Wednesday, 12 February 2014

Soc Gen - what is and is not priced in

A corporate update from the French bank Societe Generale always provides some useful insights.  They continued to make progress across their three major business divisions, as shown below, but note too the lack of overall progress at their gross operating income line. 

 
Inherently SocGen retains optionality in their business beyond a correlation to financial markets and interest rate spreads per se.  Further cost cutting could augment gross operating income, on a net basis, by a further 10%.  This is good...but not epic. 

With an oligopolistic French retail network contributing materially to the results, Soc Gen continues to scan well on region-wide banking sector risk analysis, which is to their credit.


Additionally the loan to deposit ratio continues to compress. 

 
This has contributed to allow the generation of a Euro1 dividend for 2013 - equivalent to a yield of just over 2.2% or a pay-out ratio of just over 40%.  Correctly analysts applauded this.

By far and away the most interesting disclosures in the Soc Gen report remains the return on equity line.  These range, for FY13, between 4.4% and 9.9%.  And the reason for the differences?  That wonderful catch-all of:


'impact of legacy assets, non recurring and non economic items'
 
 
And so here's the problem.  As shown below, Soc Gen shares have performed very well during the last year.  If you believe in their 10% RoE target by the end of 2015 it is possible to get a higher share price (c. Euro55+)...but this requires ignoring the one-offs. In a slide in the appendix to their presentation document, the company noted that its total on and off balance sheet credit risk was Euro650bn or over 18 times its market cap.  No bank is going to scan well on this metric but that is why buying banks at a discount to today's not tomorrow's sustainable earnings is key, to help give extra valuation protection.  From this perspective Soc Gen is no way near as interesting as Barclays (report written up yesterday on their numbers, link here) today.  

 

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