France's Banks Need the Macron Touch

(Bloomberg) -- Emmanuel Macron’s youthful energy stands in sharp contrast with France’s biggest banks, whose shares have, in the main, languished since his election as president. Societe Generale SA, once the poster child for French expertise in derivatives, has the most work to do to restore investor confidence. A more energetic approach to succession planning and to pruning underperforming businesses — with a nod to a more youthful “Generation Macron” — would surely help.

While Friday’s first-quarter results were disappointing at both BNP Paribas SA and its arch-rival, it is Societe Generale that seems most at sea. In a quarter when a revival in volatility spurred securities trading and loan losses remained minimal, revenue from trading both equities and fixed income shrank — in contrast to the gains posted by many of its rivals. Return on equity was 6 percent, trailing the bank’s target of 10 percent.

It is hard to take comfort from the management overhaul announced by CEO Frederic Oudea, Europe’s fifth-longest-serving bank chief. It seemed to offer neither youthful energy nor reassuring stability. After the departure of Deputy CEO Didier Valet, there are now four deputy CEOs, all pulled from other parts of the bank. Retail head Bernardo Sanchez Incera is out, surely a negative given his experience fixing operations at home and abroad. Compared with recent changes at Rothschild, or Natixis parent BPCE, this reshuffle doesn’t instill confidence.

Then there’s the threat that U.S. sanctions pose to Societe Generale’s sizable Russian business. The bank said their impact was “limited,” but it’s likely to be a concern for management and investors.

The bank needs structural change to satisfy investors, even after recovering from crises like the Jerome Kerviel trading scandal. It promises to grow revenue, keep a lid on costs and shutter businesses in which it doesn’t have critical mass. Keeping those promises requires both strong leadership and strong execution — neither of which has been on show this year. Even after the spinoff of auto business ALD, there’s more to be done to shrink the bank.

To be sure, not everything is within Oudea’s control. Low interest rates have squeezed profit margins in consumer banking, and tougher curbs on risk-taking have kept management cautious on the investment-banking side. As a systemically important bank in the eyes of regulators, potential solutions like a big merger seem unlikely for now.

But Societe Generale’s weakness relative to its rivals is becoming glaring. It trades at a steeper discount to book value than BNP Paribas or UniCredit SpA, which is being aggressively turned around by Oudea’s former colleague, Jean Pierre Mustier.

Like its home country, Societe Generale can no longer rely on past glories: It sits just outside the top 10 of global investment banks as ranked by Coalition, and its total market share stayed flat in 2017, according to Morgan Stanley analysts.

If Macron’s message is that strong leadership and structural changes are the path to riches, his country’s banking champions would do well to heed it.

©2018 Bloomberg L.P.

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