EUR 850.00 For Business Accounts Only

Morningstar | Socgen's 3Q Results Flattered by Revaluation

No-moat Societe Generale reported underlying net income of EUR 1.3 billion for the third quarter, which represents a 16% increase year on year. However, the underlying number is flattered by the EUR 271 million revaluation of Socgen's interest in Euroclear, which was booked during the quarter. We maintain our EUR 42 fair value estimate and no-moat rating.

French retail banking contributes around 30% of Socgen's net income, and it had flat earnings growth year over year as 2% revenue growth was offset by a 13% increase in credit costs. Investment banking contributes around another 30% of Socgen's earnings. It enjoyed a good quarter with operating profits increasing 11% before a normalisation in its tax rate limited the increase in net income to 6%. The best performance came from Socgen's disparate international banks. Combined, the international banks provide around 25% of group earnings. The international banks increased earnings 13%, mainly due to healthy top-line growth of 8%. The smaller divisions--leasing and insurance--recorded flat and 3% earnings growth, respectively.

Socgen announced the disposal of Euro Bank, its Polish retail banking business, during the quarter. It expects that the Euro Bank disposal will add 8 basis points to its core equity Tier 1 capital adequacy ratio. The disposal is part of Socgen's strategy to develop a more streamlined and focused business. Over time, Socgen anticipates that this process will add around 50 basis points to its CET1, 23 basis points of which will come in 2018-19 from the already identified disposals. We are very supportive of the strategy to narrow Socgen's presence to larger markets that enjoy clear synergies with the rest of the business. Puzzlingly, however, Socgen announced another acquisition in the quarter, following the acquisition in the previous quarter.

We are bemused as to why Socgen did not strip out the Euroclear revaluation from underlying results. A one-off, noncash revaluation of a noncore investment surely does not qualifies as underlying. This once again affirms our scepticism regarding non-IFRS adjusted numbers published by banks.