SocGen, a call at 0.3X P/B for a cleaned up stable

In our previous teaser on SocGen (Buy, France), we revisited the group’s past strategic plan, which had been focused on improving its risk profile. This risk reduction occurred mostly via the exit, planned or unplanned, of SG’s riskiest operations, whether it was the “vanilla-ization” of the equities business after the COVID crash or the emergency exit from the Russian Rosbank in the wake of the Russian invasion of Ukraine. In the last year of former CEO Oudea’s reign, SocGen seemed to have learnt the lessons of past crises, looking not only to reduce its risk profile but also to pursue cost-rationalization in its domestic banking unit while aiming at new markets with the growth of its auto leasing unit ALD, helped by its merger with Leaseplan. 
Unfortunately, SG’s valuation curse did not end despite the effective reduction of the group’s risk profile as past issues of efficiency and capital solidity became more visible at the time of SocGen’s CEO transition from Oudea to Krupa. Although the new management clearly identified these issues when unveiling its 2026 Strategic plan, difficulties remain for the new doctor Krupa in charge of curing SocGen’s valuation curse and “filling the value gap”

SocGen’s hardships of the post-Oudea era
In its last year of his tenure, CEO Oudea seemed to be ending his 15-years at the helm of SG on a note of redemption. Named CEO in the wake of the Great Financial Crisis, Oudea steered SocGen from crisis to crisis, aiming to repair breaches in SG’s foundations as they appeared, sometimes resulting in a reduction in the group’s footprint by exiting SG’s most tumultuous businesses. This focus on “crisis management” however appeared to be over in Oudea’s last quarters of management as he launched three great projects aimed at improving the group’s efficiency and earnings growth stability. 
These great initiatives, all involving the group’s retail banking operations, consisted of the merging of the SG and Crédit du Nord physical networks, the support to return Boursorama (now BoursoBank) to a profitable growth path and the completion and management of the merger between ALD (now Ayvens) and Leaseplan. 
As Oudea handed the keys to Krupa in May 2023, Oudea’s great projects looked well underway with the SG-Crédit du Nord merger on track as the IT merger was near completion with 80% of the synergies targeted coming in 2024 and with Boursobank being profitable a year ahead of schedule, with the growth path still strong, client acquisition costs declining and assets per client increasing. The ALD-Leaseplan merger also looked rosy as the merger was finalized, creating a leading player and overcoming antitrust issues, boosting the market position of what was one of the best SocGen’s growth engines in 2022.
With Oudea leaving, cracks however again began to appear, this time not on risk but on profitability and growth. The French Retail Banking unit increasingly began to suffer from the French banking environment due to the usury rate regulation and the accelerating rise in deposit costs linked to the considerable share of inflation-indexed regulated deposits on the division’s liabilities side. This issue, which affected all retail banking units in France across SocGen's French peers, turned however sourer for SocGen as the management decided in 2021-2022 to hedge the unit against interest-rate decreases months before the ECB began to hike rates at its fastest-ever pace. SG’s results were all the more impacted by this issue as the bank's main growth engines, its CIB division - which had been supported by Global Markets within which the equities business enjoyed a strongly volatile environment in 2022-2023 - and Ayvens (ex-ALD) experienced normalizing conditions, denting the group’s profitability and requiring SG’s new management to take action. 

Krupa era and the SG 2026 strategic plan: a bondholders’ paradise
With Oudea gone, Krupa launched his 2026 strategic plan, outlining a somewhat more circumspect war plan for SG. 
The plan, aiming at “filling the valuation gap” with the rest of the banking sector, focused on the two pillars of cost-reduction and capital build-up. This came however at the cost of sacrificing both growth and shareholder return. Once announced, this “valuation gap filling” plan had an immediate opposite effect on the share price, leading to a more-than20% decline as SG’s new management promised a no-growth, low-distribution story at a time the sector was enjoying a strong margin uplift from higher interest rates and handing back excess capital to shareholders. 
The French Retail Banking and Ayvens woes continued in the Q3 and Q4-23 following the CMD but Krupa nevertheless launched the group’s cost rationalization effort, based on €1.7bn gross of savings to be realized by 2026 vs 2022, supported by the end of the Single Resolution Fund contribution and declining transformation charges linked to the group’s great projects in French Retail Banking and auto leasing. With a large part of the group’s planned cost-savings coming from synergies from French Retail Banking and Ayvens and from IT improvements, a large portion of the savings were to be financed through a new reduction of the group’s footprint in segments deemed as subpar efficient, non-synergistic and too capital-consuming.

2024 milestone: the great divestment spree
SocGen’s garage sale began at the end of 2023 as the group exited several African countries where its market positions were too small to be economically efficient. The divestment efforts turned however into a spree last week as, over two consecutive days, SG announced the sale of its equipment finance activities for €1.1bn to BPCE Group and the sale of its Moroccan operations to Saham Group for €745m. The two deals, set to relieve the bank’s CET1 ratio by c. 40bps, will likely be followed by further divestments such as neobank Shine, SG Securities Services, Hanseatic Bank consumer finance, UKbased Kleinwort Hambros and the group’s Swiss private banking assets. 
While the cost savings from divestments will however not take shape before 2025, costsaving initiatives in the French domestic unit should help with physical networks synergies, Ayvens synergies and staff reduction initiatives at headquarters. This should be accompanied by a recovery in French Retail Banking as rate repricing begins to appear on the assets side and the hedging costs disappear, followed by continued momentum in International Retail Banking, helping the bank to achieve its 2024 guidance of 5% revenue growth, a below-71% C/I ratio and a 25-30bp cost of risk, allowing it to reach the 6% nonambitious ROTE threshold.

2024-26: good potential for an all-weather recovery
The recovery should really have legs by 2025-26. We expect this recovery to be sustained in any market environment, as French Retail Banking is less sensitive than other European peers’ operations to uncertainties surrounding interest rates given the structure of the French Banking market while CEE economies’ central banks are already pivoting thereby boosting the International Retail Banking division’s volume growth prospects. Ayvens' woes should also disappear given that surprise inflation in the cost of services was the main factor behind the decrease in its leasing margin. Any unforeseen deterioration in the macroeconomic environment should be caught by SG’s most successful volatility hedge: its global markets division. We project the equities business to stabilize or grow in 2024-25 depending on the return of market volatility.

Valuation: a cheap call option with a 2026 maturity 
SG’s deeply-discounted valuation with a 0.3x P/B, a low for the sector, shows that the valuation gap remains for now and that investors are looking at SG’s current share price as a call option on the success of its painful strategic plan with a 2026 maturity. The strike price has been set very low by SG’s new management and we believe the margin for disappointment is now minimal, especially given the group’s low business sensitivity to the current interest rates environment and the situations of the different group divisions. The potential recovery in earnings momentum in the coming quarters will show whether this call option has a good chance to land in-the-money or not. We would go for it.

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