SCGLF - Societe Generale: Time To Enter (Again)

2023-03-29 09:50:23 ET

Summary

• Here at the Lab, we have a bullish view of EU banks.
• RoTE at 9.6% and a shareholder return of more than 11% in 2023.
• Low cost of risks and a solid CET1 ratio make SocGen a buy.

Société Générale (SCGLF)(SCGLY) anonyme represents our fourth follow-up on EU banks. The Silicon Valley Bank crisis severely hit the European banking sector and many analysts already reported SVB's inadequate portfolio management, excessive interest rate risk, and a strong imbalance between assets and liabilities against a limited availability of cash. These conditions are far from European banks which tend to hold high liquidity with the ECB and are also equipped with rigorous ALM risk management processes.

Another aspect that makes the story " American " different is the financial services competition. In Europe, banks are financed by deposits from households and " small businesses " which are widely diversified and stable. This is partly due to the market structure but also from a lower loan growth rate post-COVID-19 compared to the United States. In these hours, European banking stocks are paying a heavy price, but we remain confident that emotion is taking precedence over the reality of the banks' numbers. As already mentioned , the European banking sector is trading at a historically low P/E, and Wall Street is underestimating the earnings prospects and returns on capital from European banks resulting from rising interest rates which are returning to levels last time seen before 2008. At the same time, and this is not acceptable, they are not lowering and adjusting their dividend yield forecasts. Here at the Lab, we took the time to distinguish the noises from the short-term negative signals (and relative emotion) and look ahead with data and prospects that might favor the EU banking environment. Investment choices can only remain long-term oriented given that the market has current high volatility.

On the other hand, we should mention that credit continues to hold back in the Eurozone. According to ECB data for February, credit business is falling on a monthly basis. On an annual basis, loans to the private sector increased by 4.3% (from 4.9% in January), and those to households by 3.2% (from 3.6%). After four consecutive months of decline, the monthly data already show the minus sign for credit to businesses. Values vary significantly between countries. In Italy, loans fell by 0.2% in February, while in Spain, they increased by 0.2%. Instead, in France and Germany, they rose by 8% and 9% respectively. Looking at the past and considering the increases in ECB rates, here at the Lab, we are forecasting a credit crunch, and then a recession (with a higher cost of risks estimated at 2% in the Eurozone). Our internal team performed an interesting banking analysis, so we suggest checking our recent publications:

1. BNP Paribas (BNPQF)(BNPQY): Another Buy Opportunity
2. UniCredit (UNCFF)(UNCRY): Again A Buy
3. Intesa Sanpaolo (ISNPY): We Should Take Advantage

SocGen Opportunity

In our initiation of coverage called Time To Enter , after having analyzed SocGen's Russian exposure, we were confident in our price target set at €30 per share on the company's TBV. After the Q4 and FY results , the company almost reached our buy rating target and since then, it was massively de-rated, and now we are back at a stock price level of approximately €20 per share.

Thanks to our MACRO analysis, we are supportive of the EU banking sector and SocGen is no exception. Why?

1. SocGen cost/income ratio is higher than competitors; however, it is in line with management's latest indications, and there is a clear path to reduce core operating expenses. The last three years' track record is a positive sign that cannot go unnoticed (Fig 1);
2. On shareholder remuneration, there is a solid margin of safety. In detail, the company is planning a share repurchase of €440 million (worth €0.55 per share) and a dividend of €1.70 per share. The implied shareholder's return at the current price is above 11% (considering DPS and buybacks);
3. Common Equity Tier 1 reached 13.5% at end-2022, above 420 basis points of the ECB regulatory requirement. Cost of risk at extremely low level i.e. 28 basis points (Fig 2) with a 2023 expectation between 30 and 35 basis points;
4. ALD upside (here at the Lab, we also reported Arval's results )
5. As a reminder, compared to UniCredit and Raiffeisen, SocGen fully exited Russia (Rosbank);
6. Concerning the bank valuation, the company is still trading at a Price-to-Tangible-Book of 0.25x versus its historical average of 0.53x. SocGen has a current RoTE of 9.6%. Therefore, we reiterate our buy rating target at €30 per share ($8 in ADR).

Source: SocGen Q4 and FY results - Fig 1

Fig 2

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