EUR 850.00 For Business Accounts Only

Morningstar | Socgen 2Q 2018: Decent Results, Interesting Internal M&A Activity

No-moat Societe Generale reported net income of EUR 1.2 billion for the first quarter of 2018, which represents a 9% increase year on year. This was also 15% ahead of the EUR 1 billion consensus pencilled in for the quarter. At the end of first-half 2018, Socgen had attained half of our full-year 2018 net income estimate of EUR 3.6 billion. While our full-year estimate represents a 36% increase year on year, this is a reflection of Socgen's soft second-half 2017. We view the announcement that Socgen will sell its retail banking operations in Albania and Bulgaria to OTP Bank as a positive. The lack of a clear geographic strategic focus is one of the main reasons for our somewhat bearish view on Socgen as an investment. We are less excited by the announcement that it will expand its presence in Germany by acquiring Commerzbank's equity and commodities trading businesses. We maintain our fair value estimate of EUR 42 and our no-moat rating.

The disposal of the Bulgarian and Albanian banks represents a rounding error on Socgen's balance sheet. The combined turnover of the disposed banks in first-half 2018 was EUR 81 million, representing 0.6% of group turnover. To our mind, however, this does signal strategic intent from Socgen to clean up the business' geographical strategy. Management indicated that the market should expect further M&A announcements in the second half of the year. We fail to see the strategic rationale for Socgen's presence in Eastern Europe, as the banks are very much stand-alone entities with limited synergies with the overall group. There are limited trade flows and no shared history or language between France and Eastern Europe.

In our opinion, the highly fragmented German banking sector is one of the least attractive banking markets in Europe. Equity and commodity trading is a more globalised business, although we are concerned that this may be the start of further expansion and capital deployment to Germany.