EUR 169.49 For Business Accounts Only

Svenska Handelsbanken (Sell, TP: SEK101.00) -

Initiatives unlikely to drive re-rating We have largely maintained our earnings estimates, and reiterate our SELL and SEK101 target price. Despite Handelsbanken’s cost-efficiency initiatives announced in Q3, which over a 4-year period it expects to free up resources equivalent to ~1,600 FTEs, we expect still-rising nominal costs. We expect ROE remain around the current 11%, which we find too low given the shares’ valuation at P/BV 1.4x. Handelsbanken noted slight pressure on Swedish mortgage margins in Q3, and we expect this trend to continue on rising competition and falling mortgage volume growth. Q3 review. ROE of 11.8% was down 40bp YOY, as costs (+12% YOY) continued to outpace revenues (up 5% YOY). NII fell by 0.5% QOQ, partly due to lower lending margins including slightly lower Swedish mortgage margins, and also due to funding by the bank in the quarter. Commissions were good, up by 3% QOQ, largely explained by a reimbursement from the bank’s partner card companies in the quarter. Nominal costs likely to continue rising despite targeted efficiency improvements. The Q3 report quantified cost-efficiency improvements from digitalisation equivalent to ~1,600 FTE equivalents (13% of FTEs) over a 4-year period. However, this targeted FTE reduction is on a gross basis. As the bank will continue to add resources in some parts of the bank (e.g. branches in the UK and the Netherlands, and in IT development), it is not clear if the number of FTEs will decline on a net basis, and we believe they are unlikely to offset wage increases to reduce costs in nominal terms. We expect the bank to enter 2019 at a fairly high cost growth pace, and a nominal cost increase of ~1% p.a. on average in 2019–2020. SELL and SEK101 target price reiterated. We have kept our earnings estimates largely intact, and our 2019–2020e EPS is 4–7% below consensus. We find the shares’ 10%+ valuation premium (on 2019e PER) to Swedish peers Swedbank and SEB difficult to justify, underscoring a negative risk/reward.