Morningstar | Swedbank Continues to Deliver Good Results in 2Q; FVE Maintained
Swedbank posted net income of SEK 11 billion for the first half of 2018, indicating a 12% increase year over year, which is higher than our expectations. The main drivers of the beat are credit impairments coming in substantially below our estimates and better-than-expected trading results. We increase our earnings estimates for 2018 by 6% to reflect the better-than-expected performance, but our longer-term expectations are intact, with credit losses in particular set to normalise from their unnaturally low current levels. We maintain our fair value estimate at SEK 232, along with our narrow moat rating.First-half net interest grew by 4% on the year-ago period, in line with our expectations. The main driver of net interest income growth was higher lending volumes, mostly in Sweden. The 7% increase in net commission fees was supported by favorable conditions in asset management--raising equity prices--and the PayEx acquisition. Another positive item during the quarter was trading income, which saw a 13% increase. Trading income during the first half of 2018 was supported by good results at the group treasury function.
Credit impairment in the second quarter was a positive surprise, contributing favourably to the net income increase compared with the first half of 2017. The Baltic banking and large corporates and institutions segments reversed their previous provisions, while Swedish banking decreased credit impairments. A credit in the P&L on the impairment line is obviously not sustainable, and impairments will normalise. Swedbank highlighted that Swedish house prices stabilised following the decline seen in 2017, but this could be the canary in the coal mine when it comes to future credit impairments.
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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