Digital Transformation And Urbanization Will Unlock European Banking Potential

Key Takeaways

• Rapid improvements in loan growth, asset quality, and digitalization position Sabadell to outperform peers in revenue, margin expansion, and recurring high-margin fee income.
  
• Strong capital generation, robust liquidity, and planned extraordinary shareholder returns could lead to sustained outperformance and an upward stock re-rating.
  
• Weak digital investment, overexposure to Spanish SMEs, demographic headwinds, fintech threats, and rising regulatory burdens collectively constrain long-term profitability and growth prospects.

Catalysts

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

• While analysts broadly agree that Sabadell's loan growth and market share gains suggest higher future revenues, the continued double-digit annual growth in public sector lending and over 20 percent surge in consumer lending indicate the bank could meaningfully outperform current consensus revenue and capital generation expectations, especially as these segments carry lower risk-weighted assets and thus drive outsized returns on equity.
  
• Analyst consensus recognizes improvements in asset quality, but the rapid, ongoing reduction of non-performing assets by more than 20 percent year-on-year, combined with premium sales of foreclosed assets and a rising coverage ratio, suggest the bank could see an even sharper drop in provision needs and an acceleration in net margin expansion, outperforming peers.
  
• Sabadell's deepening digitalization and cost discipline, evidenced by sequential declines in costs despite wage inflation, position the bank to leverage European shifts toward cashless economies, potentially delivering long-term reductions in cost/income ratio and a robust uplift in recurring earnings as digital services scale and generate high-margin fee income.
  
• The strong pipeline of new mortgages and SME lending, combined with population growth and urbanization in Spain and the UK, positions Sabadell to capture outsized share of expanding retail and business banking demand, supporting above-peer performing loan growth and boosting net interest income over the coming years.
  
• The bank's strong liquidity, capital generation, and readiness to distribute an extraordinary €2.5 billion dividend from the TSB sale-on top of a 60 percent payout policy-create the potential for sustained and extraordinary capital returns, which could trigger a re-rating of the stock as Sabadell transforms its capital structure and delivers exceptional earnings per share growth.

Banco de Sabadell Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Banco de Sabadell compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Banco de Sabadell's revenue will decrease by 4.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 31.8% today to 30.4% in 3 years time.
• The bullish analysts expect earnings to reach €1.6 billion (and earnings per share of €0.37) by about August 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 bullish analyst cohort, the company would need to trade at a PE ratio of 16.6x on those 2028 earnings, up from 9.5x today. This future PE is greater than the current PE for the GB Banks industry at 9.9x.
• Analysts expect the number of shares outstanding to decline by 1.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.37%, as per the Simply Wall St company report.

Banco de Sabadell Future Earnings Per Share Growth

Risks

• Persistent below-peer digitalization and IT investment relative to larger banks and fintech challengers may erode Banco de Sabadell's cost efficiency and customer experience over the long term, likely putting sustained pressure on operating margins and overall profitability.
  
• Accelerating digital disruption and the ongoing entry of non-bank fintech competitors threaten to erode traditional market share and fee-based income streams, representing a structural headwind for future revenue growth.
  
• Heavy reliance on Spanish SME lending concentrates credit risk in a segment particularly vulnerable to local economic slowdowns or shocks, increasing the potential for higher loan loss provisions and compressing net income during downturns.
  
• Spain and other core markets face demographic challenges, including an aging and declining population, which could structurally limit new lending opportunities and reduce demand for banking services, ultimately constraining future growth in revenues and profits.
  
• Increasing regulatory expectations around ESG and sustainability, combined with stricter European capital and liquidity requirements, could drive up compliance costs and constrain risk-taking, acting as a long-term drag on return on equity and shareholder distributions.

Valuation

• The assumed bullish price target for Banco de Sabadell is €3.99, which represents two standard deviations above the consensus price target of €3.16. 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 bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €4.0, and the most bearish reporting a price target of just €2.3.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be €5.3 billion, earnings will come to €1.6 billion, and it would be trading on a PE ratio of 16.6x, assuming you use a discount rate of 9.4%.
• Given the current share price of €3.44, the bullish analyst price target of €3.99 is 13.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.