After my Quicky about Banking Industry post I want to take a look at individual banks with different business models in my mini series on banks. This is also part #6 of my series of Quickies on new companies.
Svenska Handelsbanken AB (the company, Svenska or Handelsbanken) was established 1871 in Sweden, which ist still its biggest home market in on of its biggest. Handelsbanken emphasizes its decentralized business model, good relationships with clients and low(er) risk approach. For all these reasons it is well known in value and quality investor ranks. According to its 2019 annual report (AR 2019), the bank has ‘more satisfied customers than the sector average in all six of our home markets’.
The graveyard of corporate failures is loaded with tombstones of centralized, command and control organizations.Steven Wood (featured in Food for Thought #15)
Its stock (SHBA SS) currently trades at SEK 78, slightly above multi-year lows seen during March (75), but has by no means recovered to pre pandemic levels (110). Based trailing and forward earnings indications are for a 10x P/E (which is rather low taking into account my below conclusions). Svenska also has B-shares trading under the ticker SHBB SS (about the share). As for many other banks, dividend payouts are currently canceled.
- The 2019 regular dividend of SEK 5.5 would make for a high dividend yield of ~7%.
What is special about Handelsbanken? is the one questions worth answering in a more comprehensive way than above. Page three of Svenskas factbook says it all: My highlights:
Decentralisation – the branch is the bank. Branches are fully responsible for all customer relationships. Credit decisions are made at the branch level. Branch managers are fully responsible for all customer transactions. Depending on the size of a credit, additional approvals may be required at regional and central level. This setting actually can result in
+ lower costs and more flexibility
+ decisions better reflecting local environment / specialties
+ decisions being made priotizing long-term profitability. See next two points:
No sales targets. Svenskas focus is always on profitability and never on volumes. As a consequence, the bank has no sales targets or market share goals. I like this policy very much. Other banks behave differently, as the below infamous quote illustrates so perfectly!
When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.Charles Prince, former Citi CEO in July 2007 (dealbook, NYT)
Cyclicality is a huge problem in banking (see below quote) and banks fight for market share, effectively offering cheaper loans that may not always cover the real underlying risks. Maybe I should include both quotes about a lot of things going usually wrong in the banking industry in my Quicky about Banking Industry.
As The Economist said earlier this year, “the worst loans are made at the best ofHoward Marks (from his book)
Not a mass market bank. Handelsbanken targets corporate and private customers
with a better cash flow than average, which should result in much lower credit losses.
Focus on customers, not on products. The focus is always on the need of the individual customer and not on the sale of specific products. As a consequence, the bank does not perform any central marketing campaigns. Marketing activities are therefore decided locally.
No bonuses. Handelsbanken believes bonuses should be avoided in risktaking operations, mainly because they risk providing the wrong incentives (some of us knew before the GFC that those would result in moral hazard). Consequently, the bank has no bonus programme for any members of executive management or for any staff in the branch office operations, who all work on fixed salaries (there are exceptions ins investment banking and asset management). I like that setting very much as a potential (as of writing this) investor!
Credit policy. The bank’s credit policy is centralised and non-negotiable. It is the same in all markets and it remains unchanged over the business cycle. Credit decisions should always be made based on the cash flow and repayment capacity of the customer. A weak or uncertain repayment capacity can never be offset by a high margin or by collateral.
Low risk tolerance. The bank has a low risk tolerance and the business model is focused on underwriting and managing ultimate credit default risk at branch level. The aim is to minimise market risks and all other risks. Position taking is only accepted in client-driven transactions and within strictly defined limits. The bank also aims at reducing macro risks in order to have a business model that is as independent as possible from the shifts in the business cycle.
A vast branch network underpins Svenskas business model which is build around decentralized decision making in branches with local knowledge and responsibility. Its so called home markets are Sweden (400 branches), Denmark (50), Finland (30), Netherlands (30), Norway (50), UK (200). There are further operations in a few less important European countries. Svenskas US dependencies support corporate and institutional clients. Asian locations will be wind down. (locations)
But change is underway. Svensky is closing down many branches (press release), slashing costs and shifts to digital business of which the customers are also very fond of (press release). So, as all the other banks doing business in Western Europe, Svenskas earnigns are pressured, forcing it to slash costs. And one of the best ways to do this (with ever more business shifting only anyway) is closing branches. But stop! Svenska is rather profitable and shows earnings per share of about SEK 2 for hte last 8 quarters. For me this basically means Svenska keeps up with the times and is acting from a position of strength.
Handelsbankens financial goal is to have higher profitability than the average of its competitors through having more satisfied customers and lower costs (including loan losses) than its competitors (factbook). Taking a look at Svenskas Q3 presentation I was quickly able to confirm the three underlying factors for its banking business model.
- more satisfied customers drive
- higher profitability, incl.
- loan losses
Satisfied customers like its products. Slides #27 and 33 show the impressive customer satisfaction with Svenska. Not only did it improve a lot over the last four years (absolut) for private customers, but Svenska was also able to increase its lead over competitors (note on #27: the lead is not measured against the average of peers but against the best of the peers!). The lead over competitors was also increased in the corporate segment. I further believe, the company will take a sensible approach closing down branches but keeping customer satisfaction high (see slides #25-28).
Profitability is high. But for (potential) investors future profitability development is actually more important. Slide #32 gives us a good impression for its profitability. I like the rising share of commission income, since net interest income (NII) could be pressured longer-term with regard to low(est) interest levels globally. Page four of Svenskas factbook shows its solid income statement for the last eight quarters. EpS are about SEK 2 per quarter, or SEK 8 annualized. Svenska took reassuring steps for growing future profitability (#30, press release). But profitability can be impacted by materializing credit risks …
Loan losses are spectacularly low. Slides #20-24 supports my prior belief and should reassure investors even during crisis. Svenskas credit portfolio quality is second to none. In addition, Svensky has a very strong capital base (#19).
My conclusion on Svenska is that it is a high quality bank showing solid profits and very low credit risk.
I hope you enjoyed this post on Svesnka. Do you agree or do you have a differnet take on Svenska? If you do not want to miss my look at the next banking model, just follow my blog 😉