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European banks have served as a fresh reminder of why some investors are exercising enduring caution over the sector. The implosion of Asian stock markets and fears of a US recession weighed on sector sentiment on Monday. Perennial laggards Monte dei Paschi di Siena and Deutsche Bank led share price declines. With the Stoxx banking index down more than a tenth in the past week, the soft landing narrative is in its terminal stages.
General Society The French bank has underperformed the rest of the sector, both in the past week and since the beginning of the year. Shares in the French bank fell by more than 3% on Monday, despite the announcement of divestments worth around 1 billion euros. These are part of CEO Slawomir Krupa’s restructuring plan, announced in September last year.
But the deals have done little to turn things around for Europe’s worst-performing and worst-rated big bank. Without benign economic conditions and higher interest rates, more drastic remedies will be needed.
The sale of SocGen’s private banking operations in Switzerland and the UK will allow it to raise €900m and add 0.1 percentage point to its CET1 capital ratio. A sale in Madagascar adds another percentage point. But the bank reported a CET1 ratio of 13.1% in second-quarter results last week. That is still low compared with peers and not high enough to allow for the significant restructuring needed.
Low profitability is a drag. SocGen expects to generate a return on tangible equity of more than 6 percent this year. It still faces headwinds, most recently in French retail, where it now expects net interest income to be lower. It said lower loan volumes and the need to pass on more interest rate increases to depositors were to blame. However, BNP Paribas and Crédit Agricole’s retail divisions still managed positive surprises.
This only adds to the lack of investor confidence. SocGen shares are back below €20, a level not seen since the banking crisis last year. The fact that its shares are still trading at a third of their tangible book value a year after this recovery suggests that the market is not buying them.
The poor performance of the French retail sector highlights another problem for SocGen: a large investment bank prone to generating unpleasant headlines. Reducing it would be costly and could require the sale of profitable businesses in Eastern Europe.
That would be tantamount to selling off the crown jewels to facilitate a garage sale. No wonder Krupa or any other company is reluctant to do so. With the stock on a downward trajectory with no return, the market may have already made up its mind.