Analyst Note| Johann Scholtz, CFA |
We assess Societe Generale’s capital allocation as Poor. SocGen finds itself in a tricky situation. Its profitability has materially lagged its cost of capital for an extended period now, and reinvesting in its existing operations is likely to lead to the same result. Divestment of some noncore businesses could improve profitability marginally, but SocGen’s core businesses’ profitability is also below par. The logical course of action for a nonfinancial firm under these circumstances would be to return capital to shareholders aggressively. SocGen, however, has one of the weakest balance sheets of the European banks we cover, and it will need to maintain its current level of capitalisation to meet regulatory demands. We maintain our economic moat rating of none and our EUR 25.50 fair value estimate.