Turkey of the week: investment bank hit by the credit crunch
FREE email from MoneyWeek
Discover the latest profit opportunities and understand what’s really going on in the investment world with our punchy daily email. CLICK HERE
This genius investor does dizzying levels of research to uncover...Half Price Shares!
In an industry notorious for conflicts of interest, analysts at investment banks covering rival investment banks probably have more potential conflicts than most. How can one expect to get wholly unbiased and impartial coverage of the brokerage sector from a fellow broker?
Turkey of the week: Société Générale (Paris:GLE), raised to ‘OUTPERFORM’ by Bear Stearns
In a move that looks more than a little bizarre, Bear Stearns analyst Rahul Shah downgraded French bank BNP Paribas from ‘buy’ to ‘hold’ due to market volatility – this from the Wall Street brokerage whose failing hedge funds brought the subprime debacle into the spotlight in the first place – and suggested a switch into Société Générale instead. Given the exposure of French banks to the derivatives market, this could be a case of out of the frying pan, back into the frying pan.
Société Générale stock looks cheap, with a gross dividend yield of almost 4.5% and a prospective p/e of just over nine times. But as a glance at its recent stock-price chart confirms, cheap can get cheaper and it’s been mauled in recent weeks.
There are three segments to its business: global investment management, including the Société Générale Private Banking brand; retail banking and financial services; and corporate and investment banking. For investors fearful of subprime and related exposure, any nasties will be lurking in that last segment, which includes capital markets, derivatives and structured finance. One would need to have some fairly heroic opinions about the resilience of European debt capital markets to be bullish about future earnings from debt underwriting, derivatives or associated structures. Even if the ongoing credit crunch were to vanish rapidly, it looks as if the best days for investment banks are behind us. In that case, the market is correct in not affording Société Générale and its rivals a better multiple, given that peak earnings may well be behind us too.
(Article continues below)Advertisement
Société Générale makes the biggest chunk of its revenues from interest and similar income. That business line should be relatively robust. But it’s the other three segments: commissions, net gains on financial transactions, and ‘other’ earnings, that will be vulnerable in a broader investment banking downturn. This isn’t to say a downturn is inevitable, only that the future looks more than usually uncertain, and debt investors in particular will no longer be willing to buy structured products solely on the basis of a solid-looking credit rating. One need only extrapolate from the bad news surrounding Barclays’ exposure to failed debt vehicles to make a case not to touch other European banks until their own exposures (or lack of) to potential losses is more transparent. Société Générale is covered by 32 brokers. The stock is rated a ‘buy’ by 16, a ‘hold’ by 14 and ‘sell’ by just two. But given the incestuous nature of the investment banking community, I’d say such judgements are largely worthless.
Recommendation: STEER CLEAR, until the extent of European banking sector losses is more obvious.
Tim Price is CIO of Global Strategies at Union Bancaire Privée, London. Tim also runs his own share-tipping service, The Price Report.
FREE! For all our latest advice on making profitable investments, claim your 3-week FREE trial of the MoneyWeek website and magazine now.
FREE! MoneyWeek’s daily investment email. A quick, useful and entertaining round-up of the latest investment news, sent to your inbox first thing every morning.To sign up to our “Money Morning” email for FREE, just click here.
Money Morning is the FREE daily email from MoneyWeek
– a punchy round-up of the latest investment news and profit opportunities.
DON’T MISS IT!
