Société Générale's Q1 2024 earnings call was a masterclass in calculated ambiguity. While analysts focused on parsing the nuances of French Retail NII guidance and the impact of recent disposals, a subtle, yet powerful message was being conveyed: Société Générale is amassing a capital war chest, and a significant return to shareholders could be imminent.

The bank's capital build is progressing at a healthy clip. Despite regulatory headwinds, including TRIM and ongoing on-site inspections, Société Générale expects to comfortably reach its year-end CET1 target of 13%. This projection, however, doesn't factor in the substantial capital boost from the recently announced disposals of equipment finance and Moroccan activities, estimated to generate 40 basis points at closing.

With these disposals, Société Générale is poised to surpass its 13% target, potentially reaching a CET1 ratio closer to 13.4%. During the earnings call, CEO Slawomir Krupa hinted that the bank's 'comfortable buffer' above its MDA might currently be 'conservative', suggesting that the bank is deliberately building excess capital.

Société Générale is provisioning for a 50% payout ratio, the higher end of its 40%-50% range. This is a regulatory requirement when a company has a range, but it also signals the potential for a larger payout. Notably, the bank is already implementing a share buyback program, albeit capped at 10% of net income. This suggests a willingness to return capital, even before exceeding its target.

The article puts forth a compelling hypothesis: Société Générale is quietly overachieving on its capital build, aiming for a year-end CET1 ratio well above 13.4%. This excess capital could pave the way for a sizable shareholder return, potentially exceeding the current 50% payout ratio, through a combination of dividend increases and amplified buybacks.

Announcing a substantial capital return amidst ongoing regulatory scrutiny could attract unwanted attention.

By subtly hinting at its capital strength, Société Générale may be engaging in a whisper campaign, managing market expectations and building anticipation for a significant announcement in early 2025.

Assuming Société Générale achieves a year-end CET1 ratio of 13.4% and maintains its current buyback program, it could have over €1.5 billion in excess capital available for distribution. A 60% payout ratio, incorporating a 20% buyback component, would translate to a total shareholder return of over €2.7 billion, a substantial increase from the current trajectory.

This scenario is further bolstered by the anticipated clarity on regulatory headwinds expected in 2025. With Basel IV fully implemented and the outcome of on-site inspections known, Société Générale could confidently reassess its capital requirements and potentially announce a more aggressive distribution policy.

Société Générale has consistently prioritized a stable and growing dividend, even during periods of market turbulence. This commitment to shareholder value reinforces the likelihood of a significant capital return once the bank has achieved its desired capital buffer.

While the market remains fixated on short-term NII fluctuations and disposal impacts, Société Générale is playing a longer game. The bank's under-the-radar strategy, concealed beneath a veil of strategic ambiguity, may be its best-kept secret, and one that shrewd investors would be wise to watch closely.

"Fun Fact: Société Générale was founded in 1864, making it one of the oldest banks in France. Its history spans over 150 years, marked by periods of economic prosperity, global crises, and continuous adaptation to the evolving financial landscape."