‘From Russia with Love’: SocGen’s sober revamp could use Russian vodka shot

A view shows a board advertising Rosbank on the roof in a building in Moscow, Russia, July 4, 2016. Source: Reuters/Maxim Zmeyev

Napoleon’s 1812 Russian invasion ended in defeat and a painful withdrawal. French bank general Frederic Oudea’s eastern campaign can have a happier denouement: retreating from Moscow might earn the chief executive of Société Générale a handy war chest and boost meagre group profitability.

SocGen shares have nearly doubled from historic lows since September. But they still trade at just 40% of their book value, and analysts are pencilling in a miserable 3.5% return on tangible equity this year, according to a Web News Observer calculation. Oudea is merging the French unit’s retail brands, and may also announce a broader revamp later this year.

One way to boost the group’s appeal with investors is to get out of Russia. True, Rosbank has been a long-time Oudea project: SocGen acquired a controlling stake in the Moscow-based lender in 2008. It may also seem odd to sell a business which generated a 10% return on equity in 2019.

But SocGen’s original justification for the investment – strengthening economic ties between Europe and Russia – hasn’t fared well, given recurring European Union sanctions on the Kremlin since 2014. Russia’s dicey political environment pushes up SocGen’s cost of equity, depressing its valuation. And there are better places for the capital: the Russian market is dominated by large local players, limiting growth.

Still, Rosbank’s solid investment bank and retail franchise could make a tempting morsel. True, the unit’s pre-pandemic return of 10% was below a cost of equity that analysts at BCS Global Markets peg at around 14%. That might imply a valuation of around 70% of book value, or 2.1 billion euros. But a large domestic buyer, such as Gazprombank, could extract substantial synergies. Assume an acquirer can take out 30% of Rosbank’s costs, worth 1.1 billion euros once taxed and capitalised. That would justify a purchase price equal to Rosbank’s book value of 2.9 billion euros.

Oudea could use that money to grow in more lucrative eastern Europe or Africa. His international retail business, for example, made a 16% return on equity before Covid-19 hit. The Czech and Romanian divisions both cranked out returns of over 10% during pandemic-ravaged 2020. While a Russian exit might look like retreat, it would represent a strategic victory.