Société Générale: snow drop
European bankers hoping for a modest lift-off this year will have to wait longer
European bank share prices raced downhill in 2018 faster than grand slam skier Kamil Stoch approaching a jump. Cheerier bankers in Paris, Frankfurt or Zurich hoped for a modest lift-off this year. Société Générale shows the sector can still land as flat as Eddie the Eagle.
The French bank warned fourth-quarter capital markets revenues were roughly 20 per cent lower than the €1.35bn reported a year earlier. It suggested shareholders might prefer dividends in shares rather than cash. Oh, and it would write off €240m following disposals. SocGen’s shares fell 5 per cent, extending the loss over the past year to 37 per cent.
How big a setback? SocGen is not alone in blaming trading conditions. Financial markets hit the wrong kind of snow. Volatility paralysed investors. Most unreasonably, they did not call their banks to trade the dips.
SocGen gushed about the “solid” performance of its international retail banking and financial services businesses. The capital markets revenue slide was larger than reported by US banks, according to Berenberg. That hints at even greater woes in European markets. It bodes ill for rivals such as Deutsche Bank. Switzerland’s Credit Suisse has already warned of a tricky fourth quarter. In France, Natixis is taking a €160m charge after the hedging of equity derivative risks went awry.
SocGen also warned of a “significant increase” in market risk-weighted assets. The scrip dividend further heightened concerns about its capital strength. An expected core tier one equity ratio, a commonly watched measure of financial capital strength, in the 11.4 to 11.6 per cent range means the 2020 target of 12 per cent remains plausible. But this assumes half of dividends would be paid in shares.
European banks were last year’s great unloved stocks. Sentiment was hit by worries about bad loans, stalling economies, regulatory burdens and flaws in the construction of the euro. Tough trading came on top of all that.
January has seen a rebound. The FTSE European bank index is up 6 per cent, compared with 3 per cent for European stocks. SocGen trades at just 0.4 of tangible book value — below BNP Paribas at 0.6 and only slightly higher than Deutsche on 0.3. Analysts, who rationalise bad news with the élan of Mr Stoch leaping 240m, will see a turnround in sight. SocGen suggests they would be wrong.