Societe Generale - Less Bad And Getting Better

France's #2 bank, Societe Generale (Nasdaq: SCGLY) (SOGN.PA), continued the trend we have been seeing with most of the global super-banks. That is, sluggish loan recovery (but recovery all the same), a better credit outlook, a lot of noisy moving parts, and a fair bit of conservative guidance from the top kick.

That said, this beaten-up bank arguably did a little better than most relative to the expectations of the investment community.

Revenue rose only 1% on a sequential basis, but that was enough to beat the estimate by about 8%. Earnings were a stronger story - although the growth was just 2% on a sequential basis, the outperformance relative to expectations was on the order of 40%.

Digging into the details, the French retail banking business had a pretty good recovery. Profits were up, loans were up, and credit did not look too bad. The worst part of the picture was, arguably, that business lending tailed off on a sequential basis - not so much a SG-specific problem as an overall warning sign of economic malaise.

Elsewhere, the business was differing shades of "okay, but not great". The International Banking business saw profits rise 10% sequentially, with stronger results in the Czech Republic and less-bad results in Russia. Investment banking was not notably strong, but it was not as bad as widely expected.

As was the case with Santander (NYSE: STD), BNP Paribas, HSBC (NYSE: HBC), and well, frankly *every* bank reporting this cycle, there will be some concern about just how the company made its numbers. Provisioning for bad loans came in lower than expected (by about 200M euros), and the company also saw a nearly 250M benefit from a revaluation of debt holdings. Considering total earnings were just under 1,100M, that is quite a lot of benefit coming from some rather ephemeral sources. By the same token, though, that is how banking operates - the upward revaluation of those loans is no more "false profit" today than the initial downward revisions were false losses in the past.

Societe General has really not lived up to my initial thesis when I bought the stock. I thought I was getting a solid Euro-focused bank with some interesting growth opportunities on the higher-growth periphery of Europe (like Poland, Czech Republic, Russia, and maybe Turkey). It has not worked out so well, though. Why do I still hold it? Well, it is still below what I consider to be "fair value", so I will not just flip it unless a materially better idea comes up.

In retrospect, I probably should have flipped this for Santander back during the Greek meltdown. As it stands now, though, this stock is worth something on the order of $17.25 if you agree that ROE will return to 15% in a five-year timeframe. That is enough to lead me to hold today, but I have to admit it is not a stock I would suggest anybody else needs to own.

Disclosure - I own shares of Societe Generale