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Societe Generale released its three-quarter report in 2023, with operating income of 161.3 billion yuan in the first three quarters, down 5.59% from the same period last year, and net profit of 65 billion yuan, down 9.53% from the same period last year, with an annualized weighted average ROE of 12.13%. By the end of the third quarter, total assets reached 9.92 trillion yuan, an increase of 7.09% over the beginning of the year, of which loans and deposits increased by 6.64% and 10.14% respectively.

Peace viewpoint:

Earnings growth is bottoming, and non-interest fluctuations are a drag on revenue. Societe Generale's net profit in the first three quarters of 2023 rose 9.5% from a year earlier, an increase of 4.6 percentage points from the first half of the year. In terms of split structure, the slowdown in revenue growth remained the main factor, with revenue growth expanding to 5.6% in the first three quarters of the year, up from 4.2% in the first half. The weakness of income growth is still mainly affected by non-interest income, of which fee income negatively increased by 30.4%, mainly due to the adjustment of financial stock structure and fluctuations in the capital market. In addition, due to the increased volatility of the bond market in the third quarter, other non-interest income of Societe Generale fell by 35% in the third quarter, which also had a negative impact on revenue. However, it is worth noting that Societe Generale performed relatively steadily in terms of net interest income, with the year-on-year growth rate rebounding from 0.8% at the end of half a year to 1.1%, and 5% year-on-year growth in a single quarter, outperforming its peers. We believe that the pressure on Societe Generale's profits this year is largely due to the rise of the overall operating pressure of the industry and the impact of the qualitative adjustment of some of its own business, and the negative factors have been fully reflected. With the repair of the domestic economy and the optimization of its own capital structure, the follow-up pressure is expected to be gradually reduced.

The decline in interest rate spreads is better than that of the same industry, and the negative asset structure continues to be optimized. Societe Generale had an annualized net interest margin of 1.94 per cent in the first three quarters of 2023 (1.95 per cent in the first half of vs) and 1.92 per cent in the third quarter, slightly narrowing 1BP from the previous quarter. Taking into account the impact of factors such as the decline in LPR and deposit fixing in the industry as a whole, Societe Generale outperformed its peers. We believe that to a certain extent, this is related to the continued positive adjustment of the company's negative asset structure. in terms of scale, although the growth rate of the total assets of Societe Generale has slowed down 0.9 percentage points to 9.2% compared with the first half of the year, the growth of deposits and loans has remained stable. the year-on-year growth rate increased by 0.7 percentage points to 11.2% and 9.9% respectively over the first half of the year, and the negative asset structure continued to be optimized. Specifically, from the perspective of credit structure, the "five new tracks" continue to maintain a good momentum. Loans in inclusive finance, science and technology innovation finance, energy finance, auto finance, and park finance increased by 34.4%, 25.8%, 10.8%, 24.4% and 23.8% respectively over the end of last year.

The asset quality pressure can be controlled as a whole, and the provision remains sound. At the end of the third quarter of 2023, the non-performing rate of Societe Generale decreased by 1BP to 1.07% from the end of the third quarter of 2023, but from the perspective of the concern rate, the company's concern rate rose slightly to 1.53%, which is expected to be mainly due to the company's active recognition of potential risk projects. according to the company's disclosure, the overall risk of real estate and local platforms tends to be stable, the forward-looking indicators of credit card risk are marginal, and the overall asset quality pressure of the company is controllable. In terms of provision, the provision coverage ratio of Societe Generale at the end of the third quarter decreased by 8pct to 238% from the previous quarter, and the loan ratio decreased by 10BP to 2.55% from the previous quarter, and the overall level is still abundant.

Investment suggestions: "Commercial Bank + Investment Bank" to create differentiated operation, pay attention to the reform of the system and mechanism. Societe Generale has a flexible system and mechanism, focusing on the layout of "commercial bank + investment bank", with light capital, light assets and high efficiency as the direction, constantly promoting business transformation. At present, the balanced development of the company's off-balance sheet and off-balance business, ROE has always been in the forefront of the joint-stock bank, the company proposes to create three golden business cards of green bank, wealth bank and investment bank in the future, and we are optimistic about the long-term development space of the relevant tracks. Combined with the company's semi-annual report, we maintain the company's profit forecast for 23-25 years. It is estimated that the company's EPS for 23-25 years will be RMB 4.43, 4.72 and 5.01 respectively, and the corresponding profit growth rate will be 0.7%, 6.6% and 6.1%, respectively. At present, Societe Generale has the corresponding PB of 23-25 as 0.45x/0.41x/0.37x. Considering the relatively high margin of safety of the company's valuation at present, the long-term profitability is expected to be repaired after the short-term disturbance on the revenue side has subsided, and the "highly recommended" rating is maintained.

Risk tips: 1) the macroeconomic downturn has led to a higher-than-expected rise in asset quality pressure in the industry. 2) the decline in interest rates has led to a narrowing of industry spreads than expected. 3) the increase of cash flow pressure of real estate enterprises leads to the rise of credit risk.