Morningstar | Swedbank Brings Good 2018 to Close With Mixed 4Q Results
Narrow-moat Swedbank brought a good 2018 to a close with somewhat mixed fourth-quarter results. Net profits declined 3% to SEK 4.6 billion compared with the fourth quarter last year, despite lower expenses and virtually flat net interest income. The culprits of these results can be found in weaker market conditions weighing on commission income as well as higher credit impairments. We are not overly concerned about this development at this stage, however, as it is in line with our expectations. Full-year net profits increased 9% to SEK 21.2 billion. We maintain our fair value estimate of SEK 232 per share and narrow moat rating.While global trade tensions keep grabbing headlines, depressing equity markets and therefore asset-management income, we urge investors to focus on more structural developments affecting Swedbank. Swedish housing construction slowed in 2018, and real estate prices have been sluggish. Nevertheless, loan volume related to Swedish housing grew 4% for the year, largely in line with our thesis of continued but slowed growth in Sweden. On the asset quality side, lower consumer confidence resulted in higher provisions in the Swedish banking and large corporate segments, which could not be offset by recoveries from the Baltics. Credit impairments for the quarter came in at 10 basis points compared with 3 basis points for the whole year. Although we do not believe that this is the new normal, we expect credit impairments to normalise starting next year towards our midcycle forecast of 6 basis points.
Swedbank is well capitalised with a common equity Tier 1 ratio of 16.3% versus a required 14.6%. Its outstanding cost/income ratio of 39% for the full year was in line with expectations.
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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