BREAKINGVIEWS-Stability can help SocGen escape its value trap

The French bank reported a 19% jump in underlying net income in the third quarter

  
The logo of the French bank Societe Generale is seen in front of the bank's headquarters building at La Defense business and financial district in Courbevoie near Paris, France, April 21, 2016.

The logo of the French bank Societe Generale is seen in front of the bank's headquarters building at La Defense business and financial district in Courbevoie near Paris, France, April 21, 2016.

REUTERS/Gonzalo Fuentes

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

LONDON - Société Générale boss Frederic Oudea finally has something to smile about. The French bank reported a 19 percent jump in underlying net income in the third quarter, lifting its return on tangible equity to a respectable 11 percent. That makes its discount valuation look odd. If SocGen can resolve a long-running U.S. sanctions-busting investigation and keep its investment bank on an even keel, then it should shake off its reputation as a perennial also-ran.

SocGen has maintained for months that a settlement of alleged violations of U.S. sanctions on Iran and Cuba is weeks away, only for a final agreement to be pushed back. Oudea did his best to draw a line under the affair in the third quarter by setting aside an additional 136 million euros – bringing the total kitty to nearly 1.6 billion euros – and boldly announcing that should “put an end” to the matter.

If his claim holds, then SocGen’s prospects look brighter than they did three months ago. Underlying revenue rose by 4 percent in the third quarter, mostly due to a robust performance from its international retail banking business, including Russia, and a solid French market. That helped lift the bank’s annualised return on tangible equity above the presumed 10 percent hurdle at which it creates value for shareholders.

Crucially, SocGen avoided mishaps on the trading floor. Like domestic rivals BNP Paribas BNPP.PA and Credit Agricole, its investment banking unit lagged behind U.S. rivals in revenue terms in the first half. But in the three months to September the division boosted net income by 6 percent year-on-year, helped by a 19 percent jump in equity trading revenue and a flat top line in fixed income.

If SocGen can sustain that performance for more than one quarter, it should escape its value trap. Analysts expect the bank to earn 4.93 euros per share next year. That’s equivalent to a 9 percent return on SocGen’s current tangible equity. Yet even after a 3.5 percent jump on Thursday morning the lender’s shares are still valued at 35 percent less than its tangible book value. The long-awaited settlement and a more consistent performance by its traders would close the gap.

CONTEXT NEWS

- Société Générale on Nov. 8 reported net income of 1.2 billion euros in the third quarter, up 32 percent from the same period a year earlier, on revenue up 10 percent year-on-year to 6.5 billion euros. Underlying net income, which excludes one-off charges and a revaluation of certain assets, was up 19 percent year-on-year.

- The Paris-based lender reported annualised return on tangible equity of 10.9 percent for the quarter, compared with 8.1 percent a year earlier.

- Its common equity Tier 1 capital ratio at the end of September was 11.2 percent, 8 basis points higher than three months earlier.

- Chief Executive Frederic Oudea said the bank had “put an end to the financial impact” of ongoing litigation with US authorities. The lender announced an additional 136 million euros in provisions for legal disputes, bringing the total it has set aside to 1.58 billion euros.

- Shares in Société Générale were up 4 percent at 34.4 euros by 0915 GMT on Nov. 8.

(Editing by Peter Thal Larsen and Bob Cervi) ((Christopher.G.Thompson@thomsonreuters.com; Reuters Messaging: Christopher.G.Thompson.thomsonreuters.com@reuters.net))


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