Swedbank (Buy, TP: SEK171.00) - Turning the corner
Despite the negative numbers, we believe Swedbank’s Q1 report included signs of improving underlying performance, with increasing loan volume growth and approaching efficiency improvements as AML investigations are completed. We have raised 2021–2022e EPS by ~4%, and reiterate our BUY and SEK171 target price. Though we expect loan losses to stay elevated near-term, we expect asset quality to remain resilient, supported by a defensive profile with ~60% of lending for Swedish mortgages with limited credit risk. Q1 review. Swedbank reported negative pre-tax profit of ~SEK1.3bn in Q1, burdened by a SEK4bn AML fine (as pre-communicated). NII showed a handsome 4% QOQ growth supported by reduced resolution fund-fee and higher treasury results, benefiting from the Riksbank’s rate hike. Loan loss provisions came in close to the pre-announced guidance of SEK2.2bn, corresponding to an annualised loan loss ratio of 51bp. Loan volume momentum also improved, from a lacklustre trend in recent quarters, driven primarily by a SEK11bn increase in corporate loans. This came from rising demand at the end of the quarter (and continued in April, according to management), which should therefore benefit NII from Q2 and beyond, we believe. Costs reduction potential of 8% of pre-tax could be initiated next year. With AML investigations approaching an end, we expect Swedbank to increase efficiency efforts before year end. Management estimated that around 60% of the currently SEK3.15bn in elevated costs in 2020 (due to AML and Covid-19, among other things) are of temporary nature, and should eventually fall off. This translates into almost SEK1.9bn in potential gross cost savings, corresponding to 8% of our 2021e PTP. BUY and SEK171 target price reiterated. We have increased our 2021–2022e EPS by ~4% (2020e is unchanged) on raised revenue estimates. We reiterate our BUY as we find the P/BV discount of more than 10% attractive in relation to our expected ROE of above 12% in 2021–2022e. Our SEK171 target price is derived using a cost of equity of 10%, including a 50bp add-on (negatively affecting the valuation by more than SEK10bn) to reflect the risk of AML fines from the US authorities.Swedbank provides financial services and products in its home markets of Sweden, Estonia, Latvia and Lithuania. Co. has four segments: Swedish Banking, which is responsible for all its Swedish customers except corporates and financial institutions; Large Corporates and Institutions, which is responsible for large corporates, financial institutions and banks as well as for trading and capital market products; Baltic Banking, which operates in Estonia, Latvia and Lithuania; and Group Functions and Other. At Dec 31 2013, Co. had 731 branches and 1,396 automated teller machines. Also as of such date, Co. had total assets of SEK1.82 trillion and deposits of SEK620.85 billion.
DNB Markets is the investment banking arm of DNB Bank ASA and is focused primarily on the Nordic region, as well as internationally on niches such as global shipping, energy and related services, and seafood. DNB Markets offers services in FICC, Equities and Investment Banking advisory from offices in Oslo, Stockholm, London, Singapore and New York. Equity research coverage is offered on c250 Nordic companies. DNB was ranked no.2 in Extel Nordic Research 2017. The DNB Markets’ Credit and FICC Macro & FX Research teams are repeatedly highly rated by Prospera Nordic Institutional Investor Surveys.
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