SocGen’s Krupa Disappoints With Cuts to Revenue, Return Goal

Societe Generale SA slumped the most in six months as cuts to revenue and profitability targets in Chief Executive Officer Slawomir Krupa’s first strategy update surprised investors.

(Bloomberg) — Societe Generale SA slumped the most in six months as cuts to revenue and profitability targets in Chief Executive Officer Slawomir Krupa’s first strategy update surprised investors.

The French bank on Monday set a goal for annual revenue growth of between zero and 2% over the next three years, down from at least 3%, and slightly lowered the target for return on tangible equity that some analysts had expected to be lifted. Krupa also outlined cost cuts and said he plans to strengthen the bank’s capital buffers.

“SocGen reported an underwhelming update,” analysts Thomas Hallett and Andrew Stimpson at Keefe Bruyette & Woods wrote in a note. “The longer term, structural issues also remain.”

SocGen slumped as much as 11% in Paris trading, the most since March, erasing all gains since Krupa took the role. Analysts said they were disappointed by the revenue outlook, profitability target and lack of detail on asset disposals.

The 49-year-old Krupa, a former investment banking boss, took over four months ago with a mandate from Chairman Lorenzo Bini Smaghi to increase efficiency and boost the valuation. SocGen’s shares trade at the biggest discount to book value among major European investment banks, having dropped 42% under his predecessor Frederic Oudea when including reinvested dividends, compared with gains at rivals BNP Paribas SA and Credit Agricole SA.

Krupa lowered the target for SocGen’s return on tangible equity to between 9% and 10%. That compares with more than 10% at Deutsche Bank AG and 12% at BNP Paribas. Both rivals want to reach those marks a year earlier than SocGen.

The French lender will limit organic growth in risk weighted assets to less than 1% a year, a key pillar of the new CEO’s plan to improve the allocation of capital. Krupa also plans to cut costs by about €1.7 billion, in part by improving the IT systems. That will result in transformation charges of about €1 billion over the next three years.

The new CEO cut the outlook for revenue growth as he seeks to shrink or exit some activities. The bank already announced disposals in four African countries, with a fifth unit put under review. In addition, SocGen is exploring a sale of its custodian unit, which could fetch a valuation of more than €1 billion, Bloomberg reported previously.

What Bloomberg Intelligence Says:

Societe Generale’s focus on capital buildup and cost cutting — in the new strategic objectives set out by CEO Slawomir Krupa — come at the expense of revenue growth (with just 0-2% targeted through 2026) and profitability (9-10% return on tangible equity), making consensus upgrades unlikely. Disappointingly, there are no major plans to restructure or refocus the struggling investment bank, which is compounded by the lack of a boost to share buybacks, as caution outweighs growth hopes.

— Philip Richards, BI banking analyst

Shares of the French lender were also hit Monday after its car-leasing arm ALD said it wouldn’t meet an efficiency target because of inflation and IT costs. That sent the shares of that business as much as 15% lower. SocGen owns more than half of the company.

Krupa also adjusted SocGen’s payout policy, pledging to return between 40% to 50% of its reported net income to shareholders, instead of half of its underlying profit. The bank missed out on that dividend pledge for last year, deciding to hold onto a bigger portion of earnings after its multibillion exit from Russia hit profit. 

BNP last year raised its payout ratio to 60%, part of a broader push among European lenders to lure investors.

Krupa said that over the past decade, SocGen’s dividend relative to its market value had been one of the highest in the world.

“Has it allowed the stock to rise?” he said. The new plan is a “realistic roadmap, a roadmap where promises are less important than the capacity to achieve them.”

–With assistance from Macarena Muñoz.

(Updates shares in fourth paragraph.)

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