With banks there’s a tradeoff between shoring up capital
and achieving earnings growth – when companies have to build up their
capital position, it comes at the cost of growth, and that’s what’s
happening with France’s Societe Generale (OTCPK:SCGLY)
now. Years of underperformance in core banking, and financial services,
coupled with large legal settlements, have left the bank’s capital in
precarious shape, forcing management to shore up capital at the cost of
growth.
The good news is that expectations are
exceptionally low now. If SocGen can somehow generate just low
single-digit earnings growth without having to conduct a capital raise,
the shares are meaningfully undervalued. The bad news is that SocGen has
been losing share in France, chronically missing its own internal
targets, and may find itself forced to sell one of its more attractive
assets to shore up capital if this latest plan doesn’t work out.
Société Générale: Beats On Capital, But The Growth Costs Are More Evident
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