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Banks across the world have had a rough time over the last year, with $680B of write-downs and losses and share prices down 50% or more. Societe Generale (OTCPK:SCGLY) has thus far fared better than many on its exposure to U.S. subprime mortgages and collateralized-debt obligations (CDO), and Barron's Vito Racanelli says shares of SocGen could rise as much as 20% if it can continue to avoid the worst of the credit maelstrom.

Over the past year, SocGen has written down $6B - not exactly pocket change, but still better than the painful write-downs at rivals likes Citigroup (NYSE:C) and UBS (NYSE:UBS). SocGen's shares, however, are down 60% from last October's highs to around €42 in Paris trading. (The U.S. traded stock is hovering around $11). This makes the shares cheap at just seven times estimated earnings.

SocGen, which has €1.1T (around $1.4T) in assets, has been hurt by investors' wariness of the banking sector as a whole. It is also recovering from a rogue trader debacle that cost the company €4.9B and forced it to raise €5.5B of fresh capital this year. Yet its revenue has held up relatively well, and though profits were down 45% in H1, the bank is still in the black.

SocGen also has an advantage in its boring but stable French retail business. Domestic branches account for 30% of group revenue, with another 20% coming from international retail banking. SocGen's strong deposit base means it doesn't have to fund itself in frozen capital markets. Since French consumers aren't over-leveraged, loan-loss provisions should grow slowly, and French housing prices have continued to rise.

SocGen is set up for growth beyond just the French market. SocGen is positioned in Egypt, Vietnam, the Czech Republic, Romania and Russia, countries where growth may slow in the coming year but where SocGen should be served well in the long-term.

Investors remain wary, and not totally without reason. Depending on the definition of "toxic asset," SocGen may still be facing write-downs of €3-6B. Its investment banking unit, which contributes 20% of total revenue, is under scrutiny for some of its CDO exposure, and despite the bank's denial, rumors are circulating that SocGen needs another capital boost.

The French government, on the other hand, has helped bolster confidence in SocGen, buying €1.7B of preferred shares and raising the bank's Tier 1 capital ratio to a healthy 9%. Moreover, argue stock proponents, SocGen's "toxic assets" are mostly linked to France and Europe, not the U.S., so any future write-downs are likely to be significantly smaller than those of the last three quarters. CEO Frederic Oudea says the bank is seeing competitors disappear, better interest rates on some loans, and increased equity-derivatives business. SocGen is also aiming to cut €1B in costs by 2010. With an improvement in the health of the global financial system, perhaps by 2010, SocGen shares could be up at least 20%, trading in the €50-60/share range.

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  • In an effort to reassure investors, SocGen has advanced its Q3 earnings report to November 3. France's second-largest bank by market value, SocGen is expected to report a decline in Q3 net income due to Lehman Brother's failure. However, SocGen expects a net attributable profit of €1B ($1.3B) and says it will remain profitable at the net level even after Lehman-related charges.
Source: SocGen Could Soar If It Weathers Credit Storm - Barron's