Societe Generale (SCGLY): Cheap EU Bank With Upside Potential

Dear readers/followers,

It can’t have escaped many followers’ attention that I have been overweighting European financials for some time, to some fairly good results in most cases. However, I haven’t been focusing enough on SocGen (OTCPK:SCGLY). This is an attractive company, despite my dearth of coverage in the last year or two, and I intend to take this opportunity to really showcase the overall strong trends that SocGen, like many other banks, is currently seeing. Still, since my last article, the bank has absolutely outperformed to the tune of some 20% RoR in less than 3 months.

The 2023E period looks good for the bank – and in this article, I will present you with my thesis for the year and why SocGen is still a company I would “BUY”

Societe Generale – Revisiting the bank for 2023.

As I described in my last update, SocGen is despite what some people say, a qualitative European bank – and it’s even getting better. In my last article, I showcased a cost-income ratio of around 61.5% – and this has even improved in the latest results.

During 3Q22 reported, C/I went down to 60.7%, and is starting to touch sub-60%, which would be among sector-leading. The company furthermore improved its overall revenues, still has a solid 13.1% CET-1 (below Scandinavian banks, but still fairly solid) and has developed on many of its strategic ambitions going forward.

The bank netted nearly €860M for the 9M22 period and is accelerating the decarbonization of its overall portfolio, with significantly lower exposure to oil/energy, specifically the upstream segment. Its new target is to lower it by 20% by 2025, with a -30% reduction in 2030, based on the 2019 levels. The company isn’t leaving the segment, but it’s pushing forward. If you know my work, you know I watch developments like that with mild interest, but I don’t consider exaggerated ESG to be a massive advantage either.

Here is how the trends are looking for the bank – and these trends are very solid, as I see them. Despite only small increases in gross income, the company has been able to push down costs further.

The company has really outperformed here, illustrated by a 9M22 C/I that’s actually below 60%, at 59.6%, thanks to continued cost discipline in variable comps, SRF, and other things. Revenues are up 10.4%, but costs are up less than 5.5%. This is excellent. The bank’s continued cost of risk is also low, and despite more uncertainties, the bank’s NPLs are actually down. What was once 3.4% during late 2020 is now 2.7%, and the cost of risk for the group is less than 36 bps. Defaults are still low, with the cost of risk not exceeding €160M in stage-3 defaults. At the same time, the bank is strengthening its provisions in case things get worse.

SocGen is doing all the “right” things – remaining conservative, pushing up provisions, but staying the course. The only fundamental I think could be somewhat better would be the CET-1. Most Euro banks or Scandinavian banks have far better, even if I can’t find or see any issues in the funding, the buybacks, the leverage, or anywhere else.

On a granular level, there really wasn’t any underperforming SocGen segment. Loans and deposits are up, and the company’s insurance businesses continue to show good trends. Boursorama has more than doubled its onboarding of new clients, and is up 40% to 4.3M clients, with loans growth and a 37% deposit growth alone.

Retail banking is up, International retail banking is up as well. Remember, the company has a non-trivial Africa segment, which saw loan and deposit growth as well. Meanwhile, global markets and services delivered strong performance despite a very volatile environment.

The company continues to operate a very strong advisory and financing arm, with revenues up despite the market uncertainty, and good activity in asset-backed product sales. Global Transactions and payment services especially also showed very good growth, up 50% on a QoQ basis.

SocGen remains one of the safest and most interesting banks on earth. I don’t typically highlight ESG, but let me at least give you this, because it might be relevant for some of you to see how far the bank has come in those ambitions, and that it is in fact, leading the charge here.

You will find the bank represented across the entire world. SocGen has an S&P rating of A, a Moody’s rating of A1, and a Fitch rating of A+, as well as many other high credit ratings. This is better than many Scandinavian banks, despite the CET-1 we saw here.

If you start looking through the bank’s material, you’ll find a great deal of focus on compliance training, staff education, and how the bank intends to work with its management to ensure not only good, but safe performance going forward. Given the bank’s 7-year history, this focus is understandable.

Compared to peers, SocGen has one of the lowest costs of risk, the lowest NPL, and the lowest risk-related metrics overall. Despite France having a couple of interesting banking peers, SocGen remains my favorite French banking investment – and I’m fairly heavily invested in France compared to where I was 5 years ago.

The company has not yet realized the 170%+ upside that I guided for during COVID-19 – but I also want to be clear that I did some rotation about a month before things crashed down, and loaded up more at a later date when the bank was cheap. SocGen does have a somewhat troubled past, due to hundreds of millions in fines to the European Commission, to Fannie Mae/Freddie Mac, and to settle charges of fraudulent conduct. The bank also paid $60M to the OFAC for violation of U.S sanctions.

This is also why the company is investing so much in training – in part as a window-washing sort of measure, but also to truly ensure that its operations going forward will be compliant. It was one of the banks that took the longest to emerge out of the financial crisis.

If you recall (I do, though I wasn’t an investor at the time), a British paper (Daily Mail) posted an article announcing the bank’s bankruptcy, and this caused pressure on the bank’s stock for almost a year due to speculation. The bank successfully sued the paper for this, but the share still lost nearly 60% of its value in one year, which illustrates the power of speculation and media – and the power you could have if you invest in undervaluation.

So, let’s look right now – is SocGen undervalued here?

Societe Generale – The Valuation for 2023

In short, “sorta”.

The real time to buy Societe Generale was during, or around my last article, between September-November or so, before the company climbed 20%+. That isn’t to say SocGen isn’t attractive here, there’s some upside left, but it’s a bit like drinking a half-full glass here compared to acting when the company was really, truly cheap.

When looking at Societe Generale, we have historical performance working against us at this time. The dividend payout and stability in my opinion are a joke – compared to other banks and insofar as general dividend stability and safety goes. It really doesn’t exist. One year it’s there – the next it isn’t.

But the key here is that historical performance is far less reliable and qualitative than future performance. Here are the current set of expectations for SocGen.

Dividend stability? Not yet – but the trends in EPS stability are improving as we look forward, and the underlying trends are far more solid than they have been in the past.

Analysts, generally speaking, have been of one mind on SocGen for several years. The company’s PTs range from a low of €24 to a high of around €40 – and that’s where they have been since 2020. The average here has shifted a few euros up and down but has usually stayed around a €32-€34 range. Today, it’s €32.5. There are 20 analysts following the company.

I generally don’t have a huge problem with this PT. SocGen plays in a peer group of most multinational/global solid banks, and in this peer group, the company remains very undervalued. The NTM P/E is around 6x, and while banks typically trade at a discount, this discount is somewhat excessive still, given what the bank has actually achieved for the past few years since its turnaround during COVID-19 and after the financial crisis.

Now, based on a forecasted dividend estimate of €1.84, this bank yields over 7% at this time. This is a high number for this peer group. Granted, France has some structurally less advantageous DTAs and specific taxes that need to be taken into consideration, even for someone like me who is investing from within the EU. French companies overall are a bit more complex, and we could reflect this by lowering the effective “real” yield to somewhat below 7%, but it still stands out as a very high yield in relation to what the bank’s quality metrics are showing here.

For that reason, my stance at this time is to remain bullish on SocGen. Because what we have on our side when investing are three things.

1. Recent-term results, which indicate positive change, and a new, covered dividend, which is looking solid.

2. Solid fundamentals based on a strong economy and market-leading brands.

3. Forecasts for future results, which are also positive.

The bank, due to non-recurring effects, had a gangbuster 2021 fiscal, and is now going into 2022E with lower expectations, but is expected to move back to growth in 2023E. As I said in my previous article, I believe FactSet currently has some issues in how it is calculating non-native/US EPS numbers, because current forecasts call for a double-digit, near-20% EPS decline, which is opposed to every single analyst out there, expecting more than a 15-20% EPS increase in 2023. The numbers that are supposedly averaged from 17 FactSet analysts do not make sense when comparing them to the market – so I’ll stick to S&P Global data here, for the native, and skip ADR forecasts here.

Even assuming a 6-8X P/E for the bank on a 2024E basis gives us annual growth of 16-20%, resulting in near-triple-digit returns on a 4-year basis. Any reversion to the 10-year average of 11X P/E results in 4-year returns of over 130%, and such a valuation isn’t at all unusual for this bank.

My previous PT for SocGen was €30/share.

I see no reason at this time to shift from this PT, so I’m staying true and my capital is slowly being put to work at a great overall yield.

Thesis for the common share

• This is a class-leading French financial institution with absolutely stellar fundamentals – the sort of business I love investing in. I believe that at the right valuation, alpha isn’t just possible for SocGen, it’s an absolute given based on the current rate environment and the company’s earnings trajectory.
• Recent results do more than imply that this is possible – these results more or less confirm the bullish view for me.
• At dirt-cheap valuations, I, therefore, give the company a “BUY” with a PT of €30/share.

Remember, I’m all about:

Buying undervalued – even if that undervaluation is slight and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.

If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.

If the company doesn’t go into overvaluation but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them (italicized).

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansion/reversion.

The bank is close to not being “cheap” any longer, but I would still consider it cheap here.

Thesis for options

As I’m writing this article, SocGen is trading down about a full percent, which means the circumstances for writing a few attractive puts could be good. I’m looking at the March strikes, and found the following put to write.

There are a few other strikes and potentials I’m looking at here – but this is an acceptable one, as things stand now.

So, you could go either native or options here – I’ll see what I do to add more.

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.