EUR 850.00 For Business Accounts Only

Morningstar | Societe Generale 1Q: Disappointing Results, Announced Restructuring Has Limited Effect

No-moat Societe Generale, or Socgen, reported net profit of EUR 631 million for the first quarter of 2019. This is 26% lower than the EUR 850 million Socgen reported for the first quarter of 2018. Our current earnings estimate calls for flat earnings growth for the full year, and this is starting to look like a challenging target given the poor first-quarter results and the announced restructuring costs for the struggling investment banking franchise. We maintain our no-moat rating and EUR 33 fair value estimate.

A 2% decline in revenue and 1% increase in expenses were enough to lead to a 10% decline in pre-provision profits this quarter, compared with the first quarter of 2018 .  To compound Socgen's woes loan loss provisions increased by 27% compared with the first quarter of 2018. Revenue at Socgen's French retail banking business, which contributes 31% to group revenue, declined by 5% year on year. Overall investment banking, which contributes 36% of first-quarter 2019 revenue, held its revenue stable, however revenue for the markets or trading business' pulled back sharply 7%. The only shining light was the strong performance of international retail banking, which contributes 33% of revenue, and grew revenue by 4% this quarter,  compared with the first quarter of 2018 .

The market view's Socgen's plans to scale back its investment banking activities as positive. Some will however, view the moves as not aggressive enough. Socgen plans to refocus its investment banking business on areas where it believes it has a competitive advantage. It will scale back its fixed income, currency and commodities, or FICC, flow-trading business to focus on servicing its own corporate client base. This will reduce its risk weighted assets by EUR 10 billion, about 3% of group risk weighted assets, and operating expenses by EUR 500 million, about 3% of the operating expenses booked in 2018. The restructuring will lead to EUR 300 million of lost revenue, while the net pretax profit gain of EUR 200 million will boost group pretax profits by 3%.