On April 16th Marketwatch analyst Victor Reklaitis wrote an article about the Nordic banks and claiming that many of the Nordic banks are a bargain:
“Investor should consider buying shares in four Stockholm-based banks, says a team of UBS strategists led by Daniel Waldman in a recent note. They suggest placing equal bets on Swedbank (Sweden: Stockholm: SWEDA), Skandinaviska Enskilda Banken (Sweden: Stockholm: SEBA) Svenska Handelsbanken (Sweden: Stockholm: SHBA), and Nordea (Sweden: Stockholm: NDASEK)”
In this article, I’ll show you why I agree with the UBS strategists. Let’s start with the first bank, namely Swedbank AB (OTCMKTS: SWDBY). The illustration bellow includes an overview of the company were we focus on the most popular fundamental measurements.
As we can see, the dividend yield is very high at 7.1% and has been quite consistent in the last 5 years. Since Nordic companies pay dividends based on revenue, very few companies paid any dividend during the financial crisis – this will be the case for all the banks mentioned by the UBS strategists. When we evaluate financial assets, we look at the price to book ratio (P/B). A P/B at 1.0 means that we get zero discount on the equity within the company, but we don’t pay a premium either. The P/B for Swedbank is 1.5, but we should keep in mind that Swedbank has a lot of value in their intangible assets because of their brand, as well as Swedbank’s ability to attract new talent.
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Based on the profitability, Swedbank seems like a buy right now. The Return on Equity has been consistent for almost 10 years, and the operating margin is also very strong. The ROIC, which is how we measure if management spend the company’s capital in a smart way, has been growing for almost every year. Combine this with the double-digit ROE and a strong profit margin, and the case for Swedbank is strong.
The second bank we shall look at his Nordea Bk AB SW/S ADR (OTCMKTS: NRBAY). The special case for Nordea is that they recently decided to move the headquarter to Finland which will further decrease the cost for this Nordic bank.
Again, we look at the overview display and get an idea of what the classic fundamental numbers are for Nordea.
Nordea yields 7.6% and has a price to book ratio at 1.1. This is the “cheapest” among the Nordic banks and could be a potential reason to buy this great Nordic bank. One reason for this low valuation is that there is a trend in the banking environment that people are less loyal to a certain bank. Since most banks offer the same products, there is little difference between for the customer. The main difference is therefore in the intangible assets and the ability to attract great talent.
At last, we can see that the return on equity has been quite good in the recent years, but dropped in 2017. The ROIC and ROC has also been strong, which shows that management are spending the capital in a smart manner, which again rewards shareholders.
In total, the UBS’s strategies made a good call recommending the Nordic banks. Many are trading at good prices in a somewhat expensive market.
The overall analysis is that you can buy a great bank at a P/B close to 1.0 while getting a 5+% dividend yield.
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Disclaimer: The author owns shares in Nordea