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Société Générale shares – Banking on the banks

Société Générale issued results on Wednesday and we see no reason post results to change our price target of €54 on the stock. We see any weakness in the stock as a buying opportunity.

When we first started covering Société Générale (29/05/2017), the shares were trading on a P/E of 11.4x, and we argued that given the positive outlook we have on the sector, the share should trade on a P/E closer to its historical average, that of 12x. The shares have rallied since then and are now trading on a trailing P/E of 12.7x. Based on our optimistic outlook for the European Economy in 2017 and beyond (with particular reference to France), we expect these tailwinds to continue pushing the shares closer towards our 12-month price target of €54.

Analysing the results

There are two main reasons for the drop in price post results, and these were as follows:

  1. Margins on French retail banking are under pressure because of increased competition
  2. There continues to be the litigation issue with the US on miss selling of structured products in the past

Regarding these two issues, my comments are as follows:

  1. French retail banking – We expect the French economy to continue generating positive growth with Macron at helm. Société Générale is well placed to benefit from this. Also, margins are suffering due to being in a low interest rate environment. We expect interest rates to start improve gradually (sooner rather than later). This will be a benefit for the Group and I don’t think it’s an issue given the strong balance sheet of the company.

It is also true that the bank is looking to grow its profits in other markets to make up for this.  SocGen is looking to its Romanian and Russian franchises to support further recovery in group profitability. Meanwhile, continued restructuring and growth in fee & commission income should support French Retail Banking.

  1. Litigation issues – the CEO of the company mentioned that this is an ongoing issue and it could take years for this to be solved. Again, we were aware of this when we bought the shares and are monitoring it closely. However, we don’t expect to hear anything about this issue anytime soon. The Bank also has provisions in place to cater for this.

Rationale for investing in Société Générale:

  • GLE is trading on a P/E of 12.7x. given our positive outlook on the European economy and potential for interest rate hikes sooner rather than later, we believe this company should be trading on a P/E closer to 12x. Based on 2017 forecasted earnings of €4.45, we are expecting a 12-month price target of €54
  • We are forecasting an improvement in macro, stronger capital markets, looser regulatory environment and higher loan growth
  • European economy moving towards higher interest rates sooner rather than later
  • Shares are trading on a dividend yield of 4.60% - very attractive
  • Management reiterated that dividend policy remains unchanged with the group aiming to payout 50% of earnings and grow DPS progressively
  • Basel 3 CET1 in line at 11.5%
  • Price to book trading at 0.62x which is very conservative
  • Revenues – sales are expected to increase in the coming years from improved economic sentiment in France and globally
  • Margins are also forecasted to improve in the years ahead. From 13.20% in 2016 to 14.35% and 15.43% in 2017 and 2018 respectively

Conclusion

With our positive economic outlook on the European economy in particular, we believe Societe Generale is well positioned to benefit from future growth. We believe the shares should be a core holding in a well-diversified portfolio.

About Société Générale

Société Générale S.A. is a French multinational banking and financial services company headquartered in Paris. The company is a universal bank and has divisions supporting French Networks, Global Transaction Banking, International Retail Banking, Financial services, Corporate and Investment Banking, Private Banking, Asset Management and Securities Services.

Disclaimer: This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

 

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