Societe Generale

Societe Generale SA (PINK:SCGLY) (EPA:GLE), France’s second-largest bank, announced its first quarter results. Its profit fell 50 percent to 364 million euros ($476 million), hampered by accounting charges related to its debt. The results still beat the 317 million-euro average estimate of 10 analysts surveyed by Bloomberg.

However, France’s No. 2 listed bank made an announcement to cut 900 million euros in costs over the next three years. This has lifted investor sentiment as its stock price rose 6 percent to 30.24 euros.

Societe Generale Cost Cut Initiatives

The cost cuts are in addition to cuts of 550 million euros last year. Analysts welcomed the cost cutting strategies. SocGen’s Chief Executive Officer expressed confidence that the new savings initiatives will help the bank reach a new return-on-equity (ROE) target of 10 percent by end-2015.

According to Citi’s research report released today, Societe Generale SA (PINK:SCGLY) (EPA:GLE) reported a B3 CET1 ratio of 8.7 percent, up 60 bps QoQ or 10 bps higher than Citi’s forecast. The management is targeting an end-2013 B3 ratio close to 9.5 percent. SocGen delivered a strong CIB with an underlying post-provision operating profit of $1.06 billion, largely due to stronger revenues and lower provisions.

Kinner Lakhani and team feels French retail underlying PPOP of $556 million was better than the consensus estimates primarily driven by better revenues and lower costs partly offset by elevated provisioning from mid-sized corporates.

SocGen’s net banking income, a key measure of performance by a bank regarding the margin between the cost of taking in deposits and the price of lending them out, fell by 19.4 percent to 5.1 billion euros.

Societe Generale SA has already sold a slew of businesses over the past year, including subsidiaries in Greece and Egypt, to shore up its balance sheet in the face of global curbs on banks’ risk-taking and to offset recession in the euro zone. The French bank’s cost cutting initiatives are in line with its European rivals like UBS and Deutsche Bank as they slash jobs and exit businesses.

SocGen and its domestic arch-rival BNP are confronted with quite a few challenges such as a stagnant French economy and a jump in retail loan losses in its home market.

Citi, in its report, foresees risk of a further sharp downturn in the CEE region where SocGen has strong presence. Besides Citi anticipates additional risk factors such as a more challenging capital markets environment and worsening of the macroeconomic or bank funding environment.

However, Citi has set a target price of SocGen at $10.54 using a two-stage dividend discounted model.