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

Investopedia: HSBC Faces A Longer Road Back To Normal

With operations in 87 countries and every major region of the world, HSBC (NYSE:HBC) basically is world banking, or at the very least has a much wider view than almost any of its competitors. To that end, investors should take some encouragement from what looks like better operating conditions around the globe. That said, investors should not ignore HSBC's lower forward ROE guidance - a strong hint that the banking industry of tomorrow will not resemble the intra-bubble levels of profitability any time soon. (For background reading, see Analyzing A Bank's Financial Statements.)

An OK End to the Year 

For the full year of 2010, HSBC reported that revenue increased just over 3% to $68.2 billion, missing the consensus estimate by about $1 billion. Net interest income fell a bit more than 3%, largely due to lower rates. The company's overall net interest margin fell as well. The biggest delta on the revenue lines, though, was in trading results: HSBC booked about 25% less revenue here than in the year-ago period and that meant $2.6 billion less in operating revenue.

Unfortunately, the company did not exactly make up for it as it went along. Compensation and administrative expenses both grew at rates that outstripped revenue growth and the company saw its efficiency ratio move to an uninspiring 55.2% - well above its 50% target level. (For related reading, see Measuring Company Efficiency.)

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A Little More on Unicredit

The more I look at this Unicredit situation, the less I like it.

It looks like the proximate cause of former CEO Profumo's departure (which very much reads like a "jump ... or we push" situation) was two Libyan entities taking a combined 7.4% stake in the bank. Nevermind the fact that Unicredit needed to raise capital and large stable investors are typically a good thing, apparently this rankled some on the board and caused problems.

Truth be told, I don't know exactly what the problem is. Libya is not exactly fully rehabilitated in the eyes of the West and its not as though European institutions are overjoyed to see Arab/African investors buying their assets. And maybe that's part of what lies underneath the controversy - Libya and Italy certainly have a "history" together, and it probably aggravates the hell out of some Italians to see Libya buying into Italian assets from a position of relative power. With rumors that certain Italian politicians were displeased with this arrangement and making that known to the board, who knows exactly what role this had.

Whatever the case may be, the fact still remains that Profumo guided Unicredit from being just another Italian bank to being a major player in Europe - the second-largest bank in Italy, the third-largest in Germany, and the largest in both Austria and CEE. Even granting that the stock performed better in the first half of his tenure than the second, Profumo should still be appreciated by long-term shareholders.

And now it's time to see where the bank goes from here. There is definitely some need for restructuring at Unicredit, and perhaps that was also part of the CEO's departure - whether he wanted to go slower than the board or faster. So if Unicredit is about to change itself in some pretty significant ways, maybe it is better to do so with new management at the helm.

The vacuum at the top is certainly a big risk factor, as nobody can really say what the near-term direction for the bank is going to be (at least not until the new CEO lays it out). Likewise, it is fair to wonder just how this board operates and what sort of "non-operating influences" get to be played out behind the closed doors of the boardroom.

Still ... this bank was a quality company before the crisis and even if Italy sometimes seems like a perpetual economic and political head-case, it seems likely to be a good candidate for a strong recovery. I have enough European banking exposure for now (though Santander (NYSE: STD, Danske, and a few Swedish banks are enticing...), and would rather add in places like South America (Itau), South Africa (Standard), and Asia (DBS Group), but Unicredit seems pretty dang cheap right now.  Assuming that the board isn't daft enough to screw up over a decade of progress, this could be a good opportunity to buy a dip and get a quality pan-European bank.

Bad Timing For UniCredit

This is not a good time for UniCredito to be seeing a change at the top, but word came out tonight that CEO Profumo quit. He had been in a pretty heated squabble with the board (obviously...), and it finally comes to a head with him leaving.

It's unfortunate - although UniCredit has clearly been badly hurt in the credit crunch, they are in vast company in that regard. And it should be remembered that during Profumo's tenure at the top, he did guide the company from a conglomeration of unspectacular Italian banks into a sizable pan-European bank with once-promising businesses in Central and Eastern Europe (that could still be worth quite a bit in the future).

Admittedly, I was wrong to be so keen on banks like Societe Generale, Danske Bank, and Unicredito going into the credit crisis; I would have been far better off with banks like Itau (Nasdaq: ITUB), DBS Group (Nasdaq: DBSDY) and Standard. Luckily, SocGen was the only one I actually bought, but still ... knowing your aim was off is not comforting even if you didn't pull the trigger.

I want to write more on this tomorrow ... but suffice it to say for now that this is another challenge for a bank that already has plenty of them.

Disclosure - I own shares of SocGen

Europe's So-Called Stress Test

So, all of that build up and all of that press ... and for this?

The results of the European banking stress tests are in ... and 84 of 91 passed. Whoop-dee-doo.

I mean, really, if 92% of the banks passed, and the only failures are an already-nationalized German bank, five unlisted Spanish banks, and a Greek bank, what was the point?

Are European banks in better shape than people think? Yeah, probably. I own Societe Generale (Nasdaq: SCGLY) and I happen to think the market is undervaluing that one (though I acknowledge the risk they have with sovereign debt exposure), and Santander (NYSE: STD) certainly seems in good shape.

But to only flunk 7 banks makes me think the whole thing was a stage-managed put-on designed to create phony confidence in the health of the European banking sector. Do not misunderstand; I think there are several high-quality banks in Europe these days (I would add Unicredito to that list, as well perhaps as Danske and a couple of others), but I expected a bit more "stress" from this test.

I dunno ... maybe it is late on Friday and I am just cranky. But consider me unimpressed by these results.

Disclosure - I own shares of Societe Generale

Santander Keeps Building Assets

The more I keep researching and reading about Santander (NYSE: STD), the more interesting this global bank gets. I am still not completely certain that Santander will succeed in reaching a deal with M&T Bank (NYSE: MTB) or even reach a deal with Allied Irish Bank (NYSE: AIB) for its stake in MTB, but there are always other interesting fish in the see.

Last month, Santander paid $2.5 billion to acquire Bank of America's (NYSE: BAC) 25% stake in Santander Mexico. Bank of America originally paid Santander about $1.6 billion for that stake in late 2002, so that is not a bad return on investment. With the deal, Santander took full control of its Mexican operations, but the deal did not change earnings or capital all that much.

And now today Santander is at it again - paying close to $700M to Swedish bank SEB for its German commercial banking business. This move will not have a major impact on Santander's earnings or returns, but it will double the company's German branch count.

That is two deals in two months to expand banking operations in places where Santander already has a foothold and where business conditions are relatively good. True, Mexico has taken a hit during this recession and Germany is at risk from contagion in Europe, but they are still attractive banking markets. Moreover, Santander had a little competition for this latest deal (supposedly from Italy's Unicredito), so that at least suggests some positive signs of life in the overall marketplace.

What next for Santander? I would expect them to invest more heavily in Peru and Colombia. I would also expect them to do more deals in the United States. They have been curiously quiet in the US of late. While banks ranging from JPMorgan (NYSE: JPM) to BB&T (NYSE: BBT) to PNC (NYSE: PNC) stepped up to acquire failed or severely stressed banks, Santander has been quiet. Sooner or later, I have to assume that changes - if they cannot do a deal with M&T, do they look at other options like Regions (NYSE: RF), Fifth Third (Nasdaq: FITB), Suntrust (NYSE: STI) and so on?

And what about other areas? Canada is not quite as free-wheeling as the United States, but it is an attractive market. And then there is Africa and Asia - a company with Santander's experience in developing economies could probably do well in these regions.

I guess we will just have to wait and see. In the meantime, I do not see these two deals getting in the way of any U.S. strategy the company may desire - they still have the resources to buy MTB if they wish, though I suppose all parties involved will at least wait for the results of the Europe-wide stress tests (due to come out later this month).

Disclosure - I own share of JPMorgan and BBT