Asset Quality Improvements And NII Strategies Will Secure Future Stability

Key Takeaways

• Increased earnings potential driven by growth in loans, customer funds, and a stable risk environment with improved asset quality.
  
• Strategic focus on shareholder returns and efficient international operations enhances share price growth and contributes positively to group profitability.
  
• Lower interest rates, market volatility, and increased competition could pressure margins and profitability, while new product rollouts pose execution challenges affecting revenue streams.

Catalysts

Provides banking products and services to personal, business, and private customers in Spain and internationally.

• The bank has seen strong growth in performing loans and customer funds, with a reported increase in market share. This indicates the potential for higher future revenues driven by expanded lending and deposit bases, which could lead to increased earnings.
  
• Asset quality improvements, including a significant reduction in non-performing assets (NPAs) and improved coverage ratios, suggest a more stable risk environment. Improvements in credit quality reduce the need for provisions, enhancing net margins and profitability.
  
• Banco de Sabadell is targeting a sustainable shareholder remuneration policy, including both cash dividends and share buybacks. Such capital returns could improve investor perception and support share price growth, thus enhancing earnings per share (EPS).
  
• The bank's international presence, particularly through TSB, is contributing positively to group profits, with TSB’s restructuring anticipated to lower costs and boost net profit by mid-teens in 2025. Efficiency improvements are expected to enhance net margins over time.
  
• The bank has a strategic focus on maintaining a resilient net interest income (NII) amidst changing interest rates by balancing fixed and variable loan rates and controlling deposit costs. Successful management of NII amidst interest rate fluctuations could stabilize revenue streams and support earnings growth.

Banco de Sabadell Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Banco de Sabadell's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.3% today to 25.1% in 3 years time.
• Analysts expect earnings to reach €1.6 billion (and earnings per share of €0.33) by about March 2028, down from €1.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.6x on those 2028 earnings, up from 8.6x today. This future PE is greater than the current PE for the GB Banks industry at 8.5x.
• Analysts expect the number of shares outstanding to decline by 0.97% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.0%, as per the Simply Wall St company report.

Banco de Sabadell Future Earnings Per Share Growth

Risks

• The bank's future revenue growth may be tempered by a lower interest rate environment, which could lead to a decline in net interest income (NII) and margins, impacting overall earnings.
  
• Potential market volatility and economic uncertainties, including the impact of geopolitical tensions and regulatory changes, could influence revenue projections and risk management strategies.
  
• The expected growth in volumes might necessitate adjusted risk management, such as increased provisioning or changes in asset quality, affecting net margins and ROE.
  
• There is a risk of increased competition in the banking sector in Spain and the broader European market, which could pressure interest margins and impact revenue growth and profitability.
  
• Execution risk related to new product rollouts, technology innovations, or changes in customer behavior could affect revenue streams and necessitate higher operational expenditures, impacting net margins and profitability.

Valuation

• The analysts have a consensus price target of €2.574 for Banco de Sabadell based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €3.0, and the most bearish reporting a price target of just €2.3.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €6.5 billion, earnings will come to €1.6 billion, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 9.0%.
• Given the current share price of €2.79, the analyst price target of €2.57 is 8.3% lower. 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.