August 23, 2011 – By Lionel Laurent
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PARIS (Reuters) - Societe Generale <SOGN.PA> boss Frederic Oudea is having to work harder to keep his promise of a new dawn after the bank's devastating trading scandal in 2008.
The company veteran -- still only 48 years old -- has seen the value of France's number-two bank slump by almost 50 percent since the end of June. Market concerns whether SocGen had sufficient access to dollar funding are compounding existing fears the bank had adequately buried the Jerome Kerviel legacy.
"This is what happens when you have an event as ridiculous as Kerviel," said a London-based bank analyst. "A lot of fund managers would first sell SocGen before (French rival) BNP Paribas <BNP.PA> or others, because of management."
Liquidity concerns have pummeled bank shares in Europe across the board -- the STOXX 600 Europe banks index <.SX7P> is down 27 percent since the end of June -- but SocGen was hit hardest among French peers.
Its real problem is a business model too skewed toward investment banking, an international retail franchise that is not yet bearing fruit and lingering worries over capital, investors say.
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"The problem with Societe Generale is that it lacks a firm pedestal," said Yohan Salleron, a fund manager at Mandarine Gestion with 1.1 billion euros under management, who closed out his position in SocGen in July.
"It doesn't have a retail banking network like BNP Paribas, which means its results are a little volatile."
SocGen has already cut its investment banking balance sheet by 16 percent since 2007, but is still singled out as too risky.
SocGen was the weakest of the major French banks in Europe's stress test of its lenders last month. Investors have speculated that it might have to raise about 3 billion euros to reach new capital standards if the euro zone crisis worsens.
It also has a lower ratio of liquid assets to short-term funding than other banks that disclose the numbers, data compiled by research firm CreditSights show.
And although the bank has repeatedly denied speculation it is facing a funding challenge, some investors say the mud is sticking because of past blow-ups.
Societe Generale declined to comment.
Some analysts argue Oudea has little if any control over market sentiment at this point, saying investors are more attuned to European Union policymakers and the sovereign debt crisis than corporate strategy.
"There's nothing obvious they can do now. They just have to ride it out and hope the European authorities do the right thing," said a London-based analyst.
Small wonder than that Oudea in a weekend interview said that nervousness over bank stocks could last at least until the beginning of November, and that the market was waiting for political decisions that are "overdue."
But others say that the bank is paying the price of failing to deliver on its own business model, from growing retail banking in Central and Eastern Europe to delivering on its competitive edge in products like equity derivatives.
"I disagree that management is blameless," said one London-based analyst. "I think you have a very good business that should be outperforming, and isn't, because of management."
In a less torrid market Oudea could consider a rights issue or a ramp-up in asset sales to shore up the bank's capital base, which some analysts say is its Achilles' heel.
But its battered shares -- now trading at a price-to-book ratio of 0.35, lower than some Nigerian banks -- make such a move unlikely. The bank's market cap has swooned to around 16 billion euros from 110 billion in April 2007.
Instead, some suggest, Oudea might get a better grip on the situation by a capital injection from an outside investor, provided he would not lose control of the bank or dilute shareholders too aggressively.
"When you look at SocGen's footprint across Europe, if you are a bank in a country like China, for instance, it might look extremely attractive," said Frederic Rozier, a Paris-based fund manager at Meeschaert.
Some strong-willed investors argue the shares are now worth buying. "The valuations in the sector do not reflect the fundamentals," said Marine Michele, fund manager at Montsegur Finance, whose fund has recently added SocGen shares.
(Reporting by Lionel Laurent; Editing by Douwe Miedema, Christian Plumb and Mike Nesbit)