Societe Generale announces NC5.5 SGD AT1 notes at 8.50% IPG

Subordinated bank debt instruments such as additional tier 1 (“AT1”) and tier 2 notes dominated the SGD bond market in June. We continue to see this trend going into July as Societe Generale announced that the bank will be issuing NC5.5 SGD AT1 notes at an indicative price guidance (“IPG”) of 8.50%.

However, with the increase in subordinated bank capital instruments in the SGD space, we think the IPG of 8.50% from this new issue is not attractive as compared to recent AT1 issuances like the BACR 8.300% Perpetual Corp (SGD). We think the yield pick-up from this new issuance is not as attractively priced as compared to other recent new issues.

The AT1 perps is expected to be Ba2/ BB/ BB+ by Moody’s/ S&P/ Fitch respectively. The bond is callable from 15 Jul 2027 with the first reset date on 15 Dec 2027. If not called on 15 Dec 2027, the bond will reset at the prevailing 5Y SORA-OIS plus the initial margin.

Societe Generale (“SOCGEN”) is headquartered in France, and operates in three main banking segments - French Retail Banking (“FRB”), International Retail Banking operations, Insurance and Financial Services (“IRB”) and Global Banking and Investor Solutions (“GBI”).

The FRB segment consists of the retail banking of Societe Generale, Credit du Nord group and Boursorama Bank in France. Credit du Nord is a large regional bank while Boursorama Bank is an online banking leader in the country. The IRB segment operates outside of France with networks in Africa, Russia and Central and Eastern Europe. Lastly, the GBI segment is made up of asset management, corporate and investment banking and private banking activities.

According to S&P Global Market Intelligence, SOCGEN had EUR 1,465.95b of total assets, making it the 6th largest bank in Europe and 18th worldwide when ranked by total assets. SOCGEN is rated by the three main credit agencies – S&P (‘A’ with a stable outlook), Moodys’ (‘A1’ with a stable outlook) and Fitch (‘A-‘ with a stable outlook).

For the first quarter ended 31 March 2022 (“1Q22”), revenues increased by 16.6% year-over-year (“yoy”) to EUR 7,281m from the performance of its Global Markets, Financial Services and Financing & Advisory businesses. Cost to income ratio was 56.4% in 1Q22 as compared to 63.8% in 1Q21. This resulted in underlying gross operating income to increase by 37.6% to EUR 2,956m.

On 11 April 2022, SOCGEN announced the sale of its entire stake in Rosbank and the Group’s Russian insurance subsidiaries to Interros Capital. SOCGEN’s income statement is expected to take a hit of ~EUR 3.1b when the sale is completed, from the write-off of the net book value of the Russian subsidiaries (~EUR 2b) and an exceptional non-cash item of ~EUR 1.1b. The impact of the disposal of Rosbank and the Group’s Russian insurance activities on CET 1 ratio is expected to be around 20 bps. CET1 ratio for the Group was 12.9% in 1Q22, which is a buffer of 370 bps above regulatory requirements.

In terms of liquidity, SOCGEN had liquidity coverage ratio of 137% in 1Q22 which is above regulatory requirements of 100% while net stable funding ratio was at 112%. CET1 ratio was 12.9% and SOCGEN aims for a CET 1 ratio between 200-250 bps above regulatory requirement after the Basel III reform.

Moving on to relative valuation, comparing the new AT1s from SOCGEN to the recently issued Barclays SGD AT1s, BACR 8.300% Perpetual Corp (SGD), the initial spread of the SOCGEN AT1s is 588.5 bps as compared to the bid I-spread of 545.5 bps of the BACR 8.300% Perpetual Corp (SGD). Looking at the BACR and SOCGEN USD AT1 notes, the bid spread pick-up is ~65 bps. With just a spread pick-up of ~43bps from the SGD AT1 notes and assuming that the final price guidance of the notes will tighten additional ~25 bps, this makes the new SOCGEN AT1s not as attractive as compared to the BACR 8.300% Perpetual Corp (SGD). Furthermore, the BACR 8.300% Perpetual Corp (SGD) has a better credit rating of Baa2 and BBB- by Moody’s and Fitch respectively.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) hold a position in BACR 8.300% Perpetual Corp (SGD) and the analyst who produced this report hold a NIL position in the abovementioned securities.