Societe Generale (SCGLY.PK), the large French bank, reported its first quarter earnings today. In response to my post a couple of weeks ago in which I commented on European banking and on Credit Agricole in particular, some commenters asked, "What about Societe Generale?"
Today's report suggests to me that Societe Generale (SocGen) is successfully pursuing the same kind of strategy that I ascribed to Credit Agricole (CRARY.PK). That is, the bank is paring back its expansionary mistakes while husbanding its regulatory capital and emphasizing its French retail banking network. SocGen reported generally favorable results-profitability across most of its business units-but took losses on the sale of "legacy" assets. I would expect that a similar pattern will hold for a number of quarters. Europe's recession may well cause greater "costs of risk" as the French euphemistically refer to reserves for loan losses, but that should not prevent a reasonable level of profit from being reported. At the same time, I do not think the disposition of overvalued assets has ended, and would expect that such sales would continue to eat into profits as the bank scales back its risk-weighted assets.
Management reports that SocGen already is in compliance with the Basel 2.5 requirements that will become effective June 30, 2012. Commenting on the Group's Q1 2012 results, Frédéric Oudéa, Chairman and CEO, stated: "Societe Generale pursued its transformation, while continuing to adopt a dynamic approach in financing the economy. The healthy Q1 results are underpinned by the balanced development of our franchises, underlined by good control of our cost of risk. We continued to strengthen the Group's capital base, particularly its equity, with a substantially increased Core Tier 1 ratio in Q1. We maintain the priority given to rigorous risk management, controlling operating expenses, reducing our liquidity needs and strengthening our capital. The results for Q1 12 and the prospects for the next two years provide further evidence of our ability to meet the Basel 3 requirements by end-2013 without a capital increase."
Assuming that management is correct that SocGen will meet the Basel 3 requirements that come into effect next year without having to raise additional equity capital, the stock is now favorably priced at about 30% of tangible net value. Thus I continue to be optimistic that, at current prices, SocGen could be a good investment over the next two to three years, albeit one that continues to carry significant risk, given the European financial backdrop.