A French Bank's Digital Transformation And Asset-Light Strategy Will Strengthen Future Efficiency

Key Takeaways

• Strong rebound in French net interest income and Global Banking growth expected to drive revenue and net margin improvements.
  
• Strategic disposals and digital transformation to enhance capital strength, efficiency, and long-term revenue growth.
  
• Regulatory pressures, management changes, and slowing loan origination could challenge revenue growth, cost efficiency, and capital strategies impacting long-term earnings and ROE.

Catalysts

Provides banking and financial services to individuals, corporates, and institutional clients in Europe and internationally.

• Société Générale is seeing a strong rebound in French net interest income (NII) and improved performance in Global Banking and Investor Solutions, which is expected to drive revenue growth.
  
• The expected continued improvement of the cost-to-income ratio and disciplined cost management are likely to enhance net margins over time.
  
• Strategic disposals and an asset-light model are planned to strengthen the capital position, which could enhance the bank's ability to invest in higher-yielding opportunities or return capital to shareholders, potentially boosting earnings per share.
  
• Advancements in Société Générale's digital transformation strategy, such as investments in digital banking and service platforms, are expected to drive long-term efficiency and revenue growth.
  
• BoursoBank's continuous growth in client acquisition with low churn rates, along with its high client satisfaction and profitable operational model, is anticipated to contribute positively to earnings and margin improvements.

Société Générale Société anonyme Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Société Générale Société anonyme's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.6% today to 18.7% in 3 years time.
• Analysts expect earnings to reach €5.2 billion (and earnings per share of €6.12) by about December 2027, up from €2.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €5.8 billion in earnings, and the most bearish expecting €3.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.2x on those 2027 earnings, down from 7.5x today. This future PE is lower than the current PE for the GB Banks industry at 13.1x.
• Analysts expect the number of shares outstanding to grow by 1.97% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.85%, as per the Simply Wall St company report.

Société Générale Société anonyme Future Earnings Per Share Growth

Risks

• There are concerns about the slowdown in loan origination and volumes in the French retail market, which could potentially weigh on future revenue growth if the wait-and-see approach from customers continues.
  
• Interest rates were mentioned as a potential pressure point as a decline in rates could negatively impact net interest income by reducing the interest revenue from loans faster than deposit costs decrease.
  
• The management changes, while aiming for fresh perspectives, may introduce uncertainties and risks associated with strategic alignments and execution during critical periods of banking transformation and efficiency improvements, impacting net margins.
  
• There is a risk of increased costs if synergies from past mergers or restructuring efforts, such as the Crédit du Nord merger, do not fully materialize, potentially affecting operating margins and cost-efficiency targets.
  
• Regulatory impacts from capital requirements (like Basel IV) or taxation changes (e.g., buyback taxes) in France could alter capital allocation strategies and affect long-term earnings productivity and return on equity (ROE).

Valuation

• The analysts have a consensus price target of €32.51 for Société Générale Société anonyme based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €45.0, and the most bearish reporting a price target of just €24.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €27.8 billion, earnings will come to €5.2 billion, and it would be trading on a PE ratio of 7.2x, assuming you use a discount rate of 10.8%.
• Given the current share price of €26.83, the analyst's price target of €32.51 is 17.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.