nordic banks - 4q 2014 previewajonsson/kennsla2013/nordic banks1.pdf · nordic banks - 4q 2014...
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Sustainable dividend yield Nordic Banks - 4Q 2014 Preview
• Interest rates down 17-21bp in Norway and Sweden in 4Q
• CET1 capital target setting in 4Q likely but a non-event as banks are at est. targets
• TP up on all Swedish banks but Nordea and DNB remain our Nordic top picks
16.01.2015
Odd Weidel Nils Christian Øyen
Financial analyst Financial analyst
+47 24 14 74 81 +47 99 500 240
Interest rates down in 4Q but margins flattish
16/01/2015 2
DNB top pick among Nordic Financials – NDA remain our Swedish favorite
Oil price shock in 4Q We believe investor focus will turn from fully valued Swedish names towards less demanding pricing of Norwegian banks which could double dividends over the next years. In 4Q we have seen (i) a 60% drop in oil price, (ii) Swedish politics in upheaval which have halted the proposed bank tax (iii) a drop in interest rates in Sweden and Norway of ~20bp (iv) SEKNOK parity. Despite all this the Nordics show continued stable development and hence our top pick are unchanged – DNB and NDA.
• Mild NII headwind
A 17-21bps drop in short term rates in 4Q vouch for increased pressure on NII as deposit margins suffer again. With continued subdued credit growth banks have increased attention to costs. We hike EPS as lower costs more than outweigh a slight margin pressure. Soft macro outlook in Finland and the sharp drop in oil price in 4Q are not visible in increased losses yet. We expect the Swedish banks to post an average 13.7% ROE in 4Q.
• New capital target at 4Q – likely a non-event
We believe the Swedish banks will set their CET1 capital targets in connection with the 4Q report. However according to the FSA the Swedish banks are 180bp above FSA requirement avg. However subdued growth and adequate capital make dividend payout ratios 60-75% sustainable. We estimate an average dividend yield in 2014 of 4.6%.
• Valuation fair - NDA is our top-pick among Swedish banks backed by valuation
We conduct small positive changes to our estimates, but reiterate our Neutral recommendations on SEB, Swedbank and Handelsbanken. Nordea has been gaining momentum in the corporate segment and we believe consensus underestimate the earnings potential. Nordea is trading at 14e P/TB 1.24x, and P/E 11.2x – 25% P/B discount vs. Swedish peer average.
Oil price shock in 4Q – EURNOK up 11%
16/01/2015 3
SB1M – Macroeconomic and operational overview
Noticeable macro events in 4Q:
• Drop in oil price from 115 to 45 $ per barrel (-60%) in 4Q - adverse macro in Norway in 2015 likely although GDP forecasts does not reflect so yet
• FX - Oil Shock for NOK and SEK rises to parity
• … but overall stable macro development in Nordics
Nordic banking outlookChange s ince 3Q14
World
Stable
Nordic GDP outlook
Sweden Finland Denmark Norway
Stable Negative Sl ightly pos i tive Sl ightly negative
Regulatory
Sweden Finland Denmark Norway
Stable Stable Stable Stable
NII Nordics
Volume Margins
Sl ightly negative Sl ightly negative
Other Nordics *
income Stable
* Fa irly volati l ie markets should imply above average Markets income.
Costs Sweden *
Sl ightly pos i tive
* No changes - Flat costs out 15. NDA 5% down in 15.
Loan losses Sweden Finland Denmark Norway
Sl ightly pos i tive Sl ightly negative Sl ightly pos i tive Sl ightly negative
Overview - Continued fragi le European recovery
Mac
roO
per
atio
nal
dev
elo
pm
ent
Norway 2015e only marginally down – lag effect?
16/01/2015 4
… and 2016e slightly up – surprising given the drop in oil price 2015 consensus GDP growth
Finnish double whammy – (i) Russian sanctions and (ii) “fall of Nokia”. Russian sanctions will have relatively little direct impact on overall European growth, but the effects on Finland and the Baltic countries are more noticeable.
Source: Bloomberg
2016 consensus GDP growth
… and Finnish 2015e GDP growth also trending down. Estimated 2016 GDP growth in Denmark up last 6 months. Also positive development in consensus GDP growth in Sweden and Norway. The latter is particularly positive given the sharp drop in oil price in 4Q14.
Source: Bloomberg
0,3
0,8
1,3
1,8
2,3
2,8
Jan 14 Mar 14 May 14 Jul 14 Sep 14 Nov 14
Sweden
Norway
Denmark
Finland
1,0
1,5
2,0
2,5
3,0
Jun 14 Aug 14 Oct 14 Dec 14
Sweden
Norway
Denmark
Finland
We still prefer DNB and NDA
16/01/2015 5
Limited potential in Norwegian insurers STB and GJF.
SpareBank1 Markets - Nordic Financials
SHB NDA SEB SWED DNB GJF STB
Share price today 353 87 93 182 102 123 28
Target price 380 105 100 190 130 122 28
Upside potentia l 8 % 21 % 8 % 5 % 27 % -1 % 0 %
Recommendation Neutral Buy Neutral Neutral Buy Neutral Sell
EPS 14E 22,12 0,77 6,82 11,70 7,72 3,16
Div 16,50 0,43 4,00 10,10 2,75 6,18 0,00
CET I (Basel I I) 12,8 %
CET I (Basel I I I) 18,9 % 14,8 % 15,0 % 18,3 %
Valuation
P/E 2014E 14,7x 11,1x 10,9x 11,8x 7,9x 15,9x 9,7x
P/B 2014E 1,84x 1,23x 1,52x 1,77x 1,08x 2,89x 0,68x
P/TB 2014E 1,97x 1,37x 1,74x 2,02x 1,08x 3,48x 0,85x
RoE 2014E 13,6 % 13,2 % 12,4 % 14,8 % 12,7 % 16,2 % 7,3 %
Valuation @ target
P/E 2014E 15,8x 13,4x 11,7x 12,4x 10,1x 15,8x 7,5x
P/B 2014E 2,0x 1,5x 1,6x 1,9x 1,4x 2,9x 0,5x
P/TB 2014E 2,1x 1,7x 1,9x 2,1x 1,4x 2,0x 0,7x
Nordic Banks Norwegian Insurers
16.01.2015 6
Swedish banks with 13.7% average ROE in 4Q (i) Handelsbanken could surprise on top-line growth in 2015 (ii) SEB 4Q boosted by Euroline gain (SEK 1900m)
Nordic BanksP&L (reporting currency) NDA SHB SEB SWED NDA SHB SEB SWED
Net interest income 1 467 7 163 5 264 6 016 5 593 27 524 20 197 22 849
Net commiss ions 695 2 139 3 850 2 844 2 774 8 467 15 603 11 166
Financia l instruments 390 393 2 650 560 1 448 1 906 5 228 2 477
Li fe 0 0 899 0 0 0 3 390 0
Other income 41 96 60 772 489 652 2 478 3 625
Total income 2 593 9 791 12 723 10 192 10 304 38 549 46 896 40 117
Staff costs -729 -3 009 -3 407 -2 493 -3 120 -11 749 -13 753 -10 300
Other costs -486 -1 547 -2 324 -1 712 -2 235 -5 582 -8 330 -7 214
Total costs -1 215 -4 556 -5 731 -4 205 -5 355 -17 331 -22 083 -17 514
Operating profit 1 378 5 234 6 992 5 987 4 949 21 217 24 813 22 603
Loan losses -254 -450 -413 -509 -659 -1 534 -1 427 -674
Net ga ins on long term assets 0 0 2 -19 0 0 -34 -243
Pretax profit 1 123 4 785 6 581 5 460 4 289 19 684 23 352 21 687
Tax -247 -1 015 -1 448 -1 201 -920 -4 201 -4 688 -4 502
Discontinued operations 0 17 0 -5 -39 92 0 -264
Minori ties 0 0 1 6 0 0 2 22
Net profit 876 3 787 5 132 4 247 3 330 15 575 18 662 16 898
Key operational ratios NDA SHB SEB SWED NDA SHB SEB SWED
EPS reported 0,22 5,85 2,34 3,85 0,82 24,06 8,52 15,33
ROE reported 11,7 % 12,4 % 15,6 % 15,2 % 11,4 % 13,5 % 14,9 % 15,2 %
Loan losses , % 0,28 % 0,02 % 0,12 % 0,04 % 0,21 % 0,07 % 0,09 % 0,05 %
CET1 (Basel I I) 15,5 % 20,4 % 16,5 % 21,0 % 15,5 % 20,4 % 16,5 % 21,0 %
CET1 (Basel I I I) 15,1 % 20,4 % 16,5 % 21,0 % 15,1 % 20,4 % 16,5 % 21,0 %
Key valuation ratios NDA SHB SEB SWED NDA SHB SEB SWED
Share price (SEK) 87,40 354,60 93,00 182,30 87,40 354,60 93,00 182,30
P/E 10,63 15,16 9,92 11,83 11,19 14,74 10,92 11,89
P/B 1,24 1,85 1,52 1,78 1,24 1,85 1,52 1,78
Dividend yield 4,1 % 3,6 % 4,8 % 5,8 %
4Q14e 2014e
Nordea first out 28th of January
16/01/2015 7
4Q 2014 - Financial calendar
Nordic Financials - Financial calendarInstitution 4Q14
NDA 28.01.2015
SEB 29.01.2015
Swed 03.02.2015
SHB 04.02.2015
DNB 05.02.2015
Storebrand 11.02.2015
Gjensidige 02.02.2015
Swedish banks at peak multiples
16/01/2015 8
Consensus data
Nordic BanksP/B P/E RoE
2014 2015 2016 2014 2015 2016 2014 2015 2016
DNB 1,19 1,10 1,03 9,07 8,97 8,77 13,1 % 12,2 % 11,7 %
Nordea 1,30 1,25 1,21 11,72 10,51 10,18 11,1 % 11,9 % 11,9 %
Danske 1,08 1,02 0,97 11,78 10,02 9,66 9,1 % 10,2 % 10,0 %
SEB 1,47 1,40 1,33 11,66 11,47 10,85 12,6 % 12,2 % 12,2 %
Swedbank 1,72 1,65 1,59 11,85 11,46 10,96 14,5 % 14,4 % 14,5 %
Handelsbanken 1,70 1,65 1,58 13,77 12,86 12,52 12,4 % 12,8 % 12,6 %
Average 1,41 1,34 1,28 11,64 10,88 10,49 12,1 % 12,3 % 12,2 %
Source: Factset
Nordic banks – 4Q 2014 Preview • Operational development Nordic Banks
• Valuation - DNB remain top pick among Nordics
Interest rates down in Norway and Sweden in 4Q
16/01/2015 10
Short term (3M) interbank rates – Nordic countries 3M interbank rate - Nordic countries
Interbank rates have been trending downwards last 20 years
Source: Reuters Datastream
3M interbank rate change in 4Q 2014
3M CIBOR and 3M HELIBOR have been flattish in 4Q but Norway and Sweden have seen a 17-21bp drop respectively.
Source: Reuters Datastream
0 %
1 %
2 %
3 %
4 %
5 %
6 %
7 %
8 %
9 %
10 %
jan. 95 jan. 98 jan. 01 jan. 04 jan. 07 jan. 10 jan. 13
Norway
Denmark
Sweden
Finland
0,02 %
-0,02 %
-0,17 %
-0,21 %
0%
0%
0%
0%
0%
0%
0%
Denmark Finland Norway Sweden
… but Swedish frontbook margins was flat in 4Q
16/01/2015 11
Avg. gross margin Swedish banks minus STIBOR
The
0,0
0,5
1,0
1,5
2,0
2,5
jun. 05 jun. 06 jun. 07 jun. 08 jun. 09 jun. 10 jun. 11 jun. 12 jun. 13 jun. 14
% Lending rate less STIBOR flat in
4Q
Source: Reuters Datastream
Lending volume – still subdued growth
16/01/2015 12
Corporate lending slightly up in Sweden to ~5% - YoY change in corporate lending
-15 %
-10 %
-5 %
0 %
5 %
10 %
15 %
20 %
25 %
30 %
35 %
Nov-04 May-06 Nov-07 May-09 Nov-10 May-12 Nov-13
%
Norway
Sweden
Finland
Denmark
Uptick in Sweden and
Denmark last couple of
months
Lending - Consensus expect 2.6%-4.3% in 2015
16/01/2015 13
Handelsbanken might surprise as consensus expectations are low given high UK growth Consensus lending growth
Consensus expect low growth in Nordea and high lending growth in Handelbanken. We est. 4% lending growth in Nordea due to (i) corporate exposure and (ii) Denmark and 3-3.5% lending growth in SEB and Swedbank.
Handelsbanken – UK growth likely to continue
Average lending growth in UK has been around 7% per quarter (~31% annualized). Consensus implied SHB growth (ex-UK) is low below 2% which indicate consensus could underestimate top-line growth in Handelsbanken also ahead.
3,4%3,5%
4,3%
2,6%
3,5%3,7%
3,9%
4,3%
2,6%
3,2%
0,0 %
0,5 %
1,0 %
1,5 %
2,0 %
2,5 %
3,0 %
3,5 %
4,0 %
4,5 %
5,0 %
Swed SEB SHB Nordea DNB
2015
2016
Freeform 12
Freeform 13
Freeform 14
Freeform 15
Freeform 16
Freeform 17
Freeform 18
Freeform 19
Freeform 20
Freeform 21
Freeform 22
Freeform 23
Freeform 24
Freeform 25
Freeform 26
Freeform 27
Freeform 28
Bankruptcies flat but Norway up YoY
16/01/2015 14
Remarkable flat development in Finland given the adverse macro
-
2 000
4 000
6 000
8 000
10 000
12 000
14 000
16 000
18 000
1990 1994 1998 2002 2006 2010 2014e
Denmark
Norway
Sweden
Finland
We expect on avg. higher losses than consensus
16/01/2015 15
Consensus loan loss expectations
0,09 %
0,11 %0,10 %
0,16 %
0,14 %
0,20 %
0,00%
0,05%
0,10%
0,15%
0,20%
0,25%
Swed SEB SHB Nordea Danske DNB
2014
2015
2016
SB1M est. vs. consensus
12-13bp in 2015
15-16bp in 2016
Hist. avg. = ~20bp
SB1M est. vs.
consensus
19bp in 2015
16bp in 2016
Hist. avg. = 17
SB1M est. vs.
consensus
11bp in 2015
12bp in 2016
Hist. avg. = 7
SB1M est. vs.
consensus
27bp in 2015
30bp in 2016
Hist. avg. = ~19
Dividend payout ratio sustainable
16/01/2015 16
… if (i) lending growth stays at projected levels (ii) unchanged capital targets
Han
80%
66%70%
75%
53%49%
20%
30%
40%
50%
60%
70%
80%
90%
Swed SEB SHB Nordea Danske DNB
Dividend pay-out ratio
2014
2015
2016
DNB towards normalization in
2016 and more likely to surprise
positively
Valuation • Operational development Nordic Banks
• Valuation - DNB remain top pick among Nordics • … despite oil price shock
16.01.2015 18
Swedish banks - The valuation cycle follows short term profitability …historical P/Tangible Book levels less meaningful as ROE and capital requirements have changed …but relationship between ROTE and P/TB still makes sense going forward
16.01.2015 19
The implied cost of equity is some 6-7% currently for Swedish banks …in-line with pre crisis averages, but risk premium higher as risk free rates are lower
16/01/2015 20
Price/Book: DNB and Norwegian savings banks still at a discount to Swedish …risk/reward skewed to the upside long term for Norwegian banks, but curbed by oil price short term
16/01/2015 21
Repricing of Swedish banks in 2014, oil price takes its toll on DNB …average P/B in DNB trends up long term, though
Nordic Financials - DNB and NDA top picks
16/01/2015 22
Current SB1M 14e vs. historical RoE – P/B relationship
DNB
SWEDSEB
SHB
NDA
0,5
1,0
1,5
2,0
2,5
3,0
9,00 11,00 13,00 15,00 17,00 19,00
P/B
RoE, %
16.01.2015 23
SHB trading at a 30% premium to own historical average P/E of 11.0X …DNB 10% below average ratio
Average P/E*
SHB: 11.0X SWED: 10.0X SEB: 10.3X DNB: 9.3X NDA: 10.3X *1997 - 2013
16.01.2015 24
DNB discount higher last months at some 30% …high by historical standards as well (zero discount pre financial crisis)
DNB trading below last 2 years trading band (P/E 8.5 – 10X) …explained by oil price slump
16/01/2015 25
Swedbank: 5.8% dividend yield
Mortgage re-pricing already over
We expect Swedbank to report another set of solid 4Q figures with EPS from continuing operations of SEK 4.2, and a ROE just above 15%. Swedbank is currently trading at P/TB 2.03 2014e and P/E 11.9x, which is high vs. peers, but we believe fair given strong underlying performance and SEK 16bn in cost target in 2016. We hike 15eEPS 7% and TP up SEK 8 to SEK 190.
• “Best-in-class” 14e ROE at 15.2%
We expect NII at SEK 6 016, up from SEK 5 829m in 3Q. Swedbank expresses a defensive attitude towards mortgage competition in the Swedish market and should benefit from backbook repricing of mortgage book. We believe in a slightly tougher retail competition in Sweden going forward particularly in attractive customer segments. We expect a net profit of SEK 4 247, implying a ROE of 15.2%, and EPS of SEK 3.85.
• CET1 capital target likely set between 19-21%
Swedbank is significantly better capitalized than e.g. Handelsbanken with the highest corporate risk weights among Swedish peers. We believe Swedbank will set a capital target (CET1) of 19-21% in connection with the 4Q report. However all Swedish banks are at their likely targets and we therefore believe the target setting will be a “non-event”.
• Investors focus on dividend yield – we estimate SEK 10.7 in 2014
In spite of an appealing dividend yield at 5.8%, we see the current valuation as rather stretched as the share is trading at 11.9x 2014e P/E and 1.78x BV. Swedbank is trading high versus peers, and at these levels we prefer Handelsbanken. We reiterate our neutral recommendation and but hike our TP to SEK 190 TP on lower costs.
16/01/2015 26
2014 4Q Preview
4Q14e ROE = 15.2%
16/01/2015 27
Swedbank - 4Q14 preview table
• CC SEKm 4Q13 1Q14 2Q14 3Q14 4Q14E 1Q15E 2Q15E
Net interest income 5 626 5 483 5 521 5 829 6 016 5 827 5 888
Net fee and commission income 2 699 2 693 2 813 2 816 2 844 2 873 2 901
Net financial income 461 345 773 799 560 575 600
Net other income 866 799 1 348 706 772 746 736
Total operating income 9 652 9 320 10 455 10 150 10 192 10 021 10 125
Staff costs -2 574 -2 437 -2 901 -2 469 -2 493 -2 481 -2 468
Other expenses -1 910 -1 789 -2 018 -1 695 -1 712 -1 706 -1 700
Total operating expenses -4 484 -4 226 -4 919 -4 164 -4 205 -4 187 -4 168
Profit before credit losses etc 5 168 5 094 5 536 5 986 5 987 5 834 5 957
Loan losses 32 100 -30 -235 -509 -411 -374
Gains/losses PPE and intang. -323 -135 -70 -19 -19 -19 -19
Operating profit 4 877 5 059 5 436 5 732 5 460 5 404 5 564
Income tax expense -1 212 -1 074 -1 063 -1 164 -1 201 -1 189 -1 224
Discontinued operations -48 -27 -230 -2 -5 0 0
Minorities 5 6 4 6 6 6 6
Net profit 3 612 3 952 4 139 4 560 4 247 4 209 4 334
ROE reported 13,4 % 14,9 % 15,8 % 16,7 % 15,2 % 14,9 % 15,2 %
ROE adjusted 12,3 % 13,9 % 15,4 % 15,8 % 14,7 % 14,4 % 14,7 %
EPS reported 3,28 3,59 3,75 4,14 3,85 3,82 3,93
EPS adjusted 3,00 3,34 3,67 3,93 3,74 3,70 3,81
Interest margin (adjusted) 1,20 % 1,15 % 1,12 % 1,15 % 1,18 % 1,13 % 1,13 %
Net loan loss ratio (annualised) 0,00 % -0,01 % 0,00 % 0,02 % 0,04 % 0,03 % 0,03 %
Core Tier 1 capital ratio (Basel III) 18,3 % 18,3 % 20,9 % 20,7 % 21,0 % 21,2 % 21,4 %
Swedbank (Neutral, SEK 190) – SEK16bn in costs in 16
16/01/2015 28
We hike EPS 7%, but find ROE close to a cyclical peak.
Valuation
Recommendation
• Valuation Swedish banks: Investors focus on dividend yield – we estimate SEK 10.7 in 2014 or 5.8%.
• Swedbank is trading high versus peers, at 11.9x 2014e P/E and 1.78x BV. At these levels we prefer Handelsbanken. We reiterate our neutral recommendation and but hike our TP to SEK 190 TP on lower costs.
Risk assessment
Upside risk:
• Retail banking division (Sweden) – track record & solid asset quality
• RoE track record and Baltic revival could hike profitability going forward
• EUR-entry Baltics -> lower risk
• Corporate segment initiatives
Downside risk:
• Exposure to Baltics
• Competitive landscape heating up in Sweden – SEB targets retail market
• Higher risk weights – double edged sword for Swedbank
• EUR-entry Baltics -> lower income (trading etc)
145
155
165
175
185
195
205
215
Theoretical Peers Consensus
Sb1M TP = 190
market = 182,3
Nordea: Adverse macro but few signs of trouble
Finnish macroeconomics and Russian sanctions likely to burden Nordea in 2015
Corporate credit growth in Denmark and Sweden has seen an uptick and we believe competition is less fierce in the corporate segment in Sweden as competitor SEB reports higher segment margin. We reiterate our Buy recommendation but hike target price to SEK 105 as the share trades at a 25% P/B discount vs. Swedish peers.
• Adverse Finnish macro not visible yet
Our NII estimate of EUR 1 418m in 4Q is slightly up from last quarters EUR 1 396m. Our positive stance on NII for Nordea is based on better-than-peers growth in the corporate segment however we expect the NOK depreciation to lower NII with an estimated EUR 13m. We expect few loan losses from the Finnish operations yet (20bp in 15e) and in total we forecast Nordea to post net profit of EUR 839m, which equals EPS of EUR 0.21 and ROE of 11.2%.
• CET1 capital target likely set between 15-16%
The divestment of Nets increased CET1 by 10-12bp in 3Q to 15%. We believe Nordea will set a capital target (CET1) of 15-16% in connection with the 4Q report. However all Swedish banks are at their likely targets and we therefore believe the target setting will be a “non-event”. The Swedish FSA has implemented a 25% floor on household risk weights, but Nordea will be the least of the Swedish banks of such a regulatory change.
• Still BUY
We expect the Markets division to perform above average as there certainly has been some volatility in the financials Markets in 4Q. The share is trading at 1.38x tangible book (2014E), and 11.2 2014E earnings, well below Swedish peers. We find the bank attractively priced, with a 20% upside potential to our SEK 105 target price.
16/01/2015 29
2014 4Q Preview
4Q14e EPS = 0.21 EUR
16/01/2015 30
Nordea - 4Q14 preview table
• CC EURm 4Q13 1Q14 2Q14 3Q14 4Q14E 1Q15E 2Q15E
Net interest income 1 390 1 362 1 368 1 396 1 418 1 533 1 549
Net fee and commission income 703 704 708 667 695 712 716
Net financial income 333 411 356 291 390 410 415
Net other income 43 24 24 400 41 29 38
Total operating income 2 469 2 501 2 456 2 754 2 545 2 684 2 718
Staff costs -739 -756 -907 -728 -729 -730 -731
Other expenses -544 -481 -480 -788 -486 -463 -452
Total operating expenses -1 283 -1 237 -1 387 -1 516 -1 215 -1 193 -1 183
Profit before credit losses etc 1 186 1 264 1 069 1 238 1 330 1 491 1 535
Loan losses -180 -158 -135 -112 -254 -138 -125
Gains/losses PPE and intang. 0 0 0 0 0 0 0
Operating profit 1 006 1 106 934 1 126 1 075 1 353 1 410
Income tax expense -246 -266 -219 -188 -237 -298 -310
Net profit from continuing operations 0 0 0 0 0 0 0
Discontinued operations 1 0 0 0 0 0 0
Net profit 759 831 685 938 839 1 055 1 100
ROE reported 10,5 % 11,6 % 9,6 % 12,8 % 11,2 % 14,0 % 14,4 %
EPS reported 0,19 0,21 0,17 0,23 0,21 0,26 0,27
Interest margin (adjusted) 1,02 % 1,00 % 1,00 % 1,00 % 1,00 % 1,07 % 1,07 %
Net loan loss ratio (annualised) 0,21 % 0,18 % 0,16 % 0,13 % 0,28 % 0,15 % 0,13 %
Core Tier 1 capital ratio (Basel III) 14,8 % 14,6 % 15,2 % 15,0 % 15,1 % 15,0 % 15,3 %
Nordea (BUY, SEK 105) – Discount vs. peers
16/01/2015 31
Adverse Finnish macro
Valuation
Recommendation
• Too low consensus lending growth expectations in our view
• We expect the Markets division to perform above average as there certainly has been some volatility in the financials Markets in 4Q. The share is trading at 1.38x tangible book (2014E), and 11.2 2014E earnings, well below Swedish peers. We find the bank attractively priced, with a 20% upside potential to our SEK 105 target price.
Risk assessment
Upside risk:
• Nordea has gained market share in the corporate segment
• Growth in AuM - absolute and in relative terms
• CET1 (B3) - As shown in our recent sector report all Swedish banks will be compliant by 2015 even with 25% mortgage risk weights, but - among the Swedish banks - Nordea will be the least affected.
• Low lending growth expectations
Downside risk:
• Adverse macro in Finland
• Russian sanctions halting growth and loan losses in Baltics/Russia
• Competitive landscape corporate banking - Sweden
• Sampo might be interested in selling their 21.4% stake in NDA
86
96
106
116
126
136
146
Theoretical Peers Consensus
Sb1M TP = 105
market = 87,4
Handelsbanken: Expensive growth story
Amazing track record and now growth story as well
We continue to have high hopes for the UK growth story in Handelsbanken, and especially so since the Nordic region face subdued lending growth. We expect low loan losses at a meager 2bp, unchanged vs. 3Q. SHB is trading at 1.80x 2014E tangible book and 13.4x 2014E earnings. Handelsbanken is priced at a justified premium and we believe the bank has limited upside potential. Our Neutral recommendation is reiterated and likewise our SEK 345 target price.
• NII further up
We expect NII at SEK 7 012m, up from SEK 6 704m in 2Q on continued strong NII development in UK and Norway. We also expect a slightly positive margin development in Sweden as mortgages have been re-priced to adjust for the regulatory changes. Other income should be decent as well but are of less importance vs. other peers. We expect an EPS of SEK 5.96 and a ROE of 13%. CET1 (B3) is seen at 20.5%.
• Consensus still underestimate UK potential
We find UK growth story appealing. With 7% quarterly lending growth and ~20bp in average loan losses UK now account for >10% of group NII income. Consensus implied SHB growth (ex-UK) is low at around 1.8% which indicate Handelsbanken might surprise positively on top-line growth in 2015.
• Trading at premium but buy on dips
SHB is trading at 1.80x 2014E tangible book and 13.4x 2014E earnings. Even though Handelsbanken is priced in the high brackets we see a minor upside potential. Neutral reiterated but TP hiked to SEK 380 (350).
16/01/2015 32
2014 4Q Preview
4Q14e EPS = 5.85 on continued UK growth
16/01/2015 33
Handelsbanken - 4Q14 preview table
• CC SEKm 4Q13 1Q14 2Q14 3Q14 4Q14E 1Q15E 2Q15E
Net interest income 6 772 6 653 6 704 7 004 7 163 7 584 7 668
Net fee and commission income 2 107 2 060 2 135 2 133 2 139 2 091 2 167
Net financial income 304 658 466 389 393 397 401
Net other income 95 110 342 104 96 111 295
Total operating income 9 278 9 481 9 647 9 630 9 791 10 182 10 531
Staff costs -2 980 -2 887 -2 910 -2 943 -3 009 -2 908 -2 932
Other expenses -1 527 -1 359 -1 389 -1 287 -1 547 -1 381 -1 401
Total operating expenses -4 507 -4 246 -4 299 -4 230 -4 556 -4 289 -4 333
Profit before credit losses etc 4 771 5 235 5 348 5 400 5 234 5 893 6 198
Loan losses -322 -315 -272 -497 -450 -455 -414
Gains/losses PPE and intang. 9 0 0 0 0 0 0
Operating profit 4 458 4 920 5 076 4 903 4 785 5 439 5 784
Income tax expense -966 -1 038 -1 074 -1 074 -1 015 -1 197 -1 273
Net profit from continuing operations 35 27 31 17 17 17 17
Discontinued operations 0 0 0 0 0 0 0
Net profit 3 527 3 909 4 033 3 846 3 787 4 259 4 529
ROE reported 12,9 % 14,3 % 14,4 % 13,0 % 12,4 % 14,1 % 15,2 %
ROE adjusted 12,5 % 13,6 % 13,7 % 12,6 % 11,9 % 13,7 % 14,8 %
EPS reported 5,45 6,04 6,23 5,94 5,85 6,58 7,00
EPS adjusted 5,25 5,78 5,96 5,76 5,62 6,38 6,79
Interest margin (adjusted) 1,08 % 1,04 % 1,01 % 1,03 % 1,05 % 1,10 % 1,10 %
Net loan loss ratio (annualised) 0,02 % 0,02 % 0,02 % 0,03 % 0,02 % 0,02 % 0,02 %
Core Tier 1 capital ratio (B3) 18,9 % 19,5 % 20,1 % 20,7 % 20,4 % 20,6 % 20,9 %
SHB (Neutral, SEK 380) – Unique track record
16/01/2015 34
… and now growth story. We believe consensus underestimate UK potential
Valuation
Recommendation
Pricey, but we see a minor upside potential due to the (i) track record and (ii) UK growth story.
SHB is trading at 1.80x 2014E tangible book and 13.4x 2014E earnings. Neutral reiterated but TP hiked to SEK 380 (350).
Risk assessment
Upside risk:
• Incredible 42 years track record … » Lower-than-peers funding costs
» Lower-than-peers loan losses – due to better customer selection
» Strategy, credibility & concept – “Branchism” & Oktogonen
• … and now the only bank with a credible growth story as well. Consensus implied SHB growth (ex-UK) low at ~1.8% indicating further potential for top-line growth.
Downside risk:
• Tighter regulatory regime in Sweden with higher corporate risk weights
• Competitive landscape heating up in Sweden
• Real estate exposure
284
304
324
344
364
384
404
424
444
464
Theoretical Peers Consensus
Sb1M TP = 380
market = 354,6
SEB: 4Q up on Euroline sale - net gain SEK 1.9bn
Increased corporate lending should hike margin as well
However strong and vibrant Swedish businesses should support SEB overall going forward. We expect a net profit in 4Q of SEK 5 132m and EPS of SEK 2.34. We believe the share is fully valued, and reiterate our Neutral recommendation.
• Euroline stake sold with SEK 1.9bn in net gain - 4Q ROE at 15.6%
We expect NII at SEK 5 264m, up from SEK 5 172m in 3Q on increased corporate lending margins. We continue to expect the result to be driven by other income as SEB traditionally has a higher share of commission income vs. peers. Financial markets have been volatile in the quarter and hence trading related income should be above average. The estimated capital gain of SEK 1.9bn related to the sale of the Euroline position will hike CET1 by another ~25bp to 16.5%. Boosted by the sale we expect an adjusted EPS of SEK 2.34 and a ROE of 15.6% in 4Q.
• Below SEK 22.5bn in 15 cost target
SEB’s below SEK 22.5bn cost target was earlier this year prolonged to 2015. This is in line with other Swedish banks. We are at SEK 22.2bn in 15 implying a C/I ratio of 48.2%, which is in line with peers but well below historical levels seen in SEB. Swedbank’s 3Q report showed Swedish banks have more room to maneuver with regards to cost cutting (down 10% in 2016).
• Neutral recommendation reiterated – TP up SEK 6
Hampered by a less impressive growth in core earnings which is up a meager 30% since 1Q05, we reiterate our Neutral recommendation but hike our TP SEK 6 to SEK 100 on lower costs. We see the current valuation as rather stretched as the share is trading at 10.9x 2014e P/E and 1.52x P/BV with below business cycle loan losses.
16/01/2015 35
2014 4Q Preview
4Q14e EPS = 2.34 on Euroline gain
16/01/2015 36
SEB - 4Q14 preview table
• CC SEKm 4Q13 1Q14 2Q14 3Q14 4Q14E 1Q15E 2Q15E
Net interest income 4 932 4 818 4 943 5 172 5 264 5 798 5 841
Net fee and commission income 3 871 3 728 4 211 3 814 3 850 3 855 3 972
Net financial income 1 186 1 079 845 654 2 650 833 841
Net other income 1 041 818 1 078 3 013 959 888 914
Total operating income 11 030 10 443 11 077 12 653 12 723 11 374 11 569
Staff costs -3 386 -3 461 -3 493 -3 392 -3 407 -3 406 -3 404
Other expenses -2 275 -1 877 -2 026 -2 103 -2 324 -1 967 -2 087
Total operating expenses -5 661 -5 338 -5 519 -5 495 -5 731 -5 373 -5 491
Profit before credit losses etc 5 369 5 105 5 558 7 158 6 992 6 002 6 078
Loan losses -341 -258 -283 -473 -413 -416 -377
Gains/losses PPE and intang. -19 8 -24 -20 2 2 2
Operating profit 5 009 4 855 5 251 6 665 6 581 5 588 5 703
Income tax expense -793 -971 -1 077 -1 192 -1 448 -1 229 -1 255
Net profit from continuing operations 6 0 0 0 0 0 0
Discontinued operations 1 0 0 1 1 1 1
Net profit 4 221 3 884 4 174 5 472 5 132 4 358 4 447
ROE reported 14,2 % 12,8 % 13,8 % 17,4 % 15,6 % 13,3 % 13,6 %
ROE adjusted 12,7 % 12,2 % 13,1 % 16,0 % 15,3 % 12,9 % 13,2 %
EPS reported 1,93 1,77 1,91 2,50 2,34 1,99 2,03
EPS adjusted 1,73 1,69 1,81 2,30 2,28 1,94 1,98
Interest margin (adjusted) 0,91 % 0,88 % 0,88 % 0,88 % 0,87 % 0,95 % 0,95 %
Net loan loss ratio (annualised) 0,10 % 0,08 % 0,08 % 0,14 % 0,12 % 0,12 % 0,11 %
Core Tier 1 capital ratio (B3) 16,9 % 15,8 % 16,1 % 16,2 % 16,5 % 16,7 % 16,8 %
SEB (Neutral, SEK 100) – A bet on Swedish corporates
16/01/2015 37
… a segment which is showing resilience but adverse macro in Finland will affect in 15e
Valuation
Recommendation
We see the current valuation as rather stretched as the share is trading at 10.9x 2014e P/E and 1.52x P/BV with below business cycle loan losses. We find positive margin development in the corporate segment (lending up 3.9% qoq) to be out-weighed by a negative sentiment due to Russian uncertainty and Finland. Neutral recommendation and TP SEK 100.
Risk assessment
Upside risk:
• Nordic corporate franchise
• Swedish corporates resilient and now SEB reports higher margins
• “Below SEK 22.5bn” cost target prolonged to 2015
• Strategic initiatives towards retail segment (share of group income up 10% since 2007 to 30%)
Downside risk:
• A tougher regulatory regime in Sweden with higher corporate risk weights our prime concern.
• Competitive landscape heating up in Sweden – Nordea aggressive
• Exposure to Baltics (8% of group income) and negative sentiment in Finland could drag Swedish corporates down also
• Concentration risk (LBO and Swedish large cap.) and geographically towards mid and south-Sweden.
88
93
98
103
108
113
118
123
Theoretical Peers Consensus
Sb1M TP = 100
market = 93
16.01.2015 38
DNB (Buy, NOK 130): Loss absorbing capacity high, valuation low Conclusion We find long-term risk/reward in DNB attractive as the share trades at P/B 1.0 on 2015 book values and downside risk in oil price should be more limited after a 60% drop. Loan loss absorption capacity has improved significantly since 2007 both measured on capitalisation and profit pre losses. Lower NIBOR rates and spread widening in the high yield market should reduce lending margin pressure both within household and corporate lending. A weaker NOK has a negative impact on CET 1, though, and reduces dividend capacity short term. Buy reiterated with a revised NOK 130 (137) share price target, which implies P/B 1.3 and P/E 11.5X our 2015E.
Reported EPS of NOK 3.18 expected in 4Q
• A lower oil price and weaker NOK will colour DNB’s 4Q report. Group loan loss provisions are expected to rise on higher credit risk, while a weaker NOK supports NII but acts as a drag on CET 1. The report should confirm that ROE of 11-12 is likely going forward, but dividend capacity is somewhat lower than assumed at the November CMD due to a weaker NOK.
Loss absorption capacity improved since 2007
• DNB’s ability to absorb loan losses through annual profits and capitalisation has increased since 2007 as CET 1 has increased from 6.7% to some 13% and profits pre losses as % of gross lending is improved from 1.3% to 2.1%. We thus believe DNb will weather the lower oil price in 2015.
Normalisation of dividend to support share – Buy/NOK 130 (137)
• A lower oil price has been a drag and DNB has underperformed Swedish peers by 12% last month. A lower oil price creates increases uncertainty for the Norwegian economy, but potentially higher loan losses will also lead to higher lending margins and loss absorption is improved since 2007. Long term risk reward is attractive and we reiterate our Buy recommendation with a NOK 130 (137) target which implies P/B 1.3 and P/E 11.5X our 2015E.
• .
DNB 4Q: Expecting reported EPS NOK 3.18 and adjusted at NOK 2.95 …main focus on credit quality and dividend outlook
16/01/2015 39
DNB, NOK m 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14E
Net interest income 6 857 7 480 7 915 7 940 7 691 7 867 8 228 8 410
Net commiss ions 1 694 1 896 1 899 1 899 2 185 2 241 2 230 2 161
Financia l instruments 1 064 1 363 1 263 1 342 2 089 1 132 1 817 1 753
Li fe insurance 220 231 205 366 105 182 136 141
Profi t from companies 74 70 99 118 107 35 41 112
Other income 630 742 649 594 392 497 336 370
Other operating income 3 682 4 302 4 116 4 319 4 878 4 087 4 560 4 537
Total income 10 539 11 782 12 031 12 259 12 569 11 954 12 788 12 946
Staff costs -2 639 -3 214 -2 776 -2 678 -2 710 -2 789 -2 752 -2 848
Other costs -2 846 -2 446 -2 447 -2 830 -2 482 -2 444 -2 409 -2 485
Total costs -5 485 -5 660 -5 223 -5 508 -5 192 -5 233 -5 161 -5 333
Operating profit 5 054 6 122 6 808 6 752 7 378 6 721 7 627 7 613
Loan losses -737 -937 -475 -36 -80 -554 -183 -793
Net ga ins assets 4 -9 2 153 0 -3 13 0
Pretax profits 4 321 5 176 6 335 6 869 7 298 6 164 7 457 6 820
Tax and minori ties -1 140 -1 386 -1 454 -1 221 -1 777 -1 510 -1 771 -1 636
Net profit 3 181 3 790 4 881 5 648 5 521 4 654 5 686 5 184
EPS reported 1.95 2.33 3.00 3.47 3.39 2.86 3.49 3.18
EPS adjusted 2.23 2.52 2.99 3.08 3.17 2.81 3.23 2.95
ROE reported 9.8 % 11.6 % 14.6 % 16.3 % 15.2 % 12.6 % 15.1 % 13.3 %
ROE adjusted 11.3 % 12.5 % 14.6 % 14.4 % 14.3 % 12.4 % 14.0 % 12.3 %
Interest margin 1.20% 1.31% 1.36% 1.35% 1.30% 1.32% 1.36% 1.39%
Loan losses 0.22% 0.28% 0.14% 0.01% 0.02% 0.16% 0.05% 0.23%
CET I (50% YTD profits) 10.6 % 10.8 % 11.0 % 11.8 % 11.9 % 12.1 % 12.6 % 12.9 %
Loss absorption capacity improved from 1.3% of lending in 2008 to 2.1% …significant loan loss buffer. CET 1 from 6% to 13% as well
16/01/2015 40
-0.5 %
0.0 %
0.5 %
1.0 %
1.5 %
2.0 %
2.5 %
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14E 15E 16E
DNB: Loss absorption capacity* and loan losses as % lending*Operating profit pre loan losses ex Vital
Operatingprofit preloan losses
Loan losses
Pre-loss profit profit 6% of lending in 3yrs
Significant buffer
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Disclaimer SpareBank 1 Markets Research Department
Our recommendations are based on a six-month horizon, and on absolute performance. We apply a three-stage recommendation structure where Buy indicates an expected annualized return of greater than +15%; Neutral, from 0% to +10%; Sell, less than 0%.
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SpareBank 1 Markets assumes no obligation to update the information contained in this report or summary to the extent that it is subsequently determined to be false or inaccurate.
This document contains certain forward-looking statements relating to the business, financial performance and results of the issuer and/or the industry in which it operates. Forward-looking statements concern future circumstances and results and other statements that are not historical facts, sometimes identified by the words “believes”, expects”, “predicts”, “intends”, “projects”, “plans”, “estimates”, “aims”, “foresees”, “anticipates”, “targets”, and similar expressions. The forward-looking statements contained in this document, including assumptions, opinions and views of the issuer or cited from third party sources are solely opinions and forecasts which are subject to risks, uncertainties and other factors that may cause actual events to differ materially from any anticipated development.
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Disclaimer No Solicitation
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Disclaimer Any transaction in the securities discussed in this report by U.S. persons (other than a registered U.S. broker-dealer or bank acting in a broker-dealer capacity) must be effected with or through SpareBank 1 Capital Markets.
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