Societe Generale: 2026 RoTE target shows structural decline in profitability; still attractive

introduce

Societe Generale ( OTCPK:SCGLF ) held its investor day on September 18th. The presentation can be viewed here and the press release can be found at this link .For reference, you can also access the company’s first half 2023 results Promotional meeting here.I also recently covered Société Générale in February here. In this article, I’ll share the highlights from the investor day and conclude by comparing Societe Generale’s performance with its French peers.

financial goals

This Investor Day covers the period 2023-2026, taking 2022 results as a starting point. As a result, the French bank communicated new financial targets for 2026:

• According to Basel IV (to be launched in 2025), the CET1 ratio is 13%;
• Average annual revenue growth between 2022 and 2026 is between 0% and 2%
• The cost-to-income ratio will be less than 60% in 2026;
• RoTE in 2026 is 9-10%
• payout ratio 40-50% of reported net profit starting in 2023
• Risk cost in 2024-2026 25-30 basis points

My first big takeaway is that Société Générale has not improved its profit target. on the contrary, Midpoint 9.5% RoTE It’s actually slightly lower than the previous 10% target for 2025, and lower than the 12% target generally set by large French peers such as BNP Paribas ( OTCQX:BNPQF ) and Crédit Agricole ( OTCPK:CRARF ) . Nonetheless, it is broadly in line with the underlying RoTE of 9.1% achieved in the first half of 2023. So while the new goal may be disappointing, it is also realistic and achievable.

Another key point is Lower payout ratio 40-50% Net profit reported in 2023. Previously, Société Générale had targeted a payout of 50% of underlying net profit (which largely ignored restructuring costs and other selected items). This is part of a larger shift by the French bank to put more emphasis on reported numbers rather than allocating restructuring costs across the corporate centre, such as:

Therefore, it is reasonable to expect Cumulative shareholder dividends Given the tendency for reported numbers to be lower than the underlying results, the 2023 numbers will be lower relative to 2022:

According to the press release, a cost/income (C/I) ratio below 60% in 2026 will be due to:

• Cost saving 6%
• 3% reduction after end of single resolution fund payment
• Restructuring expenses decreased by 2.25%
• The impact of inflation is 4.75% higher

In the second quarter of 2023, the cost-to-income ratio was 65.8%.

capital position

Societe Generale maintained its CET1 ratio at 13.1% in the first half of 2023, a 3.4% buffer from the 9.73% requirement. The bank expects the introduction of Basel IV in 2025 to have a negative impact of 0.85%. As a result, the CET1 ratio is expected to bottom in the first quarter of 2025 before recovering later in the year and 2026:

The bank will absorb a further regulatory headwind of 0.5% of CET1 capital for the remainder of 2023.

Division Highlights

Despite some changes across the business, Societe Generale will continue to report on operations in three key divisions:

French retail banking (Accounting for 28.4% of bank net income in the first half of 2023)

France’s retail banking unit targets cost/income ratio below 60% by 2026, improvements driven by French network consolidation and online bank profitability Bursolama. Boursorama and vehicle lessor ALD are the only two areas where organic capital will be allocated.

Global Banking and Investor Solutions (Accounting for 37.9% of bank net income in the first half of 2023)

The segment targets a cost/revenue ratio below 65% by 2026, the weakest result among the segments.The focus is on maintaining current operating performance, reducing the use of risk-weighted assets and Higher consulting/fee-based business.

International retail, mobile and leasing services (33.7% of bank net income in 1H 2023)

The department will remain most profitable In Societe Generale’s portfolio, the cost-to-income ratio target for 2026 is below 55%.This improvement will come from LeasePlan-ALD Synergy (delayed by one year due to delays in closing the deal), as well as continued contributions from the bank’s Czech Republic /Komercni Banka/, Romania /BRD/ and Africa operations.

Société Générale relative to French peers

Before we consider Société Générale’s valuation, comparisons with BNP Paribas and Credit Agricole are generally not favorable for Société Générale:

Click to enlarge

Source: Company Disclosures

We see that Société Générale’s RoTE profitability target is around 2.5% lower than its nearest peer, despite similar C/I ratios. As a result, Société Générale is likely to be structurally valued at a discount to its closest peers, which is currently the case:

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Source: Author’s calculations

However, the current discount seems too large and a more realistic target would be 0.55 times tangible book value, or a price of €34 per share. This represents 40% upside potential if profit targets are achieved.

in conclusion

Société Générale’s new profit target disappointed the market, and the stock fell in response. Nonetheless, I believe these stocks represent an attractive risk-reward opportunity relative to peers and rank them as Buys. Time will tell whether the new management team can address the value gap.

Thank you for reading.

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.