Swedbank - an asymmetric trade (BUY - 190)

Swedbank AB, is a Nordic-Baltic banking group based in Stockholm, Sweden, offering retail banking, asset management, financial, and other services. In 2019 Swedbank had 900,000 private and 130,000 corporate clients and a 60% market share of Estonia’s payments.

Swedbank is one of the primary banks in Sweden, together with Nordea, Handelsbanken, and SEB.

The 4 banks have a marketshare of roughly 60% in Sweden.

SVT (Sweden's Television*) reported on February 20th, a potential money-laundering scandal involving Swedbank and suspicious transactions flowing from their Baltic branches between 2007-2015.

Swedbank's stock has collapsed roughly 30% since these allegations were brought forward. Investigations in the U.S, Sweden and the Baltics are currently being conducted as to examine the allegations brought forward.

The steep drop in the stock-price currently reflects the market pricing in substantial fines imposed by regulatory bodies, especially the U.S as a result of the money-laundering scandal, primarily focusing on Swedbanks gross negligence towards whistleblowers varnings over the years.

Sweden's oligopoly of the 4 banks (Swedbank, Nordea, SEB, Handelsbanken*) and their marketshare has dropped from approximately 80% to 60%, caused by an entry of smaller retail banks (Skandiabanken, SBAB Bank, Länsförsäkringar Bank och Landshypotek Bank*)  acting as competition. 

However, Sweden's banking sector enjoys a unique competitive advantage in comparison with its other Nordic and European counterparts, that lies in its high return on equity.

Yellow line - the 4 Swedish banks. 
Red line - Nordic banks.
Orange line - European banks.


for the 4 Swedish banks has historically been at 12-16%, and for European banks between 3-8%. The high ROE for Swedish banks depends on the substantial cost-savings created by technological implementation (online banking etc*) over the years, which lead to a decreased presence of physical banking offices across the country. 

P/E is currently at 7, with the average being 10 for the big 4 banks, indicating that the stock is trading at a discount.

One could argue that the decreased marketshare, (due to the increased competition of the retail-banks*), of Sweden's 4 banks ought to be reflected in its share price, but since this competition has been unfolding the last couple of years, we would see a larger decrease than the current share price.

Thus, the market seems to price Swedbank as a continuing high-performing bank and the current share price is a reflection of the risk associated fines from current investigations unfolding.

It is important to note that Swedbank is classified as a systemically important bank.

Swedbank's status as a systemically important bank is vital in terms of analysing the potential outfall of the current investigations of the alleged money-laundering.

HSBC was also under investigation for money-laundering 2012, which ended in a fine of 1.9 billion $.


"It is a dark day for the rule of law. Federal and state authorities have chosen not to indict HSBC, the London-based bank, on charges of vast and prolonged money laundering, for fear that criminal prosecution would topple the bank and, in the process, endanger the financial system. They also have not charged any top HSBC banker in the case, though it boggles the mind that a bank could launder money as HSBC did without anyone in a position of authority making culpable decisions.

Clearly, the government has bought into the notion that too big to fail is too big to jail. When prosecutors choose not to prosecute to the full extent of the law in a case as egregious as this, the law itself is diminished. The deterrence that comes from the threat of criminal prosecution is weakened, if not lost."

Clearly HSBCs status as a global systemically important bank was taken into consideration when deciding subsequent sanctions for the breach of money-laundering regulations. Clearly, a disproportionately small fine was imposed on the bank. 

Swedbank's fate, and the associated fine would follow a similar logic as the case with HSBC, with it being not too big as to avoid financial instability in the Nordic region.

Court proceedings, pending investigations etc, usually take up towards a year, and the associated uncertainty markets are currently pricing in should be gone by the time the verdicts are released.

Therefore, it is realistic to assume that Swedbank's share price ought to rise back to its level before the money-laundering allegations, which is in the 190-200 SEK range.

Profiting strategies on the future developments surrounding the stock are numerous;

Purchasing a deep-in-the-money call-options with a strike at 100 SEK, (with an expiry 1-1.5 years in to the future*) would offer substantial leverage as the future price rises after the investigations end. Basically entering a synthetic-long-stock position. 

Purchasing cheap out-of-the-money call-options with a strike at 190 SEK, (with an expiry 1-1.5 years in to the future*), offering 1:10 returns if the stock is at 200 SEK in 12-18 months time.

Purchasing the stock itself, with share price reaching 190 SEK in 12-18 months time.