Swedbank Q2: The 7% Dividend Is Safe; TP Increased

| About: Swedbank AB (SWDBF)

Summary

Swedbank published Q216 results.

Robust results with a 7% earnings beat, driven by strong NII trends as mortgage margins have repriced higher.

The numbers suggest a 4% upside to our target price.

We are reiterating our Buy recommendation.

Swedbank (OTCPK:SWDBF) (OTCPK:SWDBY) published Q216 results. Our key takeaways were as following.

The earning beat was primarily driven by strong NII (Net Interest Income) trends at the Swedish banking unit. To recap, Swedbank is the main beneficiary of persistent Swedish mortgage growth as c.50% of group loans are Swedish mortgages, which increased 4% y/y in Q2. According to the bank's press release, "the growth rate in the Swedish mortgage market was high as many customers took advantage of the opportunity to borrow more against their current homes before the amortization requirement took effect."

As a reminder, in June 2016, the Swedish Financial Supervisory Authority started applying an amortization requirement on all new Swedish mortgage loans, in order to reduce the risk of imbalances in the Swedish economy caused by excessive household lending. New mortgages with a loan-to-value (LTV) of above 70% will be subject to a minimum amortization requirement of 2% per annum and new mortgages with a LTV of 50-70% will need to be amortized by at least 1% per annum. Having said that, even with the new amortization rules, it is difficult over some time to see mortgage growth below 5% per year.

Management confirmed that the Swedish mortgage margin front book increased by 5 bps in June, and is 10 bps ahead of the back book. In our prior article on Swedbank, we have mentioned that there was an upside risk to our target price from higher mortgage margins.

The key negative from the numbers was loan loss provisioning, O&G (oil & gas) - related losses rose sharply and the outlook for loan losses in 2016 and 2017 has become less certain.

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Source: Company data

However, O&G exposure is modest relative to the overall group, just 2% of total loan book. We believe O&G - related loan loss provisions are not an issue for Swedbank, as they should subside over time.

The bank's CET1 ratio was down 70 bps q/q, of which 20 bp was due to one-off factors related to Visa (NYSE:V). There is still a buffer of around 200 bps to requirements.

Valuation

We are updating our forecasts following Swedbank's Q2 results. We are increasing our earnings estimates for 2016 to reflect higher mortgage margins. Our new target price is SEK245.

Source: Renaissance Research estimates

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Source: Bloomberg, Renaissance Research estimates

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Source: Bloomberg, Renaissance Research estimates

Bottom line: Being the main beneficiary of persistent Swedish mortgage growth, Swedbank offers a very compelling investment case. It is a high-quality bank with resilient earnings, asset quality stability and impressive capital ratios. At current prices, the shares offer a dividend yield of 7%.

Disclosure: I am/we are long SWDBF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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