Anticipated Revenue Declines And Shrinking Margins Could Harm Profitability

Key Takeaways

• Expansion into more physical locations and increased workforce in Sweden could strain resources, potentially lowering net margins if revenue growth lags behind investment.
  
• UK mortgage segment and broker partnerships may boost growth, but initial expenses could pressure profitability unless revenue increases significantly.
  
• Handelsbanken's resilient income generation, cost efficiency, and strong financials support revenue stability, profitability, and investor confidence.

Catalysts

Provides various banking products and services for private and corporate customers primarily in Sweden, the United Kingdom, Norway, the Netherlands, and internationally.

• The company's expansion into more physical locations in Sweden could lead to increased operating costs and potentially lower net margins if revenue growth does not match the investment required to support these branches.
  
• The focus on hiring additional employees, particularly replacing consultants with permanent staff for IT development, implies ongoing or increased salary and pension expenses, potentially impacting net margins negatively if not offset by accelerated revenue growth.
  
• The bank's continued investment in the UK mortgage segment and cooperation with nationwide broker firms for positive growth may mean higher initial expenses, pressuring net margins unless significant revenue uplift is achieved.
  
• Management's ongoing efficiency-enhancing measures focus on reducing headcount and operational costs, which, if not implemented effectively, could fail to achieve the desired improvement in earnings and maintain profitability.
  
• The geopolitical and economic uncertainties that justify maintaining a higher CET1 ratio could imply that any adverse events would affect revenue stability and overall financial health, making their earnings and capital returns less predictable.

Svenska Handelsbanken Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Svenska Handelsbanken's revenue will decrease by 0.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 43.1% today to 39.7% in 3 years time.
• Analysts expect earnings to reach SEK 24.3 billion (and earnings per share of SEK 12.73) by about August 2028, down from SEK 26.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK20.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.2x on those 2028 earnings, up from 9.2x today. This future PE is greater than the current PE for the GB Banks industry at 9.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.97%, as per the Simply Wall St company report.

Svenska Handelsbanken Future Earnings Per Share Growth

Risks

• Handelsbanken has shown resilience in its income generation despite sharp rate cuts by central banks, which could sustain revenue levels.
  
• The bank's efficiency measures have led to reduced running costs, which could support net margins and profitability.
  
• Increased lending and deposit volumes across all home markets may help stabilize net interest income and boost revenue.
  
• Growth in fee and commission income, especially from the savings and mutual funds business, adds a strong, capital-light income stream, enhancing earnings.
  
• The strong CET1 ratio and dividends indicate solid financials, potentially ensuring investor confidence and maintaining stock price stability.

Valuation

• The analysts have a consensus price target of SEK121.733 for Svenska Handelsbanken 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 SEK145.0, and the most bearish reporting a price target of just SEK105.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK61.3 billion, earnings will come to SEK24.3 billion, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 10.0%.
• Given the current share price of SEK121.15, the analyst price target of SEK121.73 is 0.5% 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.