2023-04-28 17:01:00 ET
Summary
- Net profit increased by 11% Q-o-Q.
- Swedbank continues to make credit impairments in preparation for a potential increase in NPA.
- Valuation is attractive but uncertainties in the economy put us on hold.
Investment Thesis
Despite the solid bump of 44% for Swedbank's (SWDBY) (SWDBF) share price over a six months period which we reported in our last article on the 2nd of February, we still felt it was necessary to downgrade our Buy stance to a Hold.
At that time, back in February, the share price sat at SEK 206 per share. We concluded that we saw little upside potential despite our confidence in the management's ability to deliver good results.
With increasing concern about a potential recession and the general sentiment about financials of "who is next" after what happened to SVB and Credit Suisse, the share price of SWDBY has come down to the low SEK 180 level.
SWDBY just delivered the financial results for the first quarter, and it is a good time to revisit the thesis.
1st Quarter 2023 Financial Results
Swedbank delivered a net profit to shareholders of SEK 7.56 billion in the first quarter of this year. That was 11% higher quarter over quarter.
EPS was SEK 6.71, an increase of SEK 0.86 quarter over quarter. If we use the TTM EPS we get SEK 22.04 and a P/E of 8.4 based on the current share price of SEK 184.
We did highlight in our last article, the management's confidence in improving the return on equity. This they have done in Q1. It is up from 15.7% to 17%.
The quarterly net interest income kept rising, due to higher deposit margins, and came in at SEK 11.94 billion which was an improvement of 9% quarter over quarter.
Total fees and commissions rose by 7% to SEK 3.66 billion over the same period.
A negative development was the bank's IT problems stemming from April of 2022 when some of their customers were shown incorrect account balances. This resulted in a fine of SEK 850 million from the Swedish authorities.
With regards to our fear of potential Non-Performing Assets, we recommend that you read that part of our previous article as it gives some color on real estate prices and household debt levels.
Although the non-performing loans have not started to hit the bank yet, SWDBY keeps taking credit impairments each quarter to have a large buffer in the event this will be required.
For the whole of 2022, they set aside SEK 1.5 billion and increased the quarterly amount from SEK 679 million in Q4 of 2022 to SEK 777 million in Q1 of 2023.
So far, we see no deterioration to their customers' ability to service their commercial and residential property loans. However, it needs to be monitored each quarter going forward.
Their CET1 capital ratio stands at 18.3%, as of March 31, 2023.
Economic Development in the Baltics
Let us start with Sweden, their largest market.
The Swedish central bank had its meeting on 26th April and could confirm our concern that the inflation is too high. Riksbanken now expects the CPIF to be 5.9% this year, which is considerably higher than their target of around 2%.
As with most other central banks, they use the interest rate to try to tame inflation. Although Riksbanken had earlier hoped that the interest rate would peak at 3%, they decided to increase it by 50 basis points from 3% to 3.5%.
The present plan is for one more increase of 0.25% or 0.50% by June or September this year.
Unemployment in Sweden is also quite high at 7.5% and is expected to increase slightly this and next year, hitting 8.5% by 2024.
So far, the high unemployment has not resulted in any uptick in Non-Performing Assets.
The economy in the Baltic countries of Estonia, Latvia, and Lithuania, which form the other markets for SWDBY, are still seeing poor GDP numbers.
Fortunately, the unemployment numbers are quite low and the household debt formation is not showing signs of stress.
Conclusion
We still like the financial sector in general, and Swedbank in particular.
As the share price has fallen roughly 10% since we downgraded it to a Hold, we might add to the position should we see a further slide in the share price to SEK 160 to 170 range.
It is good value and we believe that in a more optimistic market sentiment, we should see the share price go above SEK 200 again.
We remain with a Hold stance.
For further details see:
Swedbank Is Kicking Off 2023 With A Good Set Of Q1 Results