Declining Loan Demand And Rising Costs Will Pressure Future Bank Earnings

Key Takeaways

• Swedbank's growth may be constrained by stable private mortgage demand and reduced corporate lending, affecting future revenue projections.
  
• Strategic investments in digital and fraud prevention may initially raise costs, compressing profit margins before enhancing efficiency or capacity.
  
• Swedbank's stable financial performance, market leadership, and cost-cutting measures suggest potential revenue growth and earnings stability, contradicting expectations of a share price decrease.

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.

• Investors might perceive Swedbank's revenue growth as limited due to muted loan demand in key markets like Sweden, where private mortgage lending has been stable, and corporate lending has decreased. This could impact future revenue growth negatively.
  
• The net margins could face pressure if the expected reduction in policy rates leads to a mismatch in asset and liability repricing, potentially affecting the bank's net interest income negatively.
  
• Swedbank's heavy reliance on transaction accounts with zero interest rates means that in a declining rate environment, the bank may not be able to pass on cost savings efficiently, impacting net interest margin stability.
  
• Despite strategic investments to strengthen areas like fraud prevention and digital platforms, these initiatives could increase operational costs in the short term, potentially compressing profit margins before they deliver expected efficiency gains or boosts in advisory capacity.
  
• If geopolitical uncertainties or economic downturns worsen, they could lead to increased credit impairments and risks, negatively impacting Swedbank's earnings and return on equity targets despite current solid credit quality indications.

Swedbank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Swedbank's revenue will decrease by -3.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 46.9% today to 39.6% in 3 years time.
• Analysts expect earnings to reach SEK 26.0 billion (and earnings per share of SEK 23.97) by about December 2027, down from SEK 34.7 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as SEK 31.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.0x on those 2027 earnings, up from 7.1x today. This future PE is lower than the current PE for the GB Banks industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 1.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.44%, as per the Simply Wall St company report.

Swedbank Future Earnings Per Share Growth

Risks

• Swedbank's strong financial performance and conservative lending approach indicate that its revenue and credit quality remain stable, which could support future earnings stability and contradict expectations of a share price decrease.
  
• The anticipated economic growth in Swedbank’s home markets, with strong public finances, real wage growth, and competitive business sectors, may bolster revenue and profit margins, positively impacting share prices.
  
• Swedbank's market leadership in mortgages across all home markets and continued expansion in lending and deposits in the Baltics could enhance revenue growth and net interest margins.
  
• Successful cost-cutting measures, including a temporary hiring freeze and reduced consultancy costs, have decreased the cost-to-income ratio, potentially improving net margins and supporting profitability.
  
• Positive assessments by rating agencies, such as the upgrade from Standard & Poor's on Swedbank's outlook, reflect improved credit quality and capital strength, which could support earnings stability.

Valuation

• The analysts have a consensus price target of SEK 238.31 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 SEK 271.0, and the most bearish reporting a price target of just SEK 214.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be SEK 65.6 billion, earnings will come to SEK 26.0 billion, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 9.4%.
• Given the current share price of SEK 219.4, the analyst's price target of SEK 238.31 is 7.9% 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.