Following two disposals in less than a week, today we are back to comment on Société Générale (OTCPK:SCGLY)(OTCPK:SCGLF). For our new readers, Société Générale S.A. (SocGen) is a global bank headquartered in Paris. The company engages its activities in retail banking, corporate and investment banking (CIB), and also includes private banking and insurance divisions.
Before going into the financial details, it is essential to note our latest key takeaways:
- SocGen CMD estimates may have been overly conservative and disappointed investors; however, the French bank has already increased its 2024 financials outlook;
- Even considering A Longer Than Expected Re-Rating Journey, we positively view the new CEO’s intention to reset expectations, and there is downside protection from generous shareholders’ remuneration;
- Q4 results were solid, and SocGen valuation metrics support a buy rating status.
Disposals Derisk Strategy
Our team usually does not speculate on disinvestments, but we should report our last statement:
SocGen probably hoped to announce a few disposals before the CMD. Exiting the Africa division, the Securities Services and Equipment Finance could increase the CET 1 ratio by approximately 100 basis points and reassure the market.
In less than a week, SocGen communicated the following:
- On 11/04/2024, the company approved Societe Generale Equipment Finance’s exit. Groupe BPCE acquired the division.
- On 12/04/2024, the company decided to exit its Africa operations. These sales were related to Société Générale Marocaine de Banques for a 57.67% equity stake and La Marocaine Vie (SocGen’s local insurance division) for the entire equity stake. Saham Group acquired both activities.
This time, we cannot say no sooner said than done; however, we identified SocGen’s likely disinvestments. These disposals are part of SocGen’s strategy to streamline business and strengthen the bank’s capital base (CET1 ratio).
Starting with the African disposals, the transaction positively impacts the company’s Common Equity Tier 1 by approximately 15 basis points. SocGen sold the division for a total price of €745 million, with an estimated exit in H2 2024. According to the press release, this agreement will have a negative P&L impact of 75 million in the Q1 results.
In the Equipment Finance division, the company sold the asset for €1.1 billion. Equipment finance operations in Slovakia and the Czech Republic will remain part of the SocGen group. In number, SocGen disposed of €15.0 billion in divisional loans and released €8 billion in risk-weighted assets. According to the bank, this adds 25 basis points to the CET 1 ratio. The transaction is expected to close in Q1 2025. Looking at the details, in 2023, this division accounted for €437 million in sales, which represents 1.7% of the total company’s turnover. The division cost/income ratio reached 59% with 50 basis points of loan losses. In our estimates, we believe Equipment finance was generating €100 million in net income for the group, which accounts for a 2% lower EPS.
Earnings changes and Valuation
Considering the two disposals and including the negative €75 million P&L impact on the Africa exit, we are lowering our EPS estimate by approximately 3%. Therefore, we move our 2024 EPS from €4.5 to €4.36. On the CET1 evolution, we should also report the launch of Bernstein, a JV that creates a leading worldwide cash equities and equity research business. We positively view the JV from an industrial point of view; however, this reduces the bank’s CET1 capital ratio by ten basis points. Considering the Equipment Finance division sale in Q1 2025, we left our CET 1 estimates for 2024 unchanged.
As a reminder, the company aims for €6.7 EPS in 2026. Here at the Lab, SocGen capital build and home market retail recovery are critical to our supportive buy rating thesis. In our estimates, we believe that 80% of the group profit before tax is expected to be the company’s net interest income. In addition, we are also projecting lower costs that are aligned with the company’s target to deliver a more efficient cost/income ratio. Recovering the French retail division is critical to providing a 9-10% RoTE in 2026.
Following our last update, SocGen stock price is up by approximately 15%. In our view, the company’s valuation has room to grow. Getting deals done and positive confirmation of domestic net interest income are required steps to the upside we see. Disposals accelerate SocGen’s move for a higher payout ratio with buyback and dividend yield. In detail, the company’s total yield is between 6-8% compared with the 11% EU sector average. This is not good enough yet. For this reason, we continue to value SocGen with a discount compared to its closest peers. In number, our P/E target is set at 5.5x (vs. a sector average of 6.5x) and a P/TNAV of 0.5x (vs. a sector average of 0.8x). Blending our valuation methodology, we derive a price target of €29.86 per share. Therefore, we confirm our buy rating.
Mare Past Analysis
Risks
Downside risks to our target price include a weaker-than-forecast interest rate evolution, lower capital market revenues, execution of cost reduction plans in the French retail division, and lower earnings in CIB. In addition, we should also report a slowdown in commercial and personal loan activities.
Conclusion
These exit announcements are significant steps in the right direction. We believe there are more disposals to come, which provides a margin of safety for the company. Again, we appreciate the CEO’s cautious approach, and this environment of higher for longer rates also includes flexibility in steering the payout mix. We confirm our Buy status.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
