SocGen comes to town

The boss at SocGen, Paris is in NY. This is not a vaca; this is a road show. Frederic Oudea is here to blunt the impact of a downgrade by Moody’s. He gave an interview with Bloomberg and he plead his case. I’ll let the stock market decide if they like what he said.

A recap of the stock performance is in order. Yesterday SOGN fell to a 52 week low of E14.31. The peak was E52.70. So this puppy is down 73%. So much for the poor widows and orphans who thought they were buying a nice “safe” bank stock that paid a dividend to boot.

By the end of the day the stock did a complete U-turn and ended up 15%. I supposed the longs cheered the bounce. I’m sorry; this is just insane volatility. One would have to be either nuts or a gambler to play in this space.

The market cap of SOGN as of the close was E12b. That is the bottom of a pile of assets that total E1.3T. The market cap to assets is only 1.0%. Compare that to Wells Fargo @ 10.0% and you see the problem. Even stinky old BAC has a 3.30% of market cap to its balance sheet.

Question: Can SocGen do a rights offering and raise E5b? I would think not. That would be a 40% dilution. A recap in the equity market is closed for the time being.

They might be able to raise preferred equity, provided they gave out cheap warrants on the common. (Ala Buffett)  But what would that cost? The dividend on the common is sitting a ridiculous 11.25% yield. To get a “size” deal done the net cost (including street fees) for a Pref deal would be at least that. And let’s face it, E5b ain’t such a big number any more. I don't think Preferred equity is an option either.

Mr. Oueda makes a good defensive of all this. I urge you to read it. Some things that were said make me wonder what is coming for the global economy. Also, we keep hearing from big bankers that Basel II & III are issues.

We have said we are going to exit certain businesses and adjust.

Is it possible for everyone to de-leverage at the same time? Only If governments buy up the excess debt. That’s what we been doing for the past three years, look forward to some more.

We will escape certain businesses and adjust. Globally, it is fine and I am confident of the profitability going forward.

Escape? He could have said this better. No one in his position can be so confident about future earnings. That’s why the stock is getting shot, after all.

We have a wide range of assets that we can dispose, and effectively. Good assets, predominately in specialized financing and our global investment management and services. We will dispose that in the next few years to meet the capital requirements of Basel III.

Steady selling. At least two years worth. Who’s buying? The Chinese? Nah.

Yes, we've said also we will effectively reduce our costs in different activities, in different countries, for example, in Russia, where we merge our subsidiaries and we will cut the staff by next year. Also in countries like Poland.

Bye bye Eastern Europe. Isn’t Poland in the EU? Sure they are. Seven years already. So this is just passing the trash.

It puts pressure on the investment banking side and that's why we just announced that we are deleveraging, that we will refocus and exit certain businesses. We suffer from Basel II.

IB requires too much equity, so cut it out. But where’s the earnings after that? Retail banking? Ugh!

Compared with the banks who invested a lot, we have less to do.

This is both accurate and scary. The clear suggestion is that many of the banks in Europe face much steeper problems than SocGen. I thank the CEO for this important clarification.

I hope Mr. Oueda has an enjoyable stay in NY. I very much doubt that he will.
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I close, as always, with graffiti. This time from France. “Destiny is not written – It’s what we do”.

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