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Morningstar | Handelsbanken's 1Q Results Affected by Employee Profit-Sharing Cancellation; FVE Unchanged

Handelsbanken, or SHB, reported first-quarter 2019 results of SEK 4.8 billion, compared with SEK 4 billion in 2018, after its board decided to cancel employee profit-sharing payouts for 2018. This resulted in a provision write-back of SEK 827 million and a material uplift in operating and bottom-line figures. Excluding this effect, operating profit was virtually flat in the quarter at SEK 5.6 billion. Net interest income grew 4% compared with 2018, owing to higher volumes because currency effects and mandatory government fees more than offset the negative impact of margins and funding costs. Expenses increased 3% after cleaning for one-offs. Credit costs were marginally higher at SEK 288 million compared with SEK 276 million quarter-over-quarter. We maintain our fair value estimate of SEK 121 per share and narrow moat rating.

The cancellation of employee profit-sharing contributions for 2018 has drawn attention not only because it affected headline figures. The contribution, which is invested in the Oktogonen foundation, SHB’s largest shareholder, and paid out when an employee reaches retirement, is closely linked to SHB’s strong long-term focused culture. The concern is the cancellation may lower morale among employees. We believe this concern is largely overblown. SHB missed its own targets, specifically higher return than its peer average, so we believe it is understandable that bonuses were cancelled. We would be more worried if the board felt the need to continue incentivising employees even when missing targets.