Swedbank Earnings: Improving Economic Outlook Drives Loan Loss Reversals

Swedbank's second quarter was decent. The bank posted a return on equity of 17.5%. As expected, the first cuts of interest rates in Sweden and the Euro Area as well as further deposits shifts toward higher interest-bearing deposits weighed on net interest income, which declined 3% on a sequential basis. Operating expenses increased 5% driven by salary adjustments and IT investments, displaying a similar performance as we have seen at peers recently. Net commission income carried by a strong asset management fee performance on improving equity markets was positive, although not enough to offset the decline in net interest income. Nevertheless, total income increased 1% as net gains and losses on financial items posted a good quarter. Given the volatile nature of this last line item, however, and with further rate cuts on the cards for the second half of the year, income generation has likely peaked already. Lastly, loan loss reversals of SEK 289 million drove a strong bottom-line performance for the quarter, although this again is not a tailwind investors should expect to last. An improving economic outlook has allowed Swedbank to release provisions for bad debts it had taken earlier. The bank also lowered its management overlay by SEK 43 million. We maintain our fair value estimate of SEK 243 per share and narrow economic moat rating.