Morningstar | We Reinitiate on SEB; Fair Value Estimate of SEK 95
SEB’s focus on corporate lending and advisory banking services results in a healthy diversification between spread and fee-based income streams. We also like the group’s achievements in its efficiency programmes, keeping costs virtually flat for almost a decade. We find it difficult to close the gap between SEB’s ambition for a 15% return on equity and its current outlook. Profitability is lagging the largest segment, large corporates and financial institutions, while we believe the strong performance in the small corporates and private customer segment as well as the Baltics is partially supported by a currently benign credit environment. Additionally, we are more cautious on management’s ability to maintain the cost cap. The first step, to soften the cap, was taken in the last business plan update and we believe further risks of cost inflation exist. Now guidance excludes investments in the business and additional costs for anti-money-laundering staff could also be on the horizon. SEB has exploited its largest efficiency levers such as noncore divestments and branch closures. As a result, the group now has one of the smallest branch networks in the Nordics and management already acknowledged that any further closures may chip away at its small and medium enterprise business, which relies on close customer relationships through branches. As a result, we expect costs to trend upwards from here forcing it to turn toward its top line to drive earnings growth. Here we see more headwinds than tailwinds at the moment. While the move toward a bancassurance model and further investments in private banking services should be positive, we believe management’s target to regain market share in the Swedish mortgage market is ambitious and is likely to come at the cost of lower margins. Owing to its high dependency on wholesale funding, a lower-for-longer outlook on interest rates, and the first signs of slowing economies in Europe, we also do not expect macroeconomic tailwinds to lift earnings in the medium term. We therefore believe the 15% return on equity is likely to be the exception rather than the norm.Skandinaviska Enskilda Banken provides corporate, retail, investment and private banking services, as well as asset management and life insurance services. Merchant Banking provides wholesale and investment banking services to corporations and institutions. Retail Banking provides products mainly to private customers and small and medium-sized corporate. Wealth Management performs asset management and private banking activities and Life provides life, care and pension insurance. Division Baltic provides retail, asset management and private banking services in the Baltic countries. As of Dec 31 2013, Co. had total assets of SEK1,904.16 billion and total deposits of SEK821.47 billion.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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