Sat. Jan 22nd, 2022

Sometimes asset allocation within a company can be distilled until the decision to own, lease or sell. Société Générale’s CEO, Frédéric Oudéa, has chosen to own a larger rental business. SocGen’s Paris-listed car rental company ALD will buy TDR Capital-owned competitor LeasePlan in a € 4.9 billion transaction, the bank announced Thursday.

The combination of cash and shares will create Europe’s largest car rental group, which is majority owned by SocGen. Markets like that idea that ALD shares rose 9 percent.

Consolidation follows a bumpy ride during the pandemic. Car rental has been affected by vehicle shortages and less demand from businesses as well as new entrants. ALD’s share price went sideways for five years.

Car rental remains attractive to SocGen as a way to add more expensive loans to its books. Oudéa’s shareholders can use this elevator. The bank’s share price has halved since taking control in 2008.

The € 2 billion cash prize for the transaction will be financed by a € 1.3 billion ALD rights issue and € 700 million in surplus capital. That should erode SocGen’s overall equity level-one ratio by 40 basis points, already relatively low among peers at 13.4 percent.

With expected cost savings of € 380 million annually by 2025, SocGen thinks the deal will add 80 basis points to return on equity by 2024, against current analysts’ expectations of 6.5 percent.

Other European banks are also keen on car financing. Santander’s US subprime car loan business, once a troubled child for the Spanish bank, was its most profitable unit last year. Crédit Agricole entered into a joint venture with Stellantis in December to expand its rental fleet.

European banks undoubtedly want to offset persistently low regional interest rates, and understandably car rental offers one way. But improved lending margins run a risk. The industry has shifted to more risky, private leasing rather than the more stable commercial side. This suggests that SocGen cannot rely on these types of loans to revive its dying core businesses.

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