Simon Hughes of International Banker interviews Mr. Mikael Sørensen, CEO of Handelsbanken UK.
Today International Banker is joined by Mikael Sørensen, CEO of Handelsbanken UK, to discuss the bank’s continued strong financial performance, commitment to customer service and UK expansion. Mikael, welcome. Now, according to a recent presentation published by Handelsbanken, operating profit from the bank’s UK operations in local currency increased by 9 percent for the January to September period. What would you say has been the main reason for this strong recent growth?
Well, I would say that our increased UK result is a proof of our resilient business model working very well here on the British market. If you look at the figures behind the improvement, then it’s not down to one single issue. It’s a matter of our branches around the country making more business with their existing customers in terms of lending, deposit transactions, wealth management and so on. But at the same time also we’re taking in new customers. We have a good, steady inflow of new customers across the country.
And as I understand it, Handelsbanken has seen an improvement this year in its CET1 ratio, which now stands at 24 percent, well above the minimum regulatory requirement of 21.1 percent. What has been behind the bank’s strength in capitalization?
Financial stability and financial strength is something that is very important for Handelsbanken. We want to be a good and prudent member of the community where we operate, both locally, nationally and internationally. We want to cater for ourselves and not be a burden to the society. Handelsbanken has never received any state support or asked for any state support or state guarantees during financial crisis. And we want to keep that like that also going forward. And there are three things which are very important to achieve this. One is to run a cost-efficient operation. Another thing is to have a low-risk profile. And a third thing is to keep some buffers in your balance sheet to cope with financial-stress situations. So this is why we keep such a high capital ratio.
And thinking about the kind of unique features of Handelsbanken’s business model, one of the most striking is its decentralized organizational structure. In your opinion, what’s the biggest advantage of having such a structure in place?
In Handelsbanken, we focus on our customers. And we have now in the UK 207 branches and in our six home markets, we have between 800 and 900 branches. All decisions related to the local customers are taken in the local branch. And this is really how our decentralization works in the bank. All customers in the bank are customers in a local branch. The local branch starts with people from the local community who know the local market area and who know each individual customer. So I would say this is the biggest advantage of our decentralized model.
And as you’re saying, it places more responsibility on the shoulders of individual branch managers then is the case in other banks. Given that, what are the main responsibilities of the bank’s central management positions, such as the chief executive?
Well, that’s a very valid question indeed. Handelsbanken, as we’ve just been discussing, is a very decentralized bank, where a number of branches and regional units work very autonomously, independent from each other. One of my key roles is to ensure that everybody works according to the business model that we have set up in the bank and also are compliant with the very few centralized policies that we have in the bank. You can say that it is to ensure that everybody has their nose in the right direction, and nobody tries to implement some kind of other local sub-policies in the bank. Another important task is to act as a coach. I have long experience in the bank, and I have seen many different things in the bank from four different countries. And many of the things which I have experienced during my career is something that I am happy to share with my colleagues, and maybe they can do some of them locally.
And it’s obviously working. It is a success. It has been a long-term success. Have you noticed other banks trying to imitate your model? And if so, what has your response been to that?
Well, if anybody finds our business model interesting, and would like to copy our business model, they are, of course, very welcome to do that. I’ve been very long in banking, and I have seen during my career banks that have tried to pick some parts of our business model and copy it. But our business model is actually like an engine. It consists of many smaller parts. And for the engine to work, every single part has to work together. If you take out one or two of the components, then the engine doesn’t work. And that’s the same thing with our business model. And many of the banks that have tried to copy it have not copied the whole thing but only taken a part. And then I don’t think it’s working.
- So with a decentralized model in place, is there ever a concern that…I mean, narrow, localized skillsets could be developed by employees, ones that allow you dependence on the kind of individual needs of the branch. And if so, how’s that result, say in the event of an employee moving off to a different branch?
Actually, it works the other way around, I would say. To work in a branch in Handelsbanken really requires a high level of skills. Because we are so decentralized and because most of the decisions are taken locally. So a normal banker working in a Handelsbanken branch has a completely different set of skills than you will find in other banks. At the same time, we try to encourage our colleagues to move around in the organization. So it can be that after a number of years in a branch, you move to a regional office or to a central office and spend some years there. And then later on, maybe move back to a branch. I have done that myself. And that’s really something that can create a fantastic career path within the bank.
Thinking about your levels of customer service, maintaining those at the high level that you do, requires a lot of flexibility in order to cater for each customer’s precise needs. Does that flexibility ever come into conflict with industry regulations or compliance rules governing the bank/customer relationship?
No, absolutely not. Customer focus is in the center of our business model. And we always start in our local branches with the customers’ needs. We don’t have any centralized product or sales targets so what the local branch agrees with their customers is always based on the customer needs and not our wish to sell something to the customer. Then, of course, there are a number of regulations and rules that are imposed on the banking sector, including us. And as I said earlier on, we try to be a good and prudent member of the community where we work. And we don’t have any opinion about regulations. We follow them as we’re supposed to do. For a prudent bank with good financials like Handelsbanken, then those kinds of regulations will very often be an advantage relative to our competitors, because we have good order in our house. And I cannot see how offering good customer service can ever be in conflict with regulations and rules set by the government and the regulators.
Now earlier on you mentioned the home markets in the 20 plus countries in which you operate. Those are considered to be Sweden, the UK, Denmark, Finland, Norway and the Netherlands. What sets these countries apart from the rest to be able to earn that classification? And do you envisage any additional countries being considered as home markets in the future?
A home market for Handelsbanken, in our six home markets of Handelsbanken, we have the ambition to offer full-service banking for both personal customers and corporate customers. The rest of the world where we are represented, we are represented to serve our home market customers. So this is the starting point. There’s a big difference in the domestic or a home market and the non-home market in the bank. To decide whether or not to take on a new home market is a hard decision. It’s something that really takes a long time. The UK became part of the home market 15 years ago, and now, as you know, we have more than 200 branches. Four years ago, the Netherlands became the sixth home market, and now we have 25 branches and a growing business there. But in both countries, we had been for quite some time before we made the decision to turn it into a home market. It’s very important that we feel that our business model will work in the market. It’s also very important that we feel confident with the political and legal and economical structure of the bank. It has to fit within our low-risk profile within the bank.
Now we’ve mentioned those kinds of European countries. Has Brexit significantly altered your approach to banking in any way, both in the UK and in the other home markets? And do you see Brexit having any major impact on the UK banking industry in general?
Well, let me say that it will not have any impact on our business in the UK. We have a long-term commitment to the UK. We have built up a fantastic business here. And for us banking is local. And a customer in a branch in Sunderland will still need to have their mortgage loan or a chart or debit card and mobile app, no matter if the UK is inside or outside the EU. We have been performing banking for 145 years, and during that period of time, there have been bigger events and challenges for us than the UK leaving the EU. So for us, it will absolutely have no impact. Then when it comes to the sector, the whole financial sector, then, of course, I think that it will have some impact. There will probably be some of the investment banks that are located here in London that might move some of their activities to Continental Europe and inside the EU.
Thinking about kind of the regulation you’ve embraced, one of the big corporate values is about sustainability. How is the concept of sustainability ingrained into your corporate culture?
When people talk about sustainability, they often talk about the environment. And, of course, our direct impact on the environment is much smaller as a bank compared to let’s say, a car producer or an airline. But the few things where we do have an impact we are focusing on. But sustainability for us is much more than that. For us, one of the most important issues within this whole area is to be a prudent bank that is here for our customers both in good times and in bad times. We don’t change our credit policy over the business side. We keep it the same. So if our customers need us even during times of distress then we are still there for them. What we have seen through the latest financial crisis and also the previous one is that many banks withdraw from the market. Or, if they don’t withdraw from the market, then they are dependent on state subsidies or cheap state funding. We have never made use of those kinds of things. We want to be, we want to cater for ourselves, and not be a burden to society. So this is a very important part of sustainability for us.
It’s about having a sustainable business model.
Now just before making the move from Handelsbanken Netherlands to the UK, the bank announced the completion of the acquisition of Dutch wealth-management firm Optimix. What are the main strategic benefits of that move?
The reason why we acquired Optimix in the Netherlands was that we saw an increasing demand from our existing customers. They wanted also to use Handelsbanken for their wealth-management business. And we didn’t have that on the shelf at that time. And we were able to find a fantastic little company, a small company offering wealth management in the Netherlands, a company with many of the same values as we have at Handelsbanken. And I’m sure that will be a fantastic opportunity both for our existing customers but also for the customers of Optimix to use Handelsbanken’s products. Just as well as we have seen here in the UK with the acquisition of Heartwood almost four years ago, which has also been a great success.
You mentioned kind of the importance of the number of bank branches here in the UK. And you seemed to place significant importance on the role of the branch. In the wake of kind of banking digitization, do you think that physical bank branches could become outdated or ineffective? And how would that affect your business model?
I’ve been working in banking for over 30 years. I think I’ve received that question as long as I’ve been working in banking, if bank branches are outdated. It’s soon going to be 20 years since we saw the first fully Internet banks in the world. And before the dotcom bubble burst then everybody was saying, “Well, the traditional banks, you know, they’re going to, they’re not going to survive these new Internet banks popping up”. But actually our model has never worked better than it does right now. For us, it’s not a question of either/or; it’s not a question of running a traditional bank, closing all the branches, or running a digital bank. What we are doing is that we are taking the digital platforms and adding them to our local branches so a way that the customers can reach the bank in other ways than they could before. We have very sophisticated digital platforms in the bank. In Sweden, which is still our biggest market, we are the market leader there of the digital platforms. So for us, it’s not either/or; it’s both/and. What makes Handelsbanken different from most other banks in a digitalized world, that’s our branches. And that’s really our USP, our local branches. People will still like to talk to a real person if they have a big financial decision to make.
Now, focusing on the branches again, you’re over 200 branches in the UK. Do you see this strong branch-expansion drive continuing into the foreseeable future? And have you set in any way kind of a maximum limit on the total number of branches to be opened here in the UK?
No, in Handelsbanken we don’t set long-term goals at all. And we don’t have any goal as to how many branches we want to have in the UK. When we open a branch in Handelsbanken, no matter if it’s in the UK or any other market, then it’s always driven by demand. Customer demand. As long as we see a demand from local customers that we are moving even closer to them than we are today by opening one additional branch, and as long as we can see that we can do more business with one additional branch than we could without. As long as that then we will still continue to open new branches. There are many black spots on the map in the UK. I’m sure there will be more. But I don’t have a specific number.
So plenty of opportunities still.
Still plenty of opportunities.
Mikael, thank you very much for your time.
You’re welcome. Thank you.