DBRS: Handelsbanken’s Strong Performance Continues in Q2 2014

Summary:
• Solid performance supported by stronger NII, and fee and commission income.
• Continued expansion in the UK and plans to establish another regional bank in the UK during Q1 2015.
• Higher capital ratios, lower impaired loans and higher overall deposits helped to further strengthen the balance sheet.
• DBRS rates Handelsbanken at AA (low) with a Stable trend for Senior Unsecured Debt & Deposits.

DBRS Ratings Limited (DBRS) views Svenska Handelsbanken AB’s (Handelsbanken or the Bank) Q2 2014 results as solid, demonstrating the overall strength of the Bank. Compared to Q1 2014, net interest income (NII) increased by 1%, and compared to Q2 2013 NII rose 0.5%, supported by rising business volumes. DBRS views this as a strong performance given the lower interest rate environment. Overall income before provisions and taxes (IBPT) was up 2% on Q1 2014, and up 6% on Q2 2013. This reflects the higher NII, as well as the seasonally high dividend income of SEK 245 million (Q1 2014: SEK 4 million; Q2 2013: SEK 155 million), and an increasing contribution from mutual fund commissions. Operating expenses were up 1% on Q1 2014, although adjusting for exchange rate movements they were flat. The cost-to-income ratio improved further to 44.6% in Q2 2014 due to revenue expansion.

The Bank’s non-Swedish operations continue to contribute significantly to the Group’s earnings generation capacity, with the proportion of IBPT coming from the branch operations in the other Nordic countries, the UK and the Netherlands increasing to 30.5% in H1 2014, from 29.6% in H1 2013. This reflects the increase in customer numbers and solid business volumes in these operations. In particular with regards to the UK, where the Bank now has 176 branches (including appointed branch managers), a fifth regional bank is scheduled to start operations in the UK during Q1 2015. DBRS views this further expansion as demonstrating the Bank’s commitment to the UK market.

The asset quality of the Bank remains remarkably good and capital ratios strengthened further. Impaired loans decreased by 14% and along with a slight expansion in lending volumes this resulted in the impaired loans as a percentage of gross loans ratio dropping to 0.33%, 10 bps lower than at end-Q2 2013. DBRS also notes positively the almost 9% rise in deposits which helps to evidence the strength of the core customer base.

At end-June 2014 the Bank reported a Common Equity Tier 1 ratio (according to Basel 3) of 20.1%, up from 18.9% at end-2013 and 17.8% at end-Q2 2013. In May 2014 the Swedish Financial Supervisory Authority (FSA) announced details on the proposed structure of how capital requirements for Swedish banks will be devised in the future. These include an increase in the risk weight floor for residential mortgages to 25%, a systemic risk buffer of 3% of risk weighted assets (RWAs) and a 2% buffer requirement within the Pillar 2 framework, both of which are to be met with common equity tier 1 capital. In addition, a decision on the likely activation and final level of the counter‐cyclical capital buffer is expected in the autumn of 2014. Given the Bank’s strong internal capital generation and its current capital base, DBRS views the Bank as well placed to manage the impact of the evolving regulatory environment.

DBRS rates Handelsbanken at AA (low) with a Stable trend for Senior Unsecured Debt & Deposits.

Note:
All figures are in Swedish krona (SEK) unless otherwise noted.