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SEB (Buy, TP: SEK112.00) - Defying ROE gravity

Defying ROE gravity In a banking sector characterised by broad pressure on profitability, SEB stands out by delivering a high and rising ROE (13.8% adjusted in 2019, up 40bp YOY) with a still-strong capital position. Our 2021–2022 earnings forecasts are broadly intact and 7% above consensus, driven by more bullish NII forecasts. We reiterate our BUY and SEK112 target price. Q4 review. SEB reported a strong Q4 with a 15.5% ROE, up 3%-points YOY, driven by higher revenues across all lines boosted by higher rates, rising stock markets and strong loan volume growth. A higher ordinary DPS of SEK6.25 (SEK6.00) was proposed at a payout ratio of 67%. SEB also improved its CET1 ratio by 120bp QOQ to 17.6% – 250bp above its minimum requirement – thus positioning the bank well to meet continued lending volume growth as well as raised capital requirements. We expect SEB to continue to deliver on its cost target. The main weak spot in the Q4 report, in our view, was costs, which were up 8% YOY, and management acknowledged regulatory costs for 2019 were cSEK200m higher than in its plan. Despite some front-loading of regulatory costs relative to the current plan, management stood firm on the SEK23bn cost target for 2021 (SEK23.3bn on current FX). We find that SEB has a good track record of executing on its cost targets and expect it to continue to prioritise doing so, even if that comes at the expense of other planned revenue-generating investments. We forecast 11% NII growth in 2020e. SEB guided that it expects the reduced Swedish resolution fund fee to benefit NII by SEK600m in 2020, and that the rate hike will benefit NII by SEK1bn gross of loan margin pressure (we model SEK600m net of loan margin pressure). In addition, the outlook for continued corporate and household loan volume growth remains healthy, in our view (we forecast 5% total loan growth for 2020). Our 2020e NII represents 11% YOY growth and is SEK1.1bn above consensus. BUY and SEK112 target price reiterated. We have made limited changes to our earnings forecasts, with raised revenue estimates offset by slightly higher cost and loan loss forecasts. We consider SEB’s 2020e P/E of below 10x attractive, given: 1) an ROE above 13%; 2) the robust earnings growth outlook; and 3) the balance sheet strength.