Investors wary of socgens toxic loan swamp

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Societe Generale's long-running battle to cleanse its balance sheet of toxic assets left over from the 2008 financial crisis i s putting investors on their guard. They worry the sense of urgency in dealing with the problem is fading at a time when economic growth is flatlining across the euro zone, which is being reflected in SocGen's poor stock-market valuation relative to other European banks."(SocGen) is trying to cut its stock of illiquid assets but you can tell it's tricky," said Yohan Salleron, a fund manager at Mandarine Gestion, which has around 1.5 billion euros ($1.88 billion) under management."We prefer (domestic rival) BNP Paribas."Stuffed mainly with exotic debt securities linked to the U.S. mortgage market - which crashed in 2008 - the 'bad-bank' portfolio at SocGen, France's second-biggest bank by market value, was 17 billion euros on March 31. And that burden shows no sign of disappearing soon, even after some aggressive cutting. Whereas domestic rival Credit Agricole and German group Commerzbank have stepped up moves to dump their own piles of toxic assets, in spite of a bigger hit to profits, SocGen is seen treading a go-slow path. In the first three months of 2012, SocGen shed 2.1 billion euros of toxic assets, a marked slowdown from previous quarters and below the 5.9 billion cut by Credit Agricole and the 3.2 billion by Commerzbank."SocGen seems to have more difficulty in bringing down its exposure compared to peers," Credit Suisse analyst Maxence Le Gouvello said. UNDERVALUED

This matters in a world where investors are shunning bank risk. Though SocGen shares have outperformed those of its peers in the year to date by almost 3 percent - partly because the bank is less exposed to euro zone trouble spots such as Greece and Italy than domestic rivals - they trade at 0.36 times the bank's tangible-asset value, the sixth-worst in a 50-strong sector. By comparison, Britain's Barclays trades at 0.5, BNP Paribas at 0.6 and Swiss bank UBS at 1.0. The range runs from 0.2 to 2.62. The ratio measures how much value investors place on a bank's existing tangible assets, excluding intangibles such as goodwill. The lower the ratio, the lower the market's valuation of the bank's loan book, investments and other assets. Some say SocGen's toxic-asset strategy is to blame, stoking fears of future losses as the economy slows and as tougher Basel III capital rules make it more expensive to hold risky loans.

"Investors are asking themselves, 'should we buy a bank carrying these risky assets, which are going to cost even more in capital under Basel III?'" said Kepler Capital Markets analyst Benoit Petrarque."It's hard enough for them to buy into banks at the moment, let alone those that have atypical risks."A SocGen spokeswoman denied the bank had slowed its clean-up effort, saying it had cut its risk-adjusted balance sheet by around 15 billion euros from the start of the year through June 13, against a 16-billion reduction in the second half of 2011. SocGen's quest to slim down has also seen it agree to sell a chunk of its shipping loans to Citigroup. She said SocGen was minimising losses and improving balance-sheet strength through targeted cuts of junk assets in the bad bank, which it saw as less painful than wiping the slate clean in one go."Selling the (bad bank's) better-quality assets would destroy capital through to 2013," she said.

LANCE THE BOIL SocGen has been toiling for years to lance the boil built up by the pre-2008 boom, when banks and investors gorged themselves on sliced, diced and repackaged debt that appeared to keep risk to a minimum. Since 2009, SocGen's portfolio of toxic assets has been cut by 34.8 billion euros, or two-and-a-half times the size of the entire bank's current market value of 13.9 billion. Some say the situation is redolent of indecision within SocGen, which under Chief Executive Frederic Oudea tried to follow a growth path after 2009 but was forced into a chokehold of cost cuts as the euro debt crisis flared up in 2011."There's been a long-running clash between the corporate and investment bank - which believes it can take its time, get a good valuation for the assets and sell them at the right price - and the part of SocGen that wants to get rid of the whole lot as quickly as possible," a London-based banking source said. For those analysts who are positive on SocGen shares, the bank's toxic assets should be seen as a source of potential capital improvement through careful cutting, not fire-selling. But for the bears, the bank's balance sheet has weak spots that do not bode well in a deteriorating economic environment."We remain cautious (on SocGen) in a tough market environment," said Morgan Stanley analyst Thibault Nardin.