On Tuesday, Bofa Securities adjusted its outlook on Skandinaviska Enskilda Banken AB (SEBA:SS) (OTC: SKVKY) stock, increasing the price target from SEK 135.00 to SEK 139.00. The firm maintained its Underperform rating on the bank's stock, indicating a cautious stance despite the slight increase in the target price.
The revision reflects a valuation that accounts for SEB's strong position to benefit from a rebound in Northern Europe's corporate sector. Nonetheless, the bank is expected to face substantial net interest income (NII) pressure, with a projected compound annual growth rate (CAGR) decline of 6% from 2023 to 2025.
This anticipated pressure is attributed to several factors including a low level of fixed-rate assets, significant exposure to the predominantly floating-rate Baltic markets, and a high deposit beta, which is considered a critical factor for NII relief.
SEB's deposit beta is particularly important as there is considerable room for deposit repricing. However, the competition for corporate deposits, which are less sticky, is likely to constrain the extent of possible NII relief. Additionally, the absence of hedges is a contributing factor to the anticipated NII pressure.
The bank's operating efficiency is also expected to be challenged, with negative operating jaws resulting from increased costs and limited relief from bank levies in Sweden and the Baltic region.
These factors, along with additional risks associated with the Baltic markets, are projected to lead to more than a 4% return on tangible equity (ROTE) erosion for SEB between 2023 and 2025.
Despite the bank's high-quality profile, its valuation is considered to be on the higher end. SEB trades at the highest price to tangible book value (P/TBV) and price to earnings (P/E) ratios for the year 2025 in Europe, at 1.4 times and 10 times, respectively.
The bank's ROTE is expected to align with the European average of approximately 14% for the same period. Furthermore, the total yield, including the strategic buyback (SBB), is noted to be below the sector average at just 9%. These factors contribute to the analyst's perspective that SEB's stock is currently richly valued.
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