Geopolitical And AML Risks Will Plague Swedish Corporate Banking

Key Takeaways

• Expanding in the Swedish corporate sector may face challenges from geopolitical tensions, impacting business lending and revenue growth.
  
• Strategic moves toward sustainability and corporate client offerings could boost long-term growth despite short-term cost implications.
  
• Strong financial foundations and strategic initiatives in sustainability and cost control position Swedbank to sustain growth and profitability amidst economic uncertainties.

Catalysts

Provides various banking products and services to private and corporate customers in Sweden, Estonia, Latvia, Lithuania, Norway, the United States, Finland, Denmark, Luxembourg, and China.

• Swedbank's strategy to expand its presence in the Swedish corporate banking sector, potentially at the expense of household segments, may face challenges if geopolitical tensions and economic uncertainties affect business lending growth. This could impact revenue and earnings potential.
  
• The new partnership with SB1 Markets to enhance corporate advisory services indicates a strategic shift towards improving corporate client offerings, which could lead to higher revenue through expanded equity research and trading, but might also involve increased operational costs impacting net margins.
  
• The focus on creating a more integrated, omnichannel communication platform in Swedish Banking aims to improve customer service efficiency. While this could enhance customer satisfaction and potentially drive revenue growth, it requires maintaining cost discipline to avoid negative impacts on earnings.
  
• Swedbank's commitment to sustainability and their strategic moves to integrate this into core bank processes may incur investment costs in the short term but are seen as a significant business opportunity that can drive long-term revenue growth.
  
• The lingering uncertainty regarding potential fines from U.S. AML investigations creates a significant risk that could impact capital reserves and future earnings, thereby affecting Swedbank's stock valuation.

Swedbank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Swedbank's revenue will decrease by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 46.9% today to 40.9% in 3 years time.
• Analysts expect earnings to reach SEK 28.2 billion (and earnings per share of SEK 25.53) by about May 2028, down from SEK 34.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SEK34.3 billion in earnings, and the most bearish expecting SEK16.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.5x on those 2028 earnings, up from 7.8x today. This future PE is greater than the current PE for the GB Banks industry at 8.7x.
• 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 5.65%, as per the Simply Wall St company report.

Swedbank Future Earnings Per Share Growth

Risks

• Swedbank operates in strong home markets with robust public finances, low government debt, real wage growth, innovative companies, and profitable banks, suggesting a resilience that could positively impact revenue and earnings.
  
• Despite global economic uncertainties, Swedbank maintains a strong capital and liquidity position, as indicated by Moody's rating upgrade, potentially ensuring stable earnings and supporting the share price.
  
• The bank's successful establishment of a new Nordic investment bank, SB1 Markets, in partnership with SpareBank 1, can strengthen its capabilities in corporate customer service and could lead to increased revenue.
  
• Swedbank's focus on sustainability and their role in facilitating the transition to a sustainable society presents significant business opportunities that could enhance long-term revenue and profitability.
  
• Swedbank's strategic focus on cost control and efficiency, along with a strong loan portfolio and stable credit quality, position it well to sustain its net margins even in volatile conditions.

Valuation

• The analysts have a consensus price target of SEK245.647 for Swedbank 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 SEK271.0, and the most bearish reporting a price target of just SEK209.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK69.0 billion, earnings will come to SEK28.2 billion, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 5.6%.
  
• Given the current share price of SEK239.9, the analyst price target of SEK245.65 is 2.3% 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.