Handelsbanken not expected to suffer ‘exceptionally low’ loan losses – analysts
Svenska Handelsbanken AB’s (publ) conservative risk culture and highly secured loan portfolio helped it achieve record loan losses during the coronavirus pandemic. But analysts believe it will be difficult for the Swedish lender to maintain those levels and expect its cost of risk in 2021 to more than double or even triple, contrary to the trend anticipated for other major Nordic banks.
After posting a cost of risk of just 3 basis points in 2020, it’s no surprise that Handelsbanken is seen as a safe haven for investors in times of crisis. In comparison, the average cost of risk for large European banks was 70bp, while for its Nordic peers Nordea Bank Abp, Danske Bank A / S, DNB ASA, Skandinaviska Enskilda Banken AB and Swedbank AB (publ) this figure was 36 bps, according to data from S&P Global Market Intelligence.
CFO Carl Cederschiöld, presenting Handelsbanken’s annual results, acknowledged the lender’s prudent credit risk culture, close customer relations and highly secured loan book as determining factors for its “exceptionally low” levels of credit losses. He further reminded analysts – as has become the tradition when calling the bank’s quarterly results – that Handelsbanken has historically managed crises with lower losses than its Nordic peers and has the lowest share of loans. problematic in Europe.
Over 87% of Handelsbanken’s loan portfolio is in mortgage lending and property management, with relatively low loan-to-value levels. The bank has little exposure to the oil, gas and offshore sectors, at just 0.2% of its loan portfolio, a segment which has been particularly vulnerable during the pandemic and which has pushed up provisions for other Nordic banks in 2020. .
Analysts recognize Handelsbanken’s strong underwriting standards and loan portfolio structure as key factors in its continued low loan losses, but also believe that the small size of its current credit loss reserve reflects the fact that more provisions related to coronaviruses are forthcoming.
S&P Global Ratings expects Handelsbanken’s cost of risk to hit 10 basis points in 2021 and 8 basis points in 2022, while UBS analyst Johan Ekblom expects these numbers to land at 9 and 8, respectively. basis points.
While for other Nordic banks, 2021 appears to be a “year of transition” to normalized levels of loan losses in 2022, Handelsbanken is an “outlier” to this forecast, given that it has not incurred. substantial credit costs in 2020, Ekblom said in a note on Feb. 16.
Berenberg analyst Adam Barrass said on February 4 that “sustaining such small losses could prove difficult” for Handelsbanken, predicting that the cost of risk will more than triple to 13 basis points in 2021, before d ‘reach 10 basis points in 2022. He pointed to stage 2 of the bank. and 3 coverage rates, at 1.09% and 31.97% respectively, as being relatively low. These figures were 2.14% and 47.46% for Swedbank, and 1.77% and 48.42% for SEB, for example.
Handelsbanken appears to have taken “a somewhat different approach to general provisioning” – i.e. provisioning guided by macroeconomic modeling and management overlays rather than specific exposures – according to Louise Lundberg, Nordic banking analyst at Moody’s.
So far, the pandemic has had little impact on the asset quality of the largest Nordic banks, so they have instead anticipated loan losses through large general provisioning. Handelsbanken also established general provisions in 2020, but the levels are significantly lower than those of its peers, Lundberg mentionned.
By Handelsbanken Provisions for loan losses of SEK 781 million in 2020, SEK 564 million have been set aside as a specific COVID-19 reserve to cover stressed exposures. If this management overlap represented a significant part of its cost of risk in 2020 – about 74% – it only covered 42% of its normalized cost of risk, according to UBS’s calculations.
Ekblom found that Danske and Nordea in particular appear to be more ‘more conservatively provisioned’, with Nordea’s management overlay covering 134% of its normalized cost of risk, while for Danske this figure was 72%.
Lundberg does not think Handelsbanken necessarily “under-funded”. She said that if current macroeconomic projections hold true, Nordic banks that have taken a more cautious approach to provisioning their loan losses in 2020 are likely to be able to do reversals once the uncertainty eases, while for Handelsbanken, this is more unlikely.
Property management, UK business
The asset quality of Nordic banks has been supported by various government support efforts against coronaviruses, which means that there is a risk that the phasing out of these measures could lead to a deterioration in asset quality.
Some areas of Handelsbanken’s loan portfolio are vulnerable. DBRS Morningstar will pay particular attention to the bank’s property management portfolio, which could weaken should retail and office management activities prove to be heavily impacted by the pandemic, and its UK portfolio, which exhibited a Relatively low cost of risk of 4bp in 2020 given the macroeconomic outlook for the market, said Mario De Cicco, vice president of global financial institutions.
On a positive note, even if analysts’ cost of risk expectations hold true, Handelsbanken’s loan loss levels are likely to remain below the average for its Nordic peers. The bank’s profits and capital also mean it is well positioned to withstand any impact, according to From Cicco.
Handelsbanken’s CET1 ratio stood 6.5 percentage points above the regulatory requirement at 20.3% at the end of 2020, giving the lender “a stronger buffer to absorb unexpected losses,” said Salla von Steinaecker, Director and Senior Analyst, Nordic Banks at S&P Global Ratings.
As of March 18, USD 1 is equivalent to SEK 8.51.