SWDBY - Swedbank: Strong Net Interest Income Growth And Attractive Price/Book Ratio

2023-04-27 20:33:23 ET

Summary

• Swedbank AB has seen strong growth in net interest income over the year.
• Additionally, the stock looks attractive on a price to book basis.
• Despite risk, I take a bullish view on Swedbank AB.

Investment Thesis

I take a bullish view on Swedbank AB due to strong net interest income growth as well as an attractive price to book ratio.

Swedbank AB ( SWDBY ) is one of the largest banks in the Swedish market, alongside Handelsbanken ( SVNLF ) and SEB. The bank also has a strong presence in Lithuania, Estonia and Latvia.

We can see that while the stock has seen a strong rebound in upside over the last year - there has still been a significant decline from the highs seen in February:

The purpose of this article is to assess whether Swedbank could see renewed upside from here after the recent consolidation, particularly in light of recent results.

Performance

When looking at most recent performance for Q1 2023 (January-March) we can see that net interest income saw strong growth - up 77% on that of the previous year and up by 9% on that of the last quarter:

While expenses over the year were up by 30%, profit for the period was still up by 69%.

The bank has clearly benefited from a rising interest rate environment, with no evidence to suggest that loan demand is slowing on the back of higher rates.

Additionally, it is interesting to note that when looking at the components of net interest income - loans to the public had more than doubled from 7.73 billion SEK in Q1 2022 to over 16.76 billion SEK in Q1 2023. Cash and balances with central banks also rebounded strongly from negative territory, reflecting increased deposit demand as a result of higher interest rates.

Moreover, the 26 percent increase that Swedbank saw in other income over the course of the year has been primarily down to higher profit of the insurance business across the Baltics.

Return on equity and earnings per share have also seen significant growth over the course of the year:

With total income having seen significant growth over the course of the year - it is notable that net interest income accounted for a larger portion of total income - up to 68% for Q1 2023 versus 60% for Q1 2022.

Risks and Looking Forward

Going forward, a significant determinant of growth for Swedbank is likely to be the extent to which net interest income can continue to grow from here.

When looking at Sweden's historical interest rate trajectory - we can see that interest rates are almost up to 4%, which is the highest level seen since the late 2000s.

In this regard, should interest rates continue to rise - then it remains to be seen whether loan demand will continue to remain steady or see a decrease as the cost of loans becomes more expensive.

Depending on the trajectory of inflation, if further rate rises are not deemed necessary for the foreseeable future - then the degree to which net interest income can rise ultimately depends on demand. Should we see broad economic growth start to recover, then it is plausible that growth in net interest income could continue.

From a valuation standpoint, we can see that Swedbank's price to book ratio is still trading below levels seen before 2020. In this regard, I take the view that Swedbank is attractively valued on this basis and there is scope for the stock to see a significant rebound if profitability continues to increase.

Conclusion

To conclude, Swedbank has seen strong growth in net interest income. The main risk at this point is that Swedbank becomes overly dependent on net interest income growth to sustain overall profitability. However, other income and net commission income have continued to see growth and the stock's price to book ratio indicates that the stock is trading at good value. From this standpoint, I take a bullish view on Swedbank AB.

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