Societe Generale: Looking Past The Russia Exit

Investment Thesis

Societe Generale (OTCPK:SCGLF) has seen its shares stabilize over the past few months after a slump early in the year on the back of Russia-related losses. The stock remains one of the cheapest in terms of tangible book discount and while investment banking exposure will hurt more in the near term, ongoing efficiency improvements and rising rates make a 8% RoTE achievable over the coming years, absent a deep recession.

Tangible book value will take a further hit of circa 0.6 EUR/share in Q3 2022 from a capital raise for employees. Nevertheless, a rerating of the stock to 0.5 tangible book on par with peers like Santander (SAN) and Barclays (BCS) implies some 40% upside.

A new CEO to take the reigns in 2023 may also shift the strategy of the bank and provide a catalyst for the stock.

Company overview

Societe Generale reports results in three main divisions, namely French Retail Banking at about 30% of Q1 2022 net banking income, International Retail Banking & Financial Services at 31% of Q1 2022 net banking income, and Global Banking & Investor Solutions at 38% of Q1 2022 net banking income.

Q2 Earnings Preview

The effects of the Russian subsidiary Rosbank sale will be a highlight of the Q2 report, albeit in the rear-view mirror. Curiously SocGen was able to finalize the sale on May 18th, also confirmed on the site of Rosbank. Last month information emerged that several other lenders were unable to finalize their exits from Russia. In any case, as I discussed the transaction in my previous article there is no need to elaborate further, with the caveat that there was no update on the buyback execution so far and the effect on tangible book will be delayed in time.

On July 18th SocGen reported a material capital increase of 235.7M EUR for current and former employees, which resulted in the creation of 12,759,346 shares. I estimate the issue price at around 18.47 EUR/share with a negative effect of circa 0.6 EUR/share on tangible book to be incurred in Q3 2022.

Going back to the Q2 operational results, here is a snapshot of my expected underlying net income per divisions:

Segment	Underlying net income, M EUR
French Retail	440
International Retail & Financial Services	490
Global Banking & Investor Solutions	340
Corporate Center	-50
Total	1 220

Source: Author’s expectations

Russia was not a major contributor to SocGen’s bottom line in 2021, with a total underlying net income of 152M EUR in 2021 (2.86% of total), 50M EUR in Q2 2021 respectively.

The drop will be visible in the International Retail & Financial Services segment, which delivered an underlying net income of 508M EUR in Q2 2021. However I expect growth in other countries to offset the Russia exit to a large extent.

The only bright spot for the Global Banking & Investor Solutions segment in Q2 2022 will probably be Fixed income & currencies trading which contributed 38% of Global Markets and Investor Services revenues in Q2 2021, or 43% in Q1 2022, with the remainder made up by Equities trading. The other major component of Global Banking & Investor Solutions, Financing and Advisory, likely suffered a circa 50-60% drop in revenues.

All in all, unless the Equities trading segment outperforms competitors (Morgan Stanley (MS) reported a 4.7% year-over-year revenue increase in Equities) the weak spot in the Q2 report for SocGen will definitely be Global Banking & Investor Solutions.

Finally, with the operating result in mind, let’s have a look how key performance indicators should look for SocGen in Q2 2022, assuming a 50% payout provision against CET 1 capital and spreading the impact of Q1 bank levies throughout the year:

Indicator	Value
Underlying RoTE	7.8%
CET 1	13.05%
Tangible Book	58.9 EUR

Source: Author’s expectations

Sum-of-the-parts update

Here is a quick snapshot how key listed subsidiaries’ share prices have evolved since early May:

Company	Societe Generale Interest Worth, EUR Billion	Percentage change since 8th May
ALD	3.6	-14.9%
BRD	1.08	-21.7%
Komercní banka	3	-12.8%
Total	7.68	-15%

Source: Author’s calculations

While the period in question coincides with the ex-dividend dates of all concerned subsidiaries, BRD is still trading around 0.9 times its book value despite the year-to-date decline of circa 28%.

While by now it is clear that SocGen missed an opportunity in 2021 to monetize some of these mature assets, future sales, especially under a new CEO in 2023 (Current CEO Frederic Oudea has been at the helm for 15 years and has made it clear this will be his last year at the job), still make sense and could be a catalyst for the shares.

Peer Comparison

Let’s have a look how other European banks with a sizable investment banking business has fared so far this year:

Bank	Q2 RoTE	CET 1	P/Tangible book
Barclays	8.7%	13.6%	0.51
UBS	16.4%	14.2%	1.01
Deutsche Bank	7.9%	13.0%	0.32

Source: Q2 Company disclosures & author’s calculations

As you can see, SocGen will likely report a below-average capital position with RoTE in line with peers and valuation on par with Deutsche Bank (DB).

Turning out attention to consumer-focused banks with sizable Eastern Europe exposure like UniCredit (OTCPK:UNCFF) or emerging markets exposure line Banco Santander (SAN):

Bank	Q2 RoTE	CET 1	P/Tangible book
Unicredit	13%	15.73%	0.36
Banco Santander	13.1%	12.05%	0.57

Source: Q2 Company disclosures & author’s calculations

Looking an consumer-focused peers, SocGen will likely deliver a materially lower RoTE with tangible book discount on par with Unicredit, which admittedly is still holding its Russia exposure on the books.

Investor Takeaway

SocGen failed to monetize its mature assets in 2021 to take advantage of valuation discrepancies. Nevertheless, it remains a sound strategy for a new CEO in 2023. Looking over the medium term, a 8% RoTE seems easily achievable absent a deep recession. The current strong capital position and very undemanding valuation open the potential for strong returns over the medium term, especially if the Ukraine conflict deescalates gradually.

Personally, I will continue to roll my options position with an upward bias.

Thank you for reading.