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SocGen Q1 2022 Results

7% Yield for Ba2

SocGen’s strong Q1 2022 results support our high conviction in the AUD AT1 debt. We see the sale of its Russian banking and insurance subsidiaries at a relatively low cost as a positive step and should remove a negative overhang on the credit.

So far this year, SocGen’s (Ba2) AUD AT1 securities have underperformed both the BNP (BBB-/Ba1) and UBS (BB/Baa3) AUD AT1 securities. However, we believe the risk profile amongst these three banking institutions are not too dissimilar. Thus, the 1% difference in yield between SocGen and BNP/UBS looks mispriced and the bonds have scope to tighten versus peers.

SocGen’s Q1 2022 underlying earnings were strong and in line with its nearest peer − BNP. However, profitability was impacted by loan impairments related to Russia and Q1 2022 IFRIC 21 effect. The fully-loaded CET1 ratio remains very solid at 12.8%. The company’s MDA cushion is c.370bp − equivalent to around EUR14bn. SocGen targets an MDA cushion of 200-250bp post-Basel 4.

Chart 1. Operating Profit by Division

Source: SocGen Interim Results

Asset quality ex-Russia also continues to look good, with a relatively low cost of risk in Q1 2022. NPLs were around 40bps, with SocGen expecting that it will be 30-35bp for FY22. The cost of risk continues to be very low in French Retail Banking, while International Retail Banking and Global Banking & Investor Services were impacted by Russia-related impairments.

SocGen’s Q1 2022 revenue rebounded strongly, with all businesses contributing − including the investment bank − more than offsetting the high loan-loss charges.

Chart 2. Key Metrics

Source: Company Reports, Credit Sights

Relative Value

For this security, call risk would be relatively low.

  • The higher coupon reset of 5yr swap + 4.036% (which today would place this close to 8%!) would make it not economical to keep these securities outstanding versus where SocGen could issue T1s of similar structure and quality.
  • The other thing to consider is the cushion to the Maximum Distributable Amount (MDA) as well as the Distance to the Common Equity Tier 1 (CET1) ratio trigger. On both of these metrics, SocGen sits towards the middle (MDA) and upper region (Distance to the CET1 ratio) respectively versus other T1 issuers.

Chart 3. MDA Cushion

Source: CreditSights

Chart 4. Distance to Trigger

Source: CreditSights

Chart 5. Current vs Historical Spreads

Source: Bloomberg

Chart 6. Relative Value

Source: Bloomberg

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