Company Reports

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.

Danske published an improved guidance for its 2024 net profit, lifting the target from between DKK 20 billion to DKK 22 billion to between DKK 21 billion to DKK 23 billion. The bank flagged a continually strong credit quality and now expects small reversals of impairment charges for the second quarter of 2024. Previously, the bank guided for about 8 basis points of loan losses, or roughly DKK 1.4 billion, which would have been in line with its targeted through-the-cycle assumptions. Now, Danske believes that credit losses for the full year may not exceed DKK 0.6 billion. The better-than-expected credit quality outlook for this year is a positive development and may signal that although potentially strained, households and corporations will manage to service existing debts after a rapid rise in interest rates for the most part. We would also not be surprised if Danske's Nordic peers would show similar improved outlooks during their second-quarter earnings releases. We maintain our DKK 233 per share fair value estimate and narrow economic moat rating.

Swedbank reported fourth-quarter 2023 profit before tax of SEK 11.080 billion, down 3% sequentially. Overall, the quarter was good, rounding out a strong 2023 for Swedbank, supported by higher interest rates driving materially stronger net interest income through the year. We maintain our SEK 243 per-share fair value estimate and narrow economic moat rating.

We are raising our fair value estimate for Swedbank to SEK 243 per share from SEK 207 previously after refreshing our model. Apart from the time value of money since our last model update, we believe that Swedbank's midcycle profitability has structurally improved. While we previously believed that the bank could achieve about 12% in returns on equity through the cycle, we now believe 13% is more likely. Although interest rates are set to fall this year, we believe they will settle above previous levels, allowing for greater net interest margins than Swedbank achieved over the past decade. Our narrow moat rating is unchanged.

Swedbank is one of the largest retail banks in Sweden and the largest in the three Baltic states. While its foundation is based in Swedish savings banks, a position that still benefits Swedbank today and is part of the rationale for our narrow moat rating for the lender, its dominant presence in the Baltics is owed to the acquisition of Hansabank in 2005. Since then, Swedbank has transformed both its Swedish and Baltic lending arms into highly efficient banking operations, taking advantage of economic growth in the Baltics, a booming real estate market in Sweden, and digitalisation initiatives to improve efficiency. As a result, Swedbank has been one of the best-performing Swedish banks over the last few years.

We maintain our SEK 207 per share fair value estimate for Swedbank after the bank reported first-quarter operating profits before tax of SEK 9,681 million, up 13% on a sequential basis. Owed to its low cost/income ratio (37%), the bank was able to offset 14% higher expenses with 9% higher income. The culprit for the increased expense line was found in the SEK 850 million fine Swedbank received for an IT incident in April this year. Underlying expenses excluding fines, which we don't view as recurring, decreased 2% to SEK 5,520 million. Income generation in the quarter of SEK 17,387 million was good overall, with higher net interest income of SEK 11,936 million versus SEK 10,918 million a quarter ago standing out. Higher deposit margins more than making up for weaker product margins, both driven by rising interest rates, drove the bulk of this quarter's NII performance. Credit impairments of SEK 777 million, or 16 basis points, still speak to an overall benign credit risk environment. Of the total SEK 777 million, Swedbank added SEK 198 million to its reserves beyond what its models predicted. We maintain our narrow-moat rating.

Stress has returned to the European banking system less than a week after a solution for Credit Suisse had been announced. Shares in European banks have traded down through March 24 around midsingle digits, with Deutsche Bank taking the brunt of it, down 15% at its lowest point intraday. We maintain our fair value estimates and moat ratings across our European banking coverage. Allianz remains our Best Idea. Admiral is one of our top picks

With Credit Suisse shoring up liquidity, concerns around a banking crisis spreading in Europe have been firmly planted. While we expect that the next days and weeks will remain volatile, we do not currently see a liquidity crisis spreading through the European banking system. The issues at Credit Suisse are idiosyncratic in nature and we believe containable for now even in a worst-case scenario. With capital and liquidity levels high across the board, asset quality still good, and regulators much better equipped than 15 years ago to quell any sparks, we believe European banks are solid. The major caveat being that developments are currently happening at a rapid pace and views we form today may be stale tomorrow. We believe investors are best placed in European banks with a greater retail focus and a sound profitability outlook. We would highlight BBVA, Handelsbanken, ING, and Lloyds.

We do not believe investors should view the collapse of U.S.-based Silicon Valley Bank as a read-through of the health of European banks' balance sheets. Nevertheless, banks remain highly reliant on the confidence of depositors and other funders. It would be foolish to say there is no contagion risk for European banks, especially if other global banks run into trouble. The current uncertainty could also push up the cost of funding and increase the rate at which European banks pass on higher interest rates to depositors. But we believe it is vital for investors to take note of the contrasts between European banks' and SVB's balance sheets.

Narrow-moat Swedbank reported fourth-quarter 2022 operating profits before tax of SEK 8,571 million, up 19% compared with the same period a year ago. The good performance was entirely driven by higher net interest income (up 31%), which more than offset weaker other income lines as well as higher expenses. Credit impairments of SEK 679 million, or 14 basis points, were slightly elevated compared with levels over the last couple of quarters, albeit still below our 20-basis-point midcycle assumption. We maintain our SEK 207 per-share fair value estimate.

Narrow-moat Swedbank reported third-quarter profits before tax of SEK 7,180 million, up 23% the SEK 5,854 million the bank posted a quarter ago. The strong performance was the result of total income growing 21% to SEK 14,030 million while operating expenses were kept in check at SEK 5,329 million, up 2% only. The cost/income ratio came in at a strong 38% in the quarter, while credit impairments were significantly higher at 13 basis points or SEK 602 million compared with previous quarters. That said, the majority of these loan-loss charges were the result of harsher forward-looking macroeconomic scenarios used in the bank's risk models rather than a deterioration of observed credit quality. We maintain our SEK 207 per share fair value estimate.

Swedbank is one of the largest retail banks in Sweden and the largest in the three Baltic states. While its foundation is based in Swedish savings banks, a position that still benefits Swedbank today and is part of the rationale for our narrow moat rating for the lender, its dominant presence in the Baltics is owed to the acquisition of Hansabank in 2005. Since then, Swedbank has transformed both its Swedish and Baltic lending arms into highly efficient banking operations, taking advantage of economic growth in the Baltics, a booming real estate market in Sweden, and digitalisation initiatives to improve efficiency. As a result, Swedbank has been one of the best-performing Swedish banks recently.

Narrow-moat Swedbank reported second-quarter operating profits of SEK 5,854 million, in line with consensus collected by the bank itself prior to the release. Performance in the quarter was decent, with total income growing 1% to SEK 11,612 million versus last quarter. Net interest income, up 5%, stood out positively and more than offset slightly weaker net commission income and lower net gains and losses in the quarter. We updated our model with these results and change our fair value estimate slightly upward to SEK 207 per share from SEK 203 previously.

Swedbank is one of the largest retail banks in Sweden and the largest in the three Baltic states. While its foundation is based in Swedish savings banks, a position that still benefits Swedbank today and is part of the rationale for our narrow moat rating for the lender, its dominant presence in the Baltics is owed to the acquisition of Hansabank in 2005. Since then, Swedbank has transformed both its Swedish and Baltic lending arms into highly efficient banking operations, taking advantage of economic growth in the Baltics, a booming real estate market in Sweden, and digitalisation initiatives to improve efficiency. As a result, Swedbank has been one of the best-performing Swedish banks recently.

For the first quarter, narrow-moat Swedbank reported profits before tax of SEK 5.8 billion, 1% above company-collated consensus. On a sequential basis, total expenses were seasonally lower and in line with consensus estimates. However, profits before tax declined 4%, primarily due to credit impairments, bank taxes, and resolution fund fees that doubled. We don’t anticipate making any immediate changes to our forecasts on the back of this update, and we're maintaining our SEK 203 fair value estimate.

For the fourth quarter, Swedbank reported profits before tax of SEK 5.97 billion, in line with consensus estimates collected by the group. On a sequential basis, profits before tax declined 12% caused primarily by higher operating expenses. Higher staff costs, marketing activities, and IT spend were the main culprits. Expenses in the fourth quarter tend to be seasonally higher caused by increased investment spend in particular. That being said, this performance did stick out negatively. Income generation was decent, declining 1% on slightly lower lending margins being partially offset by higher lending volumes. Net commission income showed a strong quarter (up 6%) on high equity issuance activity and increasing assets under management. This was, however, offset by lower results in fixed income trading. We maintain our SEK 203 fair value estimate per share and narrow moat rating.

Swedbank is one of the largest retail banks in Sweden and the largest in the three Baltic states. While its foundation is based in Swedish savings banks, a position that still benefits Swedbank today and is part of the rationale for our narrow moat rating for the lender, its dominant presence in the Baltics is owed to the acquisition of Hansabank in 2005. Since then, Swedbank has transformed both its Swedish and Baltic lending arms into highly efficient banking operations, taking advantage of economic growth in the Baltics, a booming real estate market in Sweden, and digitalisation initiatives to improve efficiency. As a result, Swedbank has transformed itself into the best-performing Swedish bank recently.

Narrow-moat Swedbank reported third-quarter profit before tax of SEK 6.81 billion versus SEK 6.85 billion a quarter ago. In an uneventful quarter, total income came in flat while expenses increased by 1%. Equally, credit losses of SEK 18 million versus a credit of SEK 27 million in the second quarter, barely had an impact. We increase our fair value estimate to SEK 203 per share from SEK 192 previously, although primarily driven by the time value of money since our last model update.

Swedbank showed a solid performance in the 2021 European Central Bank stress test. In the adverse scenario, its common equity Tier 1 ratio declined from 17.5% in 2020 to 14.9% in 2021, which was the lowest point its capital ratio reached over the three-year stress horizon. This is comfortably ahead of the 12.4% minimum requirement that regulators believe is necessary to prepare the bank for economic hardship. Swedbank was the least-affected bank across the 18 banks under our coverage that participated in this year’s stress test. Its CET 1 ratio declined 14.7% versus an average drop of 30.2% across our coverage. Also, the composition of the ratio decline is promising. Its risk-weighted assets only increased 5.9% during the stress, suggesting that Swedbank’s internal risk models are robust, while its capital base shrank only 9.6%. In this scenario, Swedbank would only post a loss in one out of three years, driven primarily by a spike in credit losses. In the remaining years, Swedbank’s strong profitability was able to offset such loan losses. We maintain our SEK 192 fair value estimate and narrow moat rating.

We maintain our SEK 192 per share fair value estimate and narrow moat rating for Swedbank after the bank reported a good second quarter. Performance in the quarter was driven primarily from card and payments income returning as the economy has begun opening up and activity recovered. Net interest income, on the other hand, was flat, as lower margins on Swedish mortgages offset volume growth and a positive contribution from treasury. In total, operating income grew 4%, compared with the first quarter this year. This led to a positive operating leverage effect as expenses of SEK 4.9 billion were kept in check and are on track for meeting the full year underlying cost guidance of SEK 20.5 billion. Loan loss reversals of SEK 27 million, or 1 basis point of total loan volumes, also supported the good results this quarter. This performance resulted in a respectable 14% return on equity.