Sweden’s Handelsbanken: Europe’s Banking Blueprint

By John Manning, International Banker

Over the last year or so, Swedish banking pioneer Svenska Handelsbanken AB (Handelsbanken) has once more managed to deliver exceptional financial performance, epitomised by strong growth and record-breaking profits. Such a performance is perhaps even more remarkable when one views it against the backdrop of the turbulence that characterised much of 2015. During a period in which geopolitical issues, volatile financial markets, weak commodity markets and negligible growth across much of Europe all conspired to severely constrain banking profitability, Handelsbanken stood apart yet again, delivering stability and value for its shareholders. 

The slew of positive performance metrics from last year are simply too many to mention. Some of the most laudable highlights, however, are the 7-percent rise in operating profit that allowed Handelsbanken to hit its highest-ever figure of SEK 20,475 million (USD 2.4 billion); the 8-percent growth in earnings per share for total operations; and the 5-percent growth in income to SEK 40,336 million (USD 4.7 billion). In addition, June 2015 saw the credit-ratings agency Moody’s upgrade Handelsbanken’s long-term rating to Aa2, making it the only lender in the Nordic region—and one of the very few in Europe as a whole—to attain such a high rating. As far as the first nine months of this year are concerned, moreover, the bank has, unsurprisingly, continued to grow. Following on from Moody’s actions last year, fellow ratings-company Fitch also upgraded Handelsbanken’s long-term rating to AA, making it the highest-rated lender among all its peer banks.

Handelsbanken Headquarters in Stockholm

The continuing success of Handelsbanken’s expansion in the UK market is particularly worthy of praise, with the bank recording a 31-percent increase in net-interest income last year. It continues to generate stellar results in 2016, with total income growing by 10 percent in local currency during the first nine months and operating profit rising by 9 percent. The bank is also the fastest-growing in the UK, with the number of branches in the country growing by more than 11 percent last year. The total branch number now stands at 207. Furthermore, according to the Business Banking Insight (BBI), which is a monitoring system established by the UK’s HM Treasury and various business organisations, Handelsbanken emerged as the most favoured bank based on recommendations from small firms.

The key ingredient in Handelsbanken’s recipe for success over the last few years has been its unrivalled level of customer service. The unwavering commitment towards building deep and lasting relationships with every customer is considered within the bank to be of paramount importance— which, in turn, has put daylight between its customer service standards and those of other banks. Indeed, the bank makes no secret of championing the strong positive correlation it has identified between customer satisfaction and long-term profitability, which makes the needs of its customers its de facto starting point for any new business.

As such, Handelsbanken’s strong customer-centric banking culture goes a long way towards explaining the multitude of awards that have come the bank’s way. For the sixth year running, this year, for instance, Handelsbanken was voted as Business Bank of the Year, according to the Finansbarometern, which conducts independent market surveys of companies on their opinions of various banks and accounting firms. The bank received the highest possible ratings for numerous categories, including customer satisfaction, service and treatment; range of products and services; and quality of advisory services. According to the survey’s head, Kristian Sundberg, the bank was recognised once again “for sticking to its model of having a local presence—and customers appreciate this”. Additionally, Handelsbanken managed to notch up its fifth consecutive annual award this year as Sweden’s best small-enterprise bank. 

Anders Bouvin, CEO of Handelsbanken

One could argue, however, that the last year has been one of the more eventful of Handelsbanken’s illustrious history, particularly thanks to the replacement of CEO Frank Vang-Jensen earlier this year with the head of the bank’s UK operation, Anders Bouvin. At most banks, such a move is likely to be deemed as concerning, particularly as Mr. Vang-Jensen spent a mere 18 months in the role of chief executive. However, with the Handelsbanken business model being distinctly different to that of its peers—and admirably so from a results perspective—the move has generated little consternation. Such a model provides local branch managers with considerably more autonomy with regards to pricing, hiring and marketing than is the case at other banks. With each branch manager having more control over his or her specific branch’s performance, therefore, each also bears more responsibility; and with branch managers only needing to defer to the group’s management on the most complex and unusual of matters, a rather different type of leadership is required from a Handelsbanken CEO. In the recent words of group chairman, Pär Boman, “It is possible to be an excellent leader and manager—as Frank Vang-Jensen has been—but not fulfil the requirements of CEO of Handelsbanken”. Ultimately, the move taken by the bank seems more of a preventative one than a reactive one that, going forward, should reassure concerned parties about the bank’s long-term growth trajectory.

Moreover, it is precisely this aspect of Handelsbanken’s idiosyncratic business model that has made the bank impervious to undesirable cyclical volatility in recent times. The emphasis on localised, decentralised accountability, especially during economic downturns, means that individual branch managers are well aware of the responsibilities they bear for any bad results. Thus they can individually fine-tune the operation of their respective branches to maximise performance accordingly, rather than rely on one centralised management body to lead the recovery. According to new CEO Bouvin, this is one of the prime reasons why Handelsbanken managed to almost completely avoid the fallout from the 2008 financial crisis, and why it will continue to do so during any future crises.

Such strength during those tough times is also supported by the numbers. During those dark years at the end of the previous decade, Handelsbanken proved to be one of the very few lenders within Europe that was able to generate positive shareholder value. It was also the only commercial bank on the Stockholm Stock Exchange that did not need to resort to having to ask its shareholders for new capital during the period. Since 2011, moreover, the bank has managed to generate positive shareholder value to the tune of SEK 177 billion (USD 19.8 billion), while market capitalisation has increased by SEK 131 billion (USD 14.6 billion), and SEK 46 billion (USD 5.2 billion) has been paid out in dividends.

Handelsbanken Kvarnholmen in Kalmar Sweden

Among Handelsbanken’s other core strengths is the unusually heavy emphasis it places on sustainability, a concept that is wholly integrated into the corporate culture, and which plays a critically influential role in determining the bank’s operations in all markets in which it operates. As a result, the bank has earned an envious reputation among its peers as one that acts ethically, transparently and responsibly, which in turn has enabled it to build solid long-term relationships with customers, employees, owners/investors and the wider community across financial, social and environmental spaces. By not having sales or volume targets, moreover, Handelsbanken ensures no conflicts of interest can arise that might harm its services to customers or its ethical principles. As such, all important business decisions taken remain at the branch, as close to the customer as possible. The bank has never needed taxpayer support, but rather it remains one of the largest payers of corporate tax in Sweden; nor has it ever required liquidity support or capital contributions from the central bank, the state or in the form of new share issues.

This year has already seen Handelsbanken sign up to the Equator Principles, a risk-management framework through which its financial-institution signatories can identify, assess and manage environmental and social risk in projects, and which provides a minimum due-diligence threshold for risk decision-making.

Handelsbanken Branch in Piteå Sweden

Handelsbanken supports international initiatives and guidelines that have the common aim to encourage and facilitate sustainable corporate management, e.g., the United Nations (UN) Global Compact, the OECD (Organisation for Economic Co-operation and Development) guidelines for multinational companies, the UN Environment Programme – Finance Initiative (UNEP FI), the UN Principles for Responsible Investment (PRI), the UN’s Guiding Principles on Business and Human Rights (UNGPs), and the International Labour Organization (ILO) Core Conventions. These principles and guidelines must be key concepts in Handelsbanken’s work.

Indeed, 2016 is shaping up to be one of Handelsbanken’s most significant years for improving its sustainability efforts. In June, the bank established new environmental guidelines, as well as implementing new rules for forming business relations with the armaments and defence industry, which now prohibits the bank from dealing with companies that “manufacture or trade in weapons that are prohibited under international conventions of which Sweden is a signatory. This includes biological weapons, chemical weapons, anti-personnel mines and cluster munitions. Nor may Handelsbanken have business relations with companies which manufacture or trade in nuclear weapons”.

Companies with operations within fossil fuels are also subject to new Handelsbanken business regulations, with the bank’s mutual funds now unable to invest in companies with significant operations in coal power or in thermal coal-mining companies, due to their high emissions of greenhouse gases.

Handelsbanken Branch in Vimmerby Sweden

2015 marked the 44^th consecutive year in which Handelsbanken recorded a higher level of profitability than the average of its peer banks within its home markets of Sweden, the UK, Denmark, Finland, Norway and the Netherlands. Such an astonishing statistic alone should assuage any concern for the bank’s health going forward, as well as provide strong optimism for performance in the coming years. Its unique but highly effective business model continues to prove to be a winner to such an extent that the normally conservative analysts at Berenberg Bank have named it “one of the best-run banks globally” and “the blueprint for banking in Europe”. With a string of such strong endorsements from esteemed institutions around the world, with a refreshingly unique and effective banking model that continues to place long-term customer relationships at the top of its priority list, and with a track record of consistent growth for the past 145 years, it is highly likely that Handelsbanken’s best years continue to lie ahead of it.