Societe Generale's Ongoing Operating Malaise Still Weighs On The Valuation

I’ve flagged France’s Societe Generale (OTCPK:SCGLY) (“SocGen”) as a potential value trap for some time now, despite its low valuation and my own ownership of some shares, and the shares have borne that out – the local shares are down about 40% over the last year (the ADRs are down about 45%), underperforming French peers like BNP Paribas (OTCQX:BNPQY), Natixis (OTCPK:NTXFF), and Credit Agricole (OTCPK:CRARY), not to mention a host of European peers.

Although SocGen still appears significantly undervalued on many metrics, the fact is that the company’s performance continues to be uninspiringly weak and it’s difficult to see how management will change that in the foreseeable future. While very patient, very long-term-oriented investors may still find some value here, and valuation may well be bottoming out, the company’s ongoing restructuring efforts will continue to create headwinds for revenue and profit growth.

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Societe Generale's Ongoing Operating Malaise Still Weighs On The Valuation

Societe Generale Going Nowhere Fast

There are a few exceptions here and there, but you can’t really win a game by playing defense. Societe Generale management (OTCPK:SCGLY) (SOGN.PA) has had to spend a lot of time cleaning up past messes, but the reality is that the multiple disposals needed to shore up capital have compromised revenue growth. Coupled with a very challenging core French retail banking market, Societe Generale is going nowhere fast and it’s increasingly difficult to see how that changes, as ongoing investments in IT aren’t likely to drive meaningful outperformance.

Societe Generale shares continue to trade at what may look like an unreasonably-low price/TBV, but this bank doesn’t earn its cost of equity capital and doesn’t seem very likely to do so over the next decade. That doesn’t mean that there may not be value here, but it’s hard to get very bullish about a perennial underperformer that simply lacks impressive earnings growth drivers.

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Societe Generale Going Nowhere Fast

Societe Generale's Ongoing Stumbles And Struggles Explain The Value Gap

Savvy, attentive investors can find bargains in the market, but it is usually a good idea to stop and ask why a given stock appears undervalued, as not all cheap-looking stocks are bargains. France's Societe Generale (OTCPK:SCGLY) is a case in point. A turnaround story that just won't turn around, Societe Generale continues to produce "it's always something quarters" that leave the market and investors disappointed.

At this point, it is difficult to come up with compelling reasons to own Societe Generale beyond its low apparent valuation and the prospect that these ongoing struggles might prompt a more dramatic rethinking of the company's strategy. That said, the company's prominent position in France likely limits how much activist investors can accomplish, and likewise any M&A activity may be challenging if Societe Generale isn't in the driver's seat. While these shares do appear to have double-digit upside, the company has really done nothing to engender trust in its ability to meet even modest long-term growth expectations.

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Societe Generale's Ongoing Stumbles And Struggles Explain The Value Gap

Geared To Growth, Societe Generale's New Plan Doesn't Offer Much That's New

Between disappointing third quarter earnings and a new multiyear strategic plan that I believe many investors found underwhelming, Societe Generale (OTCPK:SCGLY) (GLE.FR) has seen its shares pressured once again. Although there have been some signs of life in this French bank’s international operations, the domestic operations have been lackluster, as have the capital markets businesses. Still, this is a bank that is structurally geared toward growth, and if economic growth does in fact pick up across Europe, Societe Generale may yet hit its long-awaited 10%-plus ROE target and unlock meaningful value.

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Geared To Growth, Societe Generale's New Plan Doesn't Offer Much That's New

To Get Its Due, Societe Generale Has To Do Better

French multinational bank Societe Generale (OTCPK:SCGLY) continues to test investor patience with its slow turnaround. While the share price has improved over the past couple of years, the company's return on equity and return on tangible equity remain frustratingly low due to persistently high costs, recent challenges in its CIB operations, and foreign operations that until recently weren't carrying their weight.

SocGen is still somewhat undervalued on the basis of what I don't regard as especially ambitious assumptions, and the shares still yield more than 4%. What's more, key markets like France, the Czech Republic, Russia, and Romania are improving, and management is expected to unveil a new strategy for growth in November that will restore some investor enthusiasm.

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To Get Its Due, Societe Generale Has To Do Better

Ageas Looks Undervalued On Its Core Earnings Power, With Capital Available To Support More Growth

As the insurance markets in Europe get back to normal after the various financial crises, not all of the participants have benefited equally. In my view, AXA (OTCQX:AXAHY) and Allianz (OTCQX:AZSEY) moved faster to reposition themselves for the new market realities, and I believe that's at least part of the reason why their shares have outperformed Belgium's Ageas (OTCPK:AGESY) over the past three years (as well as the past year). Nevertheless, I think Ageas has gone a long way toward stabilizing and repositioning its business, and I think the company is poised to benefit from better rates in life insurance and growing opportunities in Asia.

Ageas has surplus capital, and I expect that capital will go toward M&A or back to shareholders. I don't expect exceptional profit growth or return expansion from Ageas, but mid-single-digit growth is enough to support a fair value more than 10% above today's price, and I believe that the businesses will continue to support a healthy dividend payout to shareholders. Investors should note that the ADRs are not especially liquid, so buying the Belgium-listed shares (AGS.BR) may be a better option for some investors.

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Ageas Looks Undervalued On Its Core Earnings Power, With Capital Available To Support More Growth

Central Pacific Financial's Valuation Could Cause Some Trouble In Paradise

Grey skies, rain and what passes for cold weather around here may be why I was thinking about Hawaii and decided to look into Central Pacific Financial (NYSE:CPF), but the valuation there doesn't look too much like a tropical paradise. Central Pacific has done a lot to get itself on the right track from its flirtation with disaster during the credit crisis, but it is hard to see how management can drive the sort of growth it will need to make today's valuation seem cheap in a reasonable time frame.

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Central Pacific Financial's Valuation Could Cause Some Trouble In Paradise

Seeking Alpha: ING Feeling An Uncomfortable Squeeze

About nine months ago, I wrote the following in reference to Netherlands-based bank ING (NYSE:ING), "... the potential here appears to be among the best in Europe right now."

I was wrong.

While others certainly have done worse (including Unicredit (OTCPK:UNCFF), Deutsche Bank (NYSE:DB), and Santander (NYSE:SAN)), and European banks have performed poorly in general, ING's nearly 25% decline in local terms since that article is quite weak and notably worse than the performance of French banks like BNP Paribas (OTCQX:BNPQY) and Societe Generale (OTCPK:SCGLY) and Austria's Erste (OTCPK:EBKDY), not to mention fellow Dutch (but state-owned) bank ABN AMRO.

ING has taken hits on multiple fronts. Loan growth and spreads in its core Benelux markets haven't been great, and the prospect for rate increases (and higher lending margins) has faded across the banking sector. Investors have also grown more concerned with ING's energy loan book, while more stringent capital ratio rules are going to reduce prospective capital returns (as well as returns on capital).

The conditions in which ING operates are certainly less than ideal, but I do not believe that the book should trade for less than tangible book value. My base case estimates value of the bank at around $15/ADR on long-term earnings growth in the 5% to 6% range (a long-term ROE of 10% to 11%), but if lower-for-long rates, higher loan losses, and weaker returns on capital drive ROEs persistently below 10% for the future, today's price is pretty close to the mark on value.

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ING Feeling An Uncomfortable Squeeze

Seeking Alpha: Societe Generale Not Getting Its Due

It's been a disappointing summer and fall for European bank stocks, and despite two solid quarters with double-digit earnings beats, Societe Generale (OTCPK:SCGLY) (GLE.FR) has been unable to beat that trend in European bank stocks. While the shares haven't done as badly as names like Credit Agricole (OTCPK:CRARY) (down about 24%), Banco Bilbao (NYSE:BBVA) (down about 25%), or UniCredit (OTCPK:UNCFF) (down 20%), SocGen is still down about 6% from my last update.

I believe this performance has created a more interesting gap between the bank's current price and long-term potential. The world has certainly changed for large banks, and the higher capital levels that regulators are demanding will make it much harder (if not impossible) to achieve past high-water marks in ROE/ROTE/ROA. What's more, I wouldn't say that Western Europe is quite the picture of economic health yet, and Russia still has the potential to get worse before it gets any better. All of that said, I think SocGen has made underrated progress with its French retail operations, its retail operations outside of France, and with its overall costs and capital allocation. I believe that fair value for the ADRs is around $11.50 to $12.50, making these shares a more interesting consideration particularly when including the dividend.

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Societe Generale Not Getting Its Due

Seeking Alpha: ING Has Been Executing To Plan And Reaping The Rewards

A lot of European banks have laid out detailed plans for improving their cost base, stimulating loan growth, and generally restructuring their operations in the direction of better long-term sustainable profitability. There's a reason, though, that ING's (NYSE:ING) shares are up almost 20% since my last article on the company ("ING Groep NV Looks Significantly Undervalued Today") and well ahead of Euro peers like Societe Generale (OTCPK:SCGLY), UniCredit (OTCPK:UNCFF), BNP Paribas (OTCQX:BNPQY), HSBC (NYSE:HSBC) and Santander (NYSE:SAN) - they're actually doing it!

In point of fact, ING shares have been even stronger than the nearly 20% gain from the ADRs would suggest, as currency moves have blunted the 45% move in the local shares. I mention that mostly as reminder that currency moves can give or take, and investors have to keep them in mind. At this point I am no longer as bullish on ING share. I think this is an excellent bank and I think the strategy that management has used to such good effect in Germany can be replicated elsewhere, but I just don't see the level of undervaluation that would make this an exciting buy as opposed to a solid long-term holding.

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ING Has Been Executing To Plan And Reaping The Rewards

Seeking Alpha: Societe Generale Improving, But Still Unsettled On Several Fronts

ADRs are a very useful way of adding global exposure to a portfolio, but there can be that frustrating dichotomy between local performance and your actual results when currency moves get in the way. Such is the case with Societe Generale (OTCPK:SCGLY). While this giant French bank has put at least some of its troubles behind it and gotten some appreciation for that in the market since my last article (the local shares are up more than 25%), the ADRs have only posted a mid-single digit gain.

I continue to believe that SocGen can do better and merit a higher valuation, but there are still some significant challenges to surmount. SocGen needs to reignite growth in its French Retail operations and manage through the extreme challenges it is facing in its Russian operations, while also building the groundwork for future growth in areas like Africa. I believe the bank will fare better than the Street expects, but not all investors may see the 10% to 20% potential return as compelling enough to take on the currency risks, regulatory risks, and other assorted headaches that may accompany SocGen.

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Societe Generale Improving, But Still Unsettled On Several Fronts

Seeking Alpha: Fear Once Again Driving Societe Generale Shares

Sometimes it seems like French banking giant Societe Generale (OTCPK:SCGLY) can't catch a break. Management lays out ambitious expense and return targets, and analysts don't buy it … until they actually start delivering. Management lays out a strategy to grow assets and revenue in international markets like Africa, and analysts don't buy it. But when speculation arises that Russia could expropriate the company's assets and/or that the U.S. will slam the company with fines, that they choose to believe.

To be sure, the threat of significant business disruptions to SocGen's Russian operations is real. Likewise, it seems improbable that BNP Paribas (OTC:BNPZY) would get hit with fines and SocGen would get by unscathed. All of that said, the shares still seem to discount a double-digit ROE in 2018, even though management is doing a good job of delivering on its targets.

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Fear Once Again Driving Societe Generale Shares

Seeking Alpha: ING Groep NV Looks Significantly Undervalued Today

Dutch banking giant ING Groep NV (ING) hasn't been ignored over the past year by any means. As the company has continued to make solid progress with its restructuring efforts, the U.S.-listed ADRs have risen more than 50%, surpassing most of the Nordic banks but not quite matching the torrid run in the Spanish banks. Even with that significant run, I don't think today's price fully reflects the company's potential to return to double-digit ROEs relatively quickly nor its solid underlying RoTEs. Although ING won't likely pay a dividend for at least a year and there could be some noise with the impending IPO of NN Group and the further sell-downs of SulAmerica and Voya (VOYA) (formerly ING US), the potential here appears to be among the best in Europe right now.

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ING Groep NV Looks Significantly Undervalued Today

Seeking Alpha: Societe Generale Continues To Grind Forward

The last three months haven't been the easiest stretch for Western European banks, and Societe Generale (OTCPK:SCGLY) is down around 6% over that stretch. BNP Paribas (OTCQX:BNPQY) has been even weaker (down more than 10%), while Credit Agricole (OTCPK:CRARY), UniCredit (OTCPK:UNCFF), Credit Suisse (CS) and many others have done better but are still down over that short stretch.

Not all that much has changed, but banks have moved to a different part of the recovery phase. First quarter results were pretty "meh," including those at Societe Generale. The stories have shifted from significant cost of equity and balance sheet improvements to slower, grind-it-out return on equity improvements. I continue to believe that Societe Generale is undervalued and one of the more attractively-priced large bank stories today, but it's going to take time and the Street still isn't convinced that Societe Generale is going to produce the double-digit ROE on schedule and/or improve its lagging Russian operations.

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Societe Generale Continues To Grind Forward

Investopedia: Societe Generale Continues To Clean Up Its Act

The stocks of U.S. banks like Bank of America (NYSE:BAC) and Citigroup (NYSE:C), not to mention smaller regional players like Zions (Nasdaq: ZION), Regions (NYSE:RF), and Synovus (NYSE:SNV), have enjoyed strong rebounds on the back of the clean-up trade – ongoing improvements in bad debt inflow, credit ratios, and so on.

As bad as things got in the U.S., they were much worse in Europe and Societe Generale (Nasdaq:SCGLY) teetered on the brink of going the way of Lehman Brothers and Washington Mutual. Since going almost to the very edge of the cliff, though, SocGen management has been working hard to clean up the business, shore up its capital, and reposition the company for profitable growth. Although there is still a lot left to be done, and ample doubts as to whether they can do it, a strong second quarter and ongoing improvements are a good sign.

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Seeking Alpha: Can Societe Generale Ever Be Relevant Again?

I have no doubt at all that many readers will read that article title, snort, say "no", and move on with their day. And that's certainly understandable - while Societe Generale (SCGLY.PK) may not be the European bank most damaged by the Great Recession, credit crunch, and resulting European sovereign debt crisis, they certainly did their best (or worst) to be in the running.

Societe Generale has emerged from this mess as a different bank, though, and the company has gone to great lengths to improve its balance sheet and capital position. Perhaps the question to ask with Societe Generale isn't so much about whether it can be a top-tier bank again (if it ever was), but rather whether it deserves to lag relative to other troubled banks like Citigroup (C), Bank of America (BAC), and Santander (SAN).

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Can Societe Generale Ever Be Relevant Again?

Investopedia: The Grind Goes On For Bank Of America

Bank of America (NYSE:BAC) seems locked into a dance of "two steps forward, two steps back." While the company got itself into a huge mess with poor underwriting and acquisition decisions, the company continues making mistakes like taking shortcuts in its foreclosure process. The conundrum for investors is that Bank of America has an invaluable branch network and strong positions in key states like California, Texas and Florida, but that network will never get full value absent evidence that B of A can run itself effectively and earn its cost of capital. 

Another Bank with Swampy Second Quarter Results  
Like Citigroup (NYSE:C), and indeed most large banks, Bank of America's second quarter earnings are complicated by all manner of charges, gains and items. At the bottom-most bottom line, though, the company delivered on its guidance and produced earnings of 33 cents after those items. Of course, reserve release is still a big part of the story, and Bank of America saw $2.4 billion in earnings from this line item, while tangible book value fell about 4%.

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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

From Sons of Athens ... to Sons of Anarchy

Thanks Greece.

Virtually every financial system is built upon a certain level of trust and good faith amongst its members, and Greece seems to have taken up the role of "turd in the punchbowl". Greece basically lied their way into the European Union, gorged on cheap debt, wasted it on unproductive assets, and then turned around and held the financial system hostage with a version of "bail us out … or else!".

Of course, anybody wasting their time bashing on the Greeks is overlooking events a little closer to home. Let's see … lying to get favorable loans, using those loans foolishly, and then whining, wheedling, and begging for a bailout. Where have we seen that before?

Oh yeah, that's right. We did that too.

Now we have the S&P lowering Greek debt to "junk" (way to be on the stick ahead of time, guys … oh wait, we've seen that before too!), Greek 2-year notes yielding about 19%, and a lot of people nervously watching Portugal, Spain, and Ireland for signs of weakness.

Think about that for a moment … Greek 2-year notes are yielding almost 19%. That's like credit card rates. On second that, maybe I shouldn't have said that … Capital One (COF) may soon be seeing a flood of applications from Athens at this rate.

The scary part, though, is how long this could last. Latvia went into crisis a little while ago and even massive cuts to government wages, pensions, and spending (and other austerity measures) didn't help much. Greece, then, could be looking at quite a few years of high taxes, a sharply contracted public sector, malaise, and discontent. Not too many countries have the capability to withstand that, and there could be unrest as a result (as seen a few years back in Argentina).

It's almost a given that the "market" won't be much help here, and the rescue package will have to come out fully-funded by other European countries. On top of that, you're probably looking at wage cuts of 20% or higher as part of the package, and I don't think many Greek civil servants will be happy about that. Worse still, after 12 or 18 months of that, it may still not be enough and Greece may opt to default/restructure that debt and send more ripples of chaos through the market. Simply put, we're talking here about a program that would take four or five years … and that's assuming that Portugal and Spain don't fall over and make it even worse.

In the meantime, a lot of banks have gotten smacked already. Several German and French banks have (or had) major exposure to Greece, with names like Commerzbank, Credit Agricole, Societe Generale and BNP Paribas among them. The damage there is probably already done, but I'd be very cautious around any banks heavily exposed to Spain … or frankly almost any European country at this point.  After all, plenty of British banks have loans on the books for vacation homes in Spain, so you can never just assume a bank in Country X is safe.

Sooner or later, this storm will pass. The U.S. economic recovery isn't heavily predicated on Europe at this point, though chaos in the credit market can quickly become a global issue. But that isn't to say that the fallout won't cause some chaos and hairy days. Expect talk to begin about creating a mechanism to boot out European Union countries that can't get their stuff together, and should the Euro actually collapse … well, that's probably a really good day to own gold (and probably dollars as well, because as messed up as we are, we're not that bad).

Here's hoping the sons of Athens figure a way out of this mess before it gets too much worse.

(Disclosure - I own shares of Societe Generale)