Morningstar | SWED A Updated Forecasts and Estimates from 18 Jan 2019
Swedbank reported good third-quarter results, in line with our expectations. We maintain our fair value estimate of SEK 232 and our narrow moat rating. The good performance this quarter stemmed from loan growth of 6% year over year, stronger commission income, and a tailwind from other income offsetting lower net gains on financial instruments. Net interest income grew to SEK 6,326 million from SEK 6,208 million in the year-ago period. Strong inflows in asset management, positive asset value development, and good card performance contributed to net commissions recording 13% higher income than last year. The insurance business charged higher premiums while paying out a decreased amount for claims, further supporting income growth this quarter. This positive performance on the income side was accompanied by controlled cost development. Staff expenses increased 2% year over year, while credit impairments remain at the low end of historical performance, as well as our long-term assumptions. We assume a long-term credit impairment ratio of 6 basis points versus the 3 basis points Swedbank recorded this quarter. In sum, net profits came in 16% higher at SEK 5.5 billion versus the year-ago quarter, resulting in return on equity of 16.9%. Swedbank remains well capitalized with a common equity Tier 1 ratio of 24.3%. Management holds about 280 basis points in additional capital above its requirements by regulators, which we believe is prudent and allows Swedbank operational flexibility.Management addressed the bank’s Baltic exposure in the earnings call to alleviate heightened unease regarding the involvement of Nordic banks in money-laundering activities in the region. The three Baltic states form the core regions for Swedbank, together with Sweden. We think management correctly pointed out that the share of nonresident deposits is not indicative of money-laundering activities; rather, individual transactions are, on a case-by-case basis. This topic remains a black box, however, and will remain a topic of discussion through the next quarters.
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.
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