SocGen’s Krupa Fails to Win Investors With Sobering New Strategy

Societe Generale SA investors waited four months for Slawomir Krupa to outline how he wants to revive the shares of the French laggard. His answer, in a nutshell: Lower your expectations.

(Bloomberg) — Societe Generale SA investors waited four months for Slawomir Krupa to outline how he wants to revive the shares of the French laggard. His answer, in a nutshell: Lower your expectations.

Krupa on Monday cut targets for revenue and profitability, and guided for lower payouts to shareholders, as he focuses on boosting capital buffers and efficiency. But if the former head of the investment bank had planned to underpromise so he could overdeliver later, markets didn’t want to hear about it. SocGen slumped 10%, the most in six months, erasing all gains in the stock since the new chief executive officer took over. 

“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.”

The market reaction underscores the scale of the task for the 49-year-old Krupa, who inherited a lender that’s fallen behind rivals BNP Paribas SA and Credit Agricole SA as it struggled with strategic mistakes and individual missteps. Chairman Lorenzo Bini Smaghi has said he wants the new chief to increase efficiency and boost the valuation, after a long decline in the shares left them trading at the biggest discount to book value among major European investment banks.

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 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.

Krupa also scaled back payout promises for shareholders, pledging to return between 40% to 50% of its reported net income to shareholders instead of half of its underlying profit. It’s fair to assume, he said, that capital returns could initially be in the low-end of that range as the bank focuses on building up capital.

SocGen missed out on its dividend pledge for last year, deciding to hold onto a bigger portion of earnings after its exit from Russia hit profit. BNP, meanwhile, has raised its payout ratio to 60%, part of a broader push among European lenders to lure investors.

SocGen fell 10.1% at 3:12 p.m. in Paris, leaving the stock down 1.9% since Krupa took on the role of CEO.

A SocGen veteran who had campaigned for the CEO role by pledging change, Krupa said his “‘overarching” goal is lifting the CET1 ratio, a key measure of capital strength. Chief Financial Officer Claire Dumas said on Monday that the metric will be impacted more than expected this year as the European Central Bank scrutinizes the French lender’s structured products business.

“The capital base is the backbone of banking,” said Krupa. “We want to have a rock solid balance sheet.”

To help build up capital, Krupa plans to cut costs by about €1.7 billion and improve efficiency. He’s also indicated he wants to better allocate capital and cut back on operations that don’t fit. 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 ALD as much as 15% lower. SocGen owns more than half of the company.

Krupa, defending his focus on capital over shareholder returns, said that for 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.

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