2023-03-23 03:22:21 ET
Summary
- I recently wrote an update on Handelsbanken - and now it's time to update on Swedbank as well. Swedbank is in a decent position, though not as good as its peers.
- I use the same strategy that I use on Handelsbanken - a substantial long added to by covered calls, and cash-secured PUTs when the price allows.
- My long-term stance on Swedbank is mixed - and here is why I'm cautious when it comes to adding and keeping shares.
Dear readers/followers,
If you followed my stance on Swedbank ( OTCPK:SWDBY ), you were able to make some very decent returns on the position. Since my article back in Scandal-fraught COVID-19 times, the bank has beaten overall S&P500 returns, and my position is significantly up, even if I didn't divest my position at the recent high, we saw only a week or two ago.
Instead, I use a strategy that adds to the near-double-digit yield I get from my long position through the use of strategically-placed covered call options, thereby bringing my current total effective yield to around 11%, provided the company doesn't reach share price levels of 226-235 SEK/share, at which point I would be selling (and happily so!).
This will be my first update on Swedbank in over a year - so let's look at what we have going for us here.
Swedbank - A thesis update, and why the bank may be riskier than is suggested
Now, those of you that follow my investments know that I like my financials - both banks and other companies in the sector, such as insurance, reinsurance, brokers, and the like. I consider myself not inept at finding good discounts in the sector, and I think I have the track record to prove it.
Swedbank is the largest bank in the Nordics. Handelsbanken ( OTCPK:SVNLF ) is more qualitative, there is no doubt here as far as that goes - but Swedbank is larger.
And like any Swedish bank, Swedbank is a conservative allocator and manager of capital. It has class-leading RoE, good cost efficiencies, not as good risk management as Handelsbanken , but close to it, and superb buffers coupled with attractive dividend payouts.
If you read my latest piece on Handelsbanken , you'll know that Swedbank's CET-1 is below that one, but it's still conservative. It has access to by far the largest customer base in the Nordics, with 7,000,000 private customers and over 550,000 corporate ones. 85% of the company's loan book is in Sweden, and 13% is in the Baltics. It has ongoing partnerships with 58 Savings banks which in turn are part of the umbrella of the company.
Swedbank has leading liquidity and LTD ratios...
...and despite higher impairment ratios than the 0.00% found in Handelsbanken, it's nothing, as I see it, to be particularly worried about. If you've read my articles, you know that the company is relatively fraught with scandals over the past couple of years. This is an important fact to remember - though Swedbank now presents three years' worth of focus on strengthened KYC, Compliance, culture, and governance.
My anecdotal evidence which I take from having been personally in contact with the bank is that they are still one of the least customer-friendly banks I'm in contact with, and this is disheartening to see.
However, I'm a logical investor, and as someone with that perspective, I focus on numbers, not on whether I am being treated as I believe I should when it comes to investing. If Swedbank can take $100 and turn it into $200, I'm perfectly happy taking that money. However, here is the status of the investigations as of 4Q22...
Swedbank's future is driven by focusing on its leverage-proven business model and its pricing strategies and maintaining its 15% RoE. The bank wants to grow in the private segment (to which I say, "Good luck", given how I've perceived the treatment received, and being a private-banking sort of customer) by delivering almost 4x the advisory meetings as in 2021 at 2025E, gaining corporate market share, increasing exposure to Baltic long-term savings and customers, and increasing the time that front-line staff spends on advisory activities.
Part of Swedbank's strategy is transformation towards a more private banking/advisory sort of customer segment. This is not what I think about when I think Swedbank - where I instead think "everyone's bank", given their size/volume.
All of the bank's KPIs are solid and intact. The same fundamental advantages I described in some of my very early articles in how part of Swedish culture Swedbank actually is, all of those are still very much there. EPS is excellent, RoE is great, and all impairment and loss ratios are very much within the expected ranges.
Where the company starts encountering risk is in the same way, or the same segment as I described in my article regarding Handelsbanken and its trends - or rather, the trend on the overall Swedish market.
You may not have followed this as closely, but Sweden is in a bad spot for the next decade or more. The combination of over 10-20 years of what amounts to allowing extensive sub-prime mortgaging and loaning for real estate has left the population indebted, with total mortgages well above 5T SEK.
LTV for Swedish mortgage holders is, on average, at over 70% as of 2022 (Source: Finansinspektionen), with additional loans to finance the mortgages themselves at 55-60% of LTV. Most new mortgage holders go in at LTVs from 65-90%, which means that a downturn in the housing and mortgage market which we're seeing the beginning of, is going to put the screws to many homeowners - particularly in the urban areas.
I wrote more expansively about this in my article on Handelsbanken - so if you're curious, I direct your attention toward that one. But the simple fact is, Sweden and Swedish consumers are, as a whole, unprepared for the combination of inflation and interest rate increases that are going to be necessary to get a grip on this situation.
And this is muting or increasing the risk for financial stocks like Swedbank. Credit loss ratios will be increasing. Mortgage and loan defaults will go the same direction once the interest rates start climbing above 5% - and they are currently at a list interest rate of around 4.97%.
Once mortgages from the 2-5 year fixed category are set to refinance, which will start this and next year, there will likely be a housing market crunch. As of this time, the government hasn't announced any measures against this, and I personally do not view it as likely that it will happen, as any lightening of amortization of loans, or other "easing" would have an opposite effect on inflation, which is among the highest in Europe.
Loan levels are actually up, with lending up 7.3% YoY, though Swedbank hasn't seen close to the same levels of private lending or corporate lending growth that Handelsbanken has managed.
Much like with Handelsbanken, I expect that Swedbank will be able to use the combined upside of NII margins and fees to continue to grow earnings for the near term - but eventually, that will no longer be enough to offset the pressures from the issues we're heading into.
I expect this to happen within 2-3 years - analysts believe it happens in 3-4 years, as follows.
So, with that, I'm seeing the following valuation for Swedbank as being somewhat fair.
Swedbank's Valuation
The valuation for Swedbank is complex, but elevated, given that the bank really isn't going to see its earnings materially improve from the next couple of years, once things turn back down. FactSet analysts do not yet expect this to turn down in 2025E, though I expect the downturn to begin in 2025.
There is an upside to a conservative forecast here, as you can see. Double digits at 8-9x P/E forecast are conservative even for Swedbank in the valuation position where it currently is.
Analysts continue to be somewhat "too positive" for the company here. 20 analysts follow Swedbank, 11 of which are at a positive "BUY" or equivalent rating, from a range starting at 170 SEK and up to 285 SEK, which I view as insane for this bank. The average of 230 SEK is also quite high, and it corresponds more to the covered call strike level that I would be looking at.
I'll put my overall price target above my previous one, because I view Swedbank as having beat most of the negative news that we've seen from the company for the past few years. I also view it as unlikely that there is further massive downside or negativity potential in the stock - most of the scandals, at this time, as I see it, are accounted for.
To remain fair on an international comparative basis, I view a fair target for Swedbank to be around 9-10X normalized P/E valuation, which comes to a price target range of no more than 170-185 SEK/share , with my preference towards the lower end here. This illustrates to you at how much of a premium I've sold the covered calls that are currently running for the company. As the company continues to drop, which it currently is, I'm looking at buying back these calls at a fraction of my premium, which would allow me to set up the "next round" of calls when the stock goes back up.
Swedbank is a difficult investment to argue for. Why?
Because the simple fact is that for international investors, Finance is an area rife with investment opportunities of not only great companies but safe companies, which makes Swedbank a bit of a question.
While I view the company as safe long-term, the company also comes with a certain amount of medium-term uncertainty related to how Sweden develops as a whole.
RoA valuation comparisons on an international basis are unfortunately rather moot, as banks in Scandinavia and NA are held to different valuation standards, which would skew comparisons (as they've done when comparing such companies and banks before). This has been the case for years, and it's also the case at this point.
I invest in a lot of finance - and what I try to do is buy them all at extremely cheap valuations. That's why I recently added to my positions in business like Lincoln National ( LNC ), Truist ( TFC ), Bank of America ( BAC ), Citigroup ( C ), and others, as well as Canadian and other European banks.
Being a contrarian, I tend to focus on exactly those companies which tend to be underestimated by the broader market. Those are usually the companies that are receiving a lot of flak today.
Swedbank isn't massively undervalued here, and the Sweden issue of it all coupled with the immense appeal of other finance companies that are, technically speaking, larger than Swedbank, means that the upside I see here is limited.
This brings me to the following thesis.
Thesis
- Swedbank isn't exactly massively overvalued here, but nor is it massively undervalued. The company can best be called to be at close to fair value, especially when we consider what may happen to the underlying geography where Swedbank operates within the next couple of months or years.
- Given this potential pressure, I rate Swedbank conservatively and would not "BUY" the company at this valuation. I would instead focus on other, undervalued, and underappreciated financial stocks, of which there are plenty available.
- I give Swedbank a target of 175 SEK here, which is above my previous one, but below the current share price for the bank. That means Swedbank is a "HOLD".
Remember, I'm all about : 1. Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfils them (italicized).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside based on earnings growth or multiple expansion/reversion.
I will say that the company has an upside, but I will also say that the upside isn't as big as some of the others available here, and that it comes with a fair amount of shorter-term and long-term risk. my approach is to mix long-term holding with attractively priced covered calls. But I rate Swedbank a "HOLD" here.
For further details see:
Swedbank: A Decent Yield With A So-So Upside, But National Risk