SocGen’s new plan faulted by investor

In a decisive moment for European banks grappling with a fragile economic landscape, Societe Generale’s bold new strategic plans received a lukewarm reception from investors on Monday, underlining the prevailing uncertainty surrounding the continent’s financial institutions.

As the year-long windfall from interest rate hikes gradually dissipates, Europe’s major banks find themselves under scrutiny. Elevated interest rates now intensify pressure on borrowers, posing a risk to property prices and potentially further hampering the broader economic outlook.

Against this backdrop, shares in France’s third-largest publicly listed bank experienced a precipitous decline of approximately 12%. The drop followed the revelation by the newly appointed CEO that he anticipates minimal, if any, growth in annual sales in the years ahead. Investors, who were anticipating a more robust strategy, expressed their dissatisfaction.

Jerome Legras of Axiom Alternative Investments succinctly articulated the prevailing sentiment, stating, “We are at a crossroads,” alluding to the prevailing interest rate ambiguity. He added, “There are more questions about the future and the economy,” while emphasising that the transformative mergers investors have eagerly awaited seem increasingly improbable.

This less-than-enthusiastic reception casts a pall over the prospects of European banks. These institutions grapple with low and stagnant valuations, and investors struggle to discern a promising future for the sector, as noted by a prominent adviser working with top executives from regional lenders.

Slawomir Krupa, who assumed the role of SocGen’s chief executive in May, faces the daunting task of resuscitating the bank. However, he left little room for optimism on Monday, emphasising that the potential for revenue growth was decidedly limited.

Krupa’s strategy and projections, which he characterised as “honest” and pragmatic, failed to resonate with analysts. Pre-announcement rumours, including the possibility of divesting underperforming units, had fuelled expectations of a more comprehensive plan.

In response to the abrupt decline in SocGen’s share price following the strategy unveiling, Krupa defended the plan, stating, “This is the right plan for the bank for decades to come.”

The European Banking Conundrum

European banks, operating across a mosaic of countries each with distinct governments and local regulations, have long lagged behind their U.S. counterparts. A recent study by European Central Bank economists attributed this lag to the global dominance of major U.S. banks in investment banking and the burden carried by European banks due to lingering bad loans from the 2008 financial crisis.

Europe’s sluggish response to the crisis, despite some reforms and enhanced supervision, has had a lasting impact on its banking sector. Stress tests conducted earlier this year underscored persistent weaknesses, particularly among several German banks. Of the 14 German banks assessed for capital adequacy, eight fell short of the European Union average. Those surpassing the threshold were primarily subsidiaries of U.S. banking giants like Goldman Sachs and JP Morgan.

Compounding these challenges, Europe’s economic growth lags behind that of the United States. The European Commission recently revised down its economic forecasts for the 19 countries in the eurozone, anticipating only modest growth and even predicting a contraction in Germany, the region’s economic powerhouse.

Frederic Rozier, an investor at Mirabaud, noted, “At some point, you’re going to have a credit crunch and inevitably a risk of (borrower) defaults.”

A Plea for a Unified Banking Market

The modest profitability of European banks has dampened investor enthusiasm, resulting in their shares often trading at a fraction of their book value—the sum of their assets. In contrast, U.S. giants like JP Morgan and Morgan Stanley are valued at around 1.5 times their book value, while Deutsche Bank, ABN Amro, Credit Agricole, and Standard Chartered in Europe are valued at just half or less.

Karel Lannoo of the Brussels-based think tank CEPS pinpointed Europe’s fragmented regulatory approach as a root cause. “We need a single banking market,” he asserted, lamenting the absence of such unity.