DBRS: Handelsbanken Reports Robust FY14 Results

Summary:
• Robust FY14 results supported by growth in net fee and commission income
• Capital ratios and asset quality remain strong
• 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) FY14 results as robust. For the full year 2014, net income from continuing operations reached SEK 15.1 billion, or 7% higher than 2013. On a quarterly basis, profit from continuing operations was SEK 3.4 billion, down from SEK 3.9 billion in 3Q14. This was driven primarily by seasonal cost effects and increased impairment charges.

Net interest income was down 2% on 3Q14 but up 2% on an annual basis due to higher business volumes and increased lending margins. Net fee and commission income improved 4% on a quarterly basis helped by increased capital markets activity. The year on year increase of 10% mainly reflected higher asset management activity and payment commissions. DBRS notes that net commission income from mutual funds, asset management and insurance has increased by 40% over the last 2 years. Exchange rate effects negatively impacted operating expenses in 2014 and resulted in a 2% increase on 2013. However, on an adjusted basis they improved by 0.5%. Overall, the cost/income ratio improved in 2014 to 45.2%, from 47.0% in 2013, and DBRS continues to view positively the strong cost management across the Bank, particularly given the expansion outside Sweden in the UK and the Netherlands.

The contribution of non-Swedish banking operations to the Group’s overall earnings remains significant, even though the proportion of pre-tax profit coming from the branch operations outside Sweden decreased to 26.1% in 4Q14, from 31.9% in 3Q14. The decrease was primarily driven by higher loan losses, particularly in Denmark and Finland which negatively impacted results in these markets. In the UK, the Bank now has 189 branches (including appointed branch managers), and DBRS views the continued expansion as demonstrating the Bank’s successful commitment to the UK market.

At end-2014, the Bank’s asset quality remained very strong with total impaired loans of SEK 8.7 billion, or 0.48% of gross loans, up from both 0.40% at end-3Q14, and from 0.41% at end-4Q13. Net loan losses for 2014 totalled SEK 1.8 billion, up from SEK 1.2 billion in 2013, mainly due to two specific problem cases, one in Denmark and one in Sweden.

Handelsbanken’s capital levels remained high and at end-2014 the Common Equity Tier 1 (CET1) ratio was 20.4%, up from 18.9% at end-2013, with the rise mainly due to accumulated profit and lower-risk new lending. The current 20.4% CET1 ratio is above the 17.7% minimum ratio based on the Swedish Financial Supervisory Authority requirement for 3Q14. Handelsbanken plans to maintain a CET1 ratio of around 1-3 percentage points above the minimum requirement of the Swedish Financial Supervisory Authority, suggesting a ratio in the range of 18.7% to 20.7%. Given the current capital levels, and the Bank’s strong internal capital generation capacity, DBRS views Handelsbanken as well placed from a capital perspective.

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

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