Morningstar | We Reinitiate on Handelsbanken; Shares Slightly Undervalued
Much has been said about Handelsbanken's business model, some praising it as the gold standard for retail and commercial banking, while others see it as outdated in a time of ever-increasing digital offerings. Its predominant feature is a decentralised approach to banking which gives higher decision-making power to its branches and reduces the need for middle management. Additionally, it generates stronger customer relationships allowing for better loan underwriting which keeps credit costs low. We believe Handelsbanken is one of the best run banks in Europe and while we acknowledge it has been late to the digital game relative to peers and that its business model does not lend itself to a centralised efficiency splurge, we think concerns that Handelsbanken has seen its best days are exaggerated. We do not subscribe to the idea that Handelsbanken’s business model and branch network poses a significant disadvantage to the bank. Rather, we are of the opinion that Handelsbanken follows a different path to its peers. We see synergies in Handelsbanken’s approach toward clients and its growing asset management and private banking offering. As such, we expect branches to progressively move away from main streets onto the second floor rather than large-scale branch closings as the bank increases its focus on becoming an advisory service-focused bank. This should not only diversify Handelsbanken’s currently high dependence on interest spread based income but also leverage its existing strength of its customer relationships and solidify its competitive position in an increasingly competitive mortgage and corporate lending markets.We are also supporters of Handelsbanken's prudent approach in its quest for growth. While Nordic peers have entered primarily Baltic states to participate in the economic upswing, Handelsbanken has entered competitive and saturated markets in the U.K. and the Netherlands. While this may sound odd at first, we believe it speaks to its strength that the bank can replicate its business model in competitive markets and generate organic growth rather than relying on macroeconomic and acquisition driven expansion.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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