How Handelsbanken reclaimed its status as the post-crisis ideal

If any European lender has had a good 2020 so far, it’s Handelsbanken.

Sweden’s second biggest bank was the ideal of a more cautious, consistent and focused business model after the 2008 and eurozone crises. Now, it’s back in vogue, as investors are again favouring simpler European lenders over more complex, global firms.

Handelsbanken is the continent’s highest valued bank stock by price-to-book, according to Berenberg. By mid-June, its shares had performed better in 2020 than any other bank stock in Europe except Deutsche Bank and UBI Banca, neither of which have much cause to boast.

Perhaps this should come as no surprise.

“We’re seen as a safe haven during turbulent times,” says Lars Höglund, Handelsbanken’s head of investor relations.

Until recently, however, Handelsbanken had its share of doubters. It struggled to keep up with rivals’ rapid digitalization and suffered a string of short-lived chief executive tenures. The Nordic money-laundering scare of the late 2010s brought much higher compliance costs.

Carina Akerström, CEO of Handelsbanken

When Carina Akerström took over as CEO in early 2019, she was so dissatisfied with Handelsbanken’s financial performance that she suspended the staff profit-sharing mechanism, Oktogonen. Last year, she closed offices in the Baltics, Germany and Asia, to keep a lid on costs.

Handelsbanken’s relatively low exposure to emerging Europe previously saved it from the worst of the money-laundering scandals. A new focus on Scandinavia, the UK and the Netherlands now makes its business even simpler and even less risky – at least from a financial crime perspective.

Concentration

The bank’s recent share-price outperformance has nothing to do with Sweden’s lack of a strict lockdown. Exports drive much of Sweden’s economy, so the country faces an even worse recession than the one it experienced in 2009.

Rather, Handelsbanken looks better than others today precisely because this crisis is still omnipresent. Diversification counts for little. That’s highlighted the benefits of banks that concentrate on doing well in one country or sub-region, especially those that do it while maintaining strong capital buffers.

Handelsbanken has a capital ratio of 17.6%, one of Europe’s highest. Compare that with a bank such as Santander, with a ratio of just 11.6%. Today, Santander can less convincingly argue that such a low ratio is justified by the lack of economic correlation between Spain, the UK and Brazil, its biggest markets.

Above all, investors favour Handelsbanken in an economic downturn because of its reputation for lower-risk lending. Credit losses increased in the first quarter as management set aside capital for the potential impact of Covid-19, but this still came to only 0.08% of its loan book, Europe’s lowest provision in the first quarter.

This is despite commercial real-estate lending, which is notoriously volatile, making up about a third of Handelsbanken’s loan book. That’s one of the highest levels of such lending in European banking, according to Johan Ekblom, an analyst at UBS.

You need to be humble around asset quality in a crisis like this. If this crisis were to continue for a long time, beyond the summer, then that’s a different situation 

 – Lars Höglund, Handelsbanken

In the UK, which accounts for a much bigger proportion of Handelsbanken’s business than it did in the last crisis, such lending is almost 60% of the loan book.

Meanwhile, the bank has also grown more in Norway more rapidly than in Sweden, which might bode ill considering the collapse in the oil price.

“You need to be humble around asset quality in a crisis like this,” Höglund accepts. “If this crisis were to continue for a long time, beyond the summer, then that’s a different situation.”

Nevertheless, the quality of Handelsbanken’s borrowers, and of their collateral, stand it in good stead. Its average loan-to-value ratios in the UK and Norway are about 50%. The bank has long veered more to office blocks than shopping malls, shielding itself from the now-escalating rise of internet shopping.

“When we lend to properties, we are not looking for properties per se but for solid, conservative, long-term property owners,” Höglund tells me. “We need to see other cash flows, not just from the property, and we’re looking for customers that are able to adjust to different parts of demand.”

Lower risk

There’s no doubt that Handelsbanken has had strong asset quality. It started the year with a non-performing loan ratio of just 0.04%, lower than any other bank of its size, even in Scandinavia.

“That’s a good starting point when you enter a crisis like this,” Höglund comments.

During the past two decades, Ekblom notes, Handelsbanken’s average cost of credit has been just 0.06% of its loan book. That compares to 0.15% at Nordea, Scandinavia’s biggest bank.

The difference may be partly because Handelsbanken sticks to wealthier borrowers. However, Handelsbanken’s historically lower risk is also to do with its business model. Nordea has previously been a larger corporate and investment bank, for example, which has inevitably brought bigger exposure to sectors such as energy and shipping.

It requires more of a leap of faith to say Handelsbanken’s credit quality will always be lower because it’s so much better than others at picking credits in the same country and sector. After the 2008 crisis, Handelsbanken’s cost of credit in Sweden was not much different to what Swedbank marked down, according to Ekblom.

But with every other European bank in such pain – and other Nordic banks such as Swedbank also reeling from a slew of money-laundering scandals – it’s little wonder that yield-starved investors are ready to give Handelsbanken the benefit of the doubt for now.