Tactical Hedge Contributions And Asset Quality Propel A Bright Future For Banking Growth

Key Takeaways

• Effective management of interest rate sensitivities and cost reductions could enhance net margins and profitability.
  
• Loan growth, improved asset quality, and solid capital positions suggest potential revenue uplift and shareholder returns.
  
• Banco de Sabadell faces revenue stability challenges from declining noninterest income, increased deposit costs, and inconsistent growth due to tax and seasonal factors.

Catalysts

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

• The bank's ability to maintain resilient net interest income through effectively managing interest rate sensitivities and structural hedge contributions, particularly TSB's hedge anticipated to add GBP 100 million annually in 2025 and more in subsequent years, may buoyance future earnings.
  
• The ongoing reduction in the cost base, highlighted by TSB's efficiency plan targeting 3% cost reductions in both 2024 and 2025, could enhance net margins and improve profitability targets.
  
• Loan volume growth, especially in mortgages and consumer loans, coupled with strategies to increase customer engagement, suggests potential revenue uplift from increased lending activity.
  
• Enhanced asset quality, as indicated by improved non-performing assets and cost of risk metrics, suggests a healthier balance sheet which can reduce future provisions and increase net margins.
  
• Solid capital positions, including strategic securitization activities, might provide sufficient room for further shareholder remunerations and investments to drive revenue growth.

Banco de Sabadell Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Banco de Sabadell's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 27.7% today to 22.7% in 3 years time.
• Analysts expect earnings to reach €1.4 billion (and earnings per share of €0.29) by about November 2027, down from €1.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €1.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.7x on those 2027 earnings, up from 6.6x today. This future PE is lower than the current PE for the GB Banks industry at 12.8x.
• Analysts expect the number of shares outstanding to decline by 3.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.42%, as per the Simply Wall St company report.

Banco de Sabadell Future Earnings Per Share Growth

Risks

• The bank's noninterest income faces challenges, as fees decreased year-on-year partly due to lower revenues from service fees, potentially impacting future revenue stability.
  
• The international business loan book declined during the quarter by 3.7%, driven by weaker lending activity in Mexico and regional currency volatility, which could affect the bank's overall earnings.
  
• While the U.K.'s TSB has shown growth, the cost of deposits increased, reflecting potential headwinds in managing interest expenses and affecting net margins.
  
• The positive trend in customer loans in Spain is partly offset by typical seasonality and special tax considerations, suggesting future revenue growth may not be consistent.
  
• Banco Sabadell's capital optimization efforts, such as securitizations, indicate a need to manage regulatory capital requirements, potentially impacting net margins if not carefully managed.

Valuation

• The analysts have a consensus price target of €2.19 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 €2.8, and the most bearish reporting a price target of just €1.65.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €6.2 billion, earnings will come to €1.4 billion, and it would be trading on a PE ratio of 9.7x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of €1.83, the analyst's price target of €2.19 is 16.5% higher.
  
• 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.