Digital Rivalry And Demographic Challenges Will Weaken Profitability

Key Takeaways

• Increased digital competition and regulatory demands threaten the bank's revenue growth, margin stability, and long-term profitability.
  
• Overdependence on the Spanish market exposes Sabadell to demographic risks and limited expansion opportunities.
  
• Strong asset quality, profitability, capital strength, cost efficiency, and digital growth initiatives position the bank for sustainable earnings and reduced downside risks.

Catalysts

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

• The accelerating shift to digital and fintech disruptors is likely to intensify pressure on Banco Sabadell's core revenue streams and fee income, as nimble technology-first competitors erode market share in payments, consumer lending, and SME banking-undermining long-term profitability and compressing net interest and commission margins.
  
• The bank's heavy reliance on the Spanish domestic market exposes it to pronounced structural risks from Spain's demographic decline and aging population, which will suppress organic loan demand, limit customer base expansion, and ultimately weaken revenue growth despite recent positive loan book trends.
  
• Persistently low or volatile European interest rates threaten to lock in downward pressure on net interest margins, as seen in the recent year-over-year NII decline of 1.3 percent. With repricing of the loan book at lower rates and diminishing ability to offset this through volumes, sustained earning power and future NII are at risk.
  
• Ongoing and escalating regulatory demands, coupled with rising compliance and ESG-related costs, are set to substantially erode future profitability. These pressures will drive up operating expenses, limit capital flexibility, and potentially constrain expansion into more profitable but higher-risk sectors, deteriorating net margins.
  
• The company's digital transformation initiatives risk underdelivering relative to more agile fintech and big tech rivals, raising the likelihood of market share losses and persistent competitive pressure. This difficulty scaling digital platforms could undermine Sabadell's capacity to achieve sustainable fee and commission income growth, resulting in weaker long-term earnings and shareholder returns.

Banco de Sabadell Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Banco de Sabadell compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Banco de Sabadell's revenue will grow by 4.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 32.0% today to 23.9% in 3 years time.
• The bearish analysts expect earnings to reach €1.6 billion (and earnings per share of €0.34) by about July 2028, down from €1.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.7x on those 2028 earnings, up from 8.1x 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 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.09%, as per the Simply Wall St company report.

Banco de Sabadell Future Earnings Per Share Growth

Risks

• Sustained growth in high-margin segments such as consumer lending and SMEs, combined with significant technological and risk management improvements, is driving both revenue and improved risk-adjusted returns, which can continue to support stable or increasing net margins over the long term.
  
• The drastic improvement in asset quality, with the non-performing loan ratio falling to historic lows, material reductions in Stage 2 and Stage 3 exposures, and a robust provisioning and coverage ratio, points to lower credit losses that bolster earnings stability for the coming years.
  
• Enhanced capital generation capacity and a strong capital position (CET1 fully loaded ratio at 13.3% with rising tangible book value per share) coupled with increasing shareholder distributions and a resilient payout policy can support higher earnings per share, fueling positive share price dynamics.
  
• Ongoing cost efficiency initiatives, including technology-driven process optimization and UK subsidiary TSB's realization of operational synergies, are leading to slower expense growth relative to revenues, which can protect profit margins and underpin long-term profitability.
  
• Expanding digital banking, robust fee growth especially in asset management and insurance, along with proactive ALCO management and a diversified loan book, suggest secular competitive advantages that mitigate downside risks and can underpin sustained top-line and bottom-line growth well into the future.

Valuation

• The assumed bearish price target for Banco de Sabadell is €2.3, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Banco de Sabadell's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €3.8, and the most bearish reporting a price target of just €2.3.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €6.8 billion, earnings will come to €1.6 billion, and it would be trading on a PE ratio of 9.7x, assuming you use a discount rate of 9.1%.
• Given the current share price of €2.94, the bearish analyst price target of €2.3 is 27.7% lower.
• 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.