Aiming For Leadership In Private Banking Could Open Opportunities But Faces Execution Risks

Key Takeaways

• Avanza's expansion and innovation strategies come with execution risks and potential net margin compression due to increased operational costs.
  
• Market conditions and regulatory environments pose risks to their growth goals, affecting revenue and earnings stability.
  
• Strong customer satisfaction, innovative tools, fund growth, favorable macroeconomics, and strategic expansion could drive Avanza Bank Holding's revenue and profitability.

Catalysts

Offers a range of savings, pension, and mortgages products in Sweden.

• Avanza Bank Holding is aiming for market leadership in Private Banking, occupational pensions, and plans to establish themselves in at least one additional European market, which could lead to increased revenue streams, but also comes with significant execution risk that may impact earnings if not managed efficiently.
  
• The company's strong push for innovation, including cloud migration and automation of processes, suggests ongoing investment in technology that may compress net margins in the short-term due to increased operational costs.
  
• Avanza's ambition to grow savings capital in Sweden by 15% annually involves assuming favorable market conditions, which could pose risks to revenue and net profit projections if these conditions do not materialize.
  
• While the increased trading activity, especially in foreign and cryptocurrency markets, generates higher brokerage fees, this could inject volatility into earnings if market trends reverse or if foreign exchange and regulatory environments become less favorable.
  
• The company's ongoing strategy to reduce costs to savings capital ratio over time implies sustained cost efficiencies, but investment-heavy years initially forecasted may put pressure on earnings until these efficiencies are realized.

Avanza Bank Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Avanza Bank Holding's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 52.5% today to 54.5% in 3 years time.
• Analysts expect earnings to reach SEK 2.7 billion (and earnings per share of SEK 17.86) by about January 2028, up from SEK 2.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.3x on those 2028 earnings, down from 22.4x today. This future PE is lower than the current PE for the GB Capital Markets industry at 22.9x.
• Analysts expect the number of shares outstanding to decline by 1.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.42%, as per the Simply Wall St company report.

Avanza Bank Holding Future Earnings Per Share Growth

Risks

• Avanza Bank Holding's strong customer satisfaction and high engagement could bolster revenue and retention, providing stability and growth potential in a competitive market.
  
• The company's innovation, such as improved tools for technical and fundamental analysis, may enhance the user experience and attract more active trading customers, positively impacting revenue streams.
  
• Avanza's fund business shows significant growth, with net inflows into funds increasing by 76%, offering a stable income source that could support earnings in fluctuating market conditions.
  
• The favorable macroeconomic outlook in Sweden, including lower rates and inflation, could enhance the financial situation of households, potentially increasing savings and investment activities, which may uplift Avanza's revenues.
  
• Avanza's strategic ambitions, including expanding into an additional European market and strengthening leadership in Private Banking and occupational pension, could open new revenue streams and market opportunities, supporting overall growth and profitability.

Valuation

• The analysts have a consensus price target of SEK280.82 for Avanza Bank Holding 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 SEK400.0, and the most bearish reporting a price target of just SEK200.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK5.0 billion, earnings will come to SEK2.7 billion, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 5.4%.
• Given the current share price of SEK320.9, the analyst's price target of SEK280.82 is 14.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.