Societe Generale: Market Not Impressed By Strategic Plan

Societe Generale‘s CEO Frederic Oudea did not impress the markets with his 2020 strategic plan. Shares only gained 0.3% on Nov 28.

While the 2020 EPS forecast of €6.50 is clearly ahead the consensus figure (which stands at €5.86-6.08/share in 2020 based on IBES data – fully reported or not, i.e. about 7-11% higher), investors have taken only taken a pinch of it as granted.

Why such a caution when management claims it is taking into account the structural challenges banks will have to deal with in the near/medium term ?

One of the reason brokers underlined Tuesday is probably that most of the upside in earnings will come from the top-line. Net Banking Income is expected to increase by €3.6 bn by 2020 (on €23.3 bn NBI in 2016) while the bank would not increase significantly its risky assets going forward.

This seems hard tu understand especially in an industry where major disruption are occurring. Retail customers are moving their banking consumption online.

Innovation brought about by the emergence of fintechs will potentially disrupt a number of business lines and create more pressure on both the top-line and force incumbents to reduce costs further. Fiinancing and investing activities are prone to major changes from the regulator (MiFID2 being just the tip of the iceberg), while new rules keep being implemented in terms of prudential risk management.

Therefore, market’s view that the roadmap set for 2020 looks rather ambitious is understandable. SG targets >12% CET1 ratio, ROTE of 11.5%, 63% cost/income ratio, and a floor of €2.2/share for the dividend (with payout ratio of 50%).

SocGen currently trade at a discount to French peers between 16% and 30% based on 2018 estimates for P/E, Price to Book and Price to Tangible Book. One of the reason for this discount and the underperformance of the share price YTD is probably that investors did not expect much in terms of revenue or earnings growth.

Between 2016 and 2020, until today, consensus expected 2.1% revenue growth per annum, 3.3% EBIT growth p.a., 8.3% EPS growth p.a. and 7% DPS growth p.a., compared with respectively 4.5%, 10.3%, 8.8% and 8.9% for the 3 other banks on average.

SocGen was therefore in great need of a more ambitious plan to raise its profile among investors. Since the stock is a laggard, today’s investor day meeting might be a turning point for the share price. Now is time to deliver.