimed at ensuring that a bank maintains an adequate level of liquid assets that can be converted into cash under a liquidity stress scenario. In number, LCR increased by 30 percentage points, reaching 171% compared to 141% in 2022 Q4. There was also no decline in deposits, and on the contrary, SocGen marked a +0.7% compared to the previous quarter, reaching €598 billion.

The cost/income ratio reached 60.5% (compared to the target of around 64%) and the cost of risk was at a record low at 13 basis points (from 39 basis points the previous year - Fig 1) - this again was better than the consensus. According to the bank's 2023 estimates, the cost of risk is forecasted below 30 basis points at year-end. The fully loaded CET1 capital ratio improved more than consensus expectations at 13.4%, +10 basis points on a quarterly basis, and +30 basis points vs consensus estimate, with around +14 basis points of organic capital generation (Fig 2). It is important to note a reduction of €1.4 billion in risk-weighted assets quarter-over-quarter.

Fig 1

Fig 2

On Mare Evidence Lab's upside, it is important to review ALD's performance. As a reminder, SocGen has a 57.01% equity stake with a current market value of approximately $3.7 billion. ALD reported an important increase in net profit generation. This was supported by solid organic growth with 1.815 million contracts managed and higher used car prices. Even considering higher expenses on LeasePlan-related integration costs and a €20 million one-off on a Russian subsidiary, the company's total net income was up by 22.4% at €315.5 million.

Source: ALD Q1 results presentation

Conclusion and Valuation

Following our Q2 buy case recap , SocGen recorded important cost-saving initiatives confirmed by a lower cost/income ratio and ALD delivered a solid performance.

Post earnings release, Société Générale shares show a plus 1.74% and we are not surprised. We reiterated our buy rating and €30 target price ($8 in ADR). The bank is still trading at a depressed valuation with a price-to-Tangible-Book at 0.28x versus its historical average of 0.53x. The company's valuation is also supported by organic cash generation and a higher RoTE (now at 10.7%). The group's capital position is sound and we positively view the buyback . On the other hand, regulatory/market developments and growth may impact capital return. In detail, on the risk side, the company has approximately 30% of its assets in the Corporate Investment Banking division with exposure also to equity derivatives and with a volatile capital market trend, the division represents an area of risk, Bank funding is an important variable and any tension on the market can affect funding costs and the bank's balance sheet. A worsening macroeconomic situation could lead to an increase in the cost of risk and a more difficult revenue environment. Additionally, given the exposure to Central and Eastern Europe, any deterioration in macro conditions in the benchmark region could impact the institution's financial results, as well as geopolitical developments. Potential trade disputes also pose a risk. Societe Generale is also sensitive to developments in macroeconomic data and political trends in Europe. If one of these risk factors were to have a negative impact greater than our forecasts, the share price will probably struggle to reach our target price.

For further details see: