On Tuesday, BofA Securities adjusted its stance on Swedbank AB (OTC:SWDBY) (SWEDA:SS) (OTC: SWDBF) stock, shifting from an Underperform rating to Neutral. The firm also raised the price target for the bank's shares to SEK 257.00 from the previous SEK 212.00.
This upgrade reflects a strategic move by the analyst, anticipating that the resolution of potential U.S. fines, expected in the second half of 2024, may boost the bank's share price and enable increased capital distribution. The analyst from BofA Securities highlighted that the upgrade was driven by an opportunistic view rather than a fundamental change in the bank's outlook.
The bank's fundamentals are still seen as challenging, with the weakest net interest income (NII) compound annual growth rate (CAGR) forecasted for 2023-2025 among its peers, estimated at a 7% decline. This is attributed to Swedbank's significant exposure to the competitive markets in the Baltics, as well as the Swedish mortgage and savings sectors, and the absence of interest rate hedges.
Further concerns for Swedbank include an expected negative operating leverage, or "operating jaws," with projections of an 8% decrease in 2024 and an 11% decrease in 2025. These figures are driven by anticipated higher operating costs. Additional risks are seen in the possibility of increased and extended bank levies in both Sweden and the Baltic countries.
The analyst also cautioned that the pace of capital distribution after the resolution of U.S. fines might not accelerate as quickly as investors hope. This is due to the potential decrease in profitability and the likelihood of extended probation periods that could span two to three years. Despite these challenges, the near-term clarity regarding the U.S. regulatory fines is seen as a positive factor that could lead to a favorable reaction in Swedbank's share price.
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