SocGen’s BNP envy carries a cost

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A Societe Generale sign is seen outside a bank building in Paris, France, August 1, 2021. REUTERS/Sarah Meyssonnier

LONDON, Nov 22 (Reuters Breakingviews) - Slawomir Krupa is solving one problem while exacerbating another. The future Société Générale (SOGN.PA) chief executive, who currently runs the investment banking division, is forming a joint venture with AllianceBernstein’s (AB.N) research unit. It helps give the $20 billion French lender a more rounded equities offering, but also suggests he is doubling down on a low-return business that shareholders dislike.

The venture may be just a first step for Krupa. SocGen will own over half of the business that includes stock analysis and trading, but has an option to buy the rest after five years at an unspecified valuation. It mimics BNP Paribas’s (BNPP.PA) deal with European peer Exane, which the French group took over last year.

There are two main benefits. First, Krupa gets a fleet of stock analysts and traders in the United States and Asia, tilting the business away from slow-growing Europe, which brought in well over half of commercial wholesale revenue in 2021. SocGen research analysts cover around 500 mostly European stocks, according to JPMorgan, compared with AllianceBernstein’s more international coverage of roughly 800 companies.

Second, the venture makes the French bank’s equities business less reliant on derivatives and structured products, which led to heavy losses in 2020. Trading cash equities and selling research typically chews up much less capital and leads to fewer blow-ups.

Yet it's notable that AllianceBernstein seems willing to part with a business that it was only recently trying to expand. It agreed to buy London-based Autonomous in 2018. Analysts expect Bernstein Research Services, which also includes trading, to revert to pre-pandemic revenue levels next year and barely grow in 2024, using Visible Alpha consensus data.

One problem is that investors have generally not been willing to increase their research budgets in the wake of European rules that prohibited banks from bundling the charge into trading fees. And the wider equities trading business is increasingly dominated by larger players, especially U.S. banks. JPMorgan (JPM.N), for example, will generate more than twice as much revenue from buying and selling stocks this year as SocGen. Krupa may therefore need to invest more in the business or do more deals to stay relevant.

Bank shareholders apply a discount to European lenders with large trading businesses, like Barclays (BARC.L). SocGen already trades at a measly 40% of its tangible book value. Krupa’s expansive investment banking plans hardly help.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

Société Générale and U.S. asset manager AllianceBernstein on Nov. 22 said they had agreed to form a joint venture combining their cash equities and research businesses.

SocGen plans to take a 51% interest in the venture, with an option to take 100% ownership after five years.

Robert van Brugge, chief executive of Bernstein Research Services, will become CEO of the new entity for an initial term of five years, with Stephane Loiseau, head of SocGen's cash equities business, as his deputy.

Shares in SocGen were roughly flat as of 0955 GMT.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

Editing by Neil Unmack and Pranav Kiran

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