Danish Central Bank Rate Cuts Will Adversely Impact Net Interest Income

Key Takeaways

• Lower deposit margins from expected rate cuts and strategic investments may compress net interest income and profitability.
  
• Normalizing value adjustments and stabilized asset growth could moderate short-term gains and fee income, impacting revenue streams.
  
• Jyske Bank's strategic acquisitions, revenue growth, and effective cost management highlight strong financial performance and potential for enhanced shareholder returns.

Catalysts

Engages in the provision of various financial solutions in Denmark and Germany.

• Investors may believe that Jyske Bank’s future revenue growth might be hindered by lower deposit margins due to expected rate cuts by the Danish central bank, impacting the net interest income adversely.
  
• The adoption of targeted strategic investments alongside rising inflation could potentially lead to a slightly higher cost base, compressing net margins and affecting profitability.
  
• Market expectations indicate a normalization in value adjustments compared to the strong preceding years, suggesting potential lower earnings from one-off positive events impacting short-term gains and earnings volatility.
  
• Despite robust historical asset growth, the anticipated stabilization and potential decline in momentum of asset under management (AUM) could moderate fee income growth, possibly affecting revenue streams.
  
• The bank’s significant capital distribution program may reflect investor expectations that internal growth opportunities may not sustain elevated earnings levels in the absence of reinvesting these funds into business expansion, which could reflect in the long-run earnings and return on equity (ROE) metrics.

Jyske Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Jyske Bank's revenue will decrease by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 35.9% today to 32.6% in 3 years time.
• Analysts expect earnings to reach DKK 4.2 billion (and earnings per share of DKK 77.5) by about April 2028, down from DKK 5.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as DKK3.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.0x on those 2028 earnings, up from 6.8x today. This future PE is greater than the current PE for the GB Banks industry at 6.9x.
• Analysts expect the number of shares outstanding to decline by 4.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.99%, as per the Simply Wall St company report.

Jyske Bank Future Earnings Per Share Growth

Risks

• Jyske Bank has recorded a significant increase in net fee income due to higher assets under management and an inflow of private banking customers, suggesting strong revenue potential from its wealth management sector.
  
• The consistent positive growth momentum in mortgage lending to personal customers, coupled with improved customer satisfaction, could positively impact Jyske Bank’s loan portfolio and interest income.
  
• With strategic acquisitions and integrations, such as those of Handelsbanken and PFA Bank, Jyske Bank has strengthened its position in the market, potentially boosting revenue growth and market share.
  
• The bank’s commitment to stable or slightly improving cost structures, amidst strategic investments and inflation, indicates effective cost management which can support net margins.
  
• A substantial capital return to shareholders through dividends and buybacks, driven by strong financial performance, reflects robust earnings and capital position that may support future stock performance.

Valuation

• The analysts have a consensus price target of DKK591.25 for Jyske Bank based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be DKK12.8 billion, earnings will come to DKK4.2 billion, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 6.0%.
• Given the current share price of DKK555.0, the analyst price target of DKK591.25 is 6.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.