Morningstar | Handelsbanken Reports Good Full-Year 2018; Fair Value Estimate Unchanged
Handelsbanken reported operating profit of SEK 22 billion, up 3% from last year if one adjusts for non-recurring items, as income outpaced higher expenses in 2018. Income generation was healthy with both net interest income and net fee and commission income growing 5% year over year supported by 7% loan growth and an uptick of 11% in fund management and asset custody fees. Net credit losses came in lower than our expectations at 4 basis points, however, we do not think that such low levels are sustainable through the cycle. We expect a very good, albeit higher than in 2018, credit loss ratio of 7 basis points in our explicit forecast period until 2022. Operating expenses increased by 10% year over year, lifting Handelsbanken's cost/income ratio to 48% from 46% the previous year. The culprits were costs related to expansion and development in the Netherlands and the U.K. with the goal to grow and streamline operations. Return on equity for the full year came in at 12.8%, around our 12.5% ROE forecast for Handelsbanken in the medium term and comfortably above its cost of equity of 9%. We updated our analysis with full-year results and maintain our fair value estimate of SEK 121 per share. Our narrow moat and stable trend ratings remain unchanged.Handelsbanken's common equity Tier 1 ratio has declined to 16.8% from 22.7% after regulators moved the risk weight floor for Swedish mortgage loans from Pillar 2 to Pillar 1, increasing Handelsbanken's risk exposure amount by SEK 163 billion. Capital requirements have been adjusted accordingly, however, such that Handelsbanken continues to hold a common equity Tier 1 buffer of about 170 basis points.
Svenska Handelsbanken is a commercial bank for both private and corporate customers. Co. has six home markets: Sweden, the U.K., Denmark, Finland, Norway and the Netherlands. Co. has four business areas: Handelsbanken Capital Markets, which includes operations for investment banking, asset management, and also pensions and insurance; Stadshypotek, a mortgage provider; Forestry and Farming, which provides financial advice to forest owners and farmers; and Handelsbanken Direkt, which is engaged in business and product development of standardised banking services for the private and corporate market. At Dec 31 2013, Co. had total assets of SEK 2.49 trillion and deposits of SEK 825.21 billion.
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