The only way is down for Société Générale’s investment banking business and, for the bank as a whole, even a takeover offers little upside, analysts at Citi were telling their clients on Monday.
We believe the SG business model will shift fundamentally as a result of the fraud losses. This is not a 1 PE event: SG’s trading ‘black box’ has been discredited, and substantial changes will be needed in order to restore the confidence of regulators and ratings agencies. Current risk controls that allowed a position capable of yielding a €5 billion loss are clearly insufficient. Trading VAR will need to be curbed substantially in the near term and the degree of trading risk taken is unlikely to ever return.
While there may not be major direct repercussions for divisions other than investment banking, this business has spoken for 22 per cent of group revenue, historically.
As a standalone entity, we see SG’s leading European equities franchise gradually deteriorating. The long run of proprietary trading success has now been broken and the ‘black box’ nature of SG’s CIB operations will no longer be trusted. It is unclear that SG will be able to match 2006-07 levels of trading income for the foreseeable future.
On a “zero growth” scenario and with the market only willing to pay “trough earnings”, Citi analysts put SocGen’s fair value at €53 per share. That compares with a Euronext quote of €68.90 on Monday, itself a 6.7 per cent fall on the day.
Reuters on Monday were relaying comments by the French Economy minister, Christine Lagarde, who insists that SocGen isn’t under pressure to merge with another bank. There has been speculation that the French government could seize the chance to create a national banking champion, possibly to help avert a foreign institution making a move on SocGen.
The business has its attractions in terms of retail banking in France, international banking and also asset management. Who might want to buy the bank?
A number of in-market and cross border combinations can be considered for SG. In-market, BNPP and SG have often been regarded as a ‘natural’ combination. This would provide scale in French retail banking, emerging European exposure to balance BNPP’s Italian/ US operations, and would pair SG’s strength in equity derivatives with BNPP’s strength in fixed income. An inmarket combination with CASA could also be a strategic fit.
Despite its current problems, SG is a collection of very attractive businesses, which would potentially appeal to various large local and foreign banks. The list of potential bidders for part or all of SG would include BNP Paribas, Credit Agricole, Unicredito, HSBC, Barclays, Santander and BBVA.
For what it’s worth, Citi reckon HSBC would be amongst the most convincing bidders for SocGen:
The emerging Europe focused international retail unit and the CIB / derivatives unit would fill two holes in the HSBC footprint. Also, the acquisition would be manageable (HSBC market capitalisation is c3.3x that of SG today) and given SG’s low valuation the goodwill / capital impact would be relatively small. HSBC also has an existing French retail business — it is no stranger to the Hexagone.
And what sort of premium might this justify? Up to €33 per share for a French in-market merger, Citi says, and perhaps as little as €11 for a cross-border deal.
