Handelsbanken: A “HOLD” After Outperformance (Downgrade) (OTCMKTS:SVNLF)

Dear readers/followers,

I have been rating Handelsbanken (OTCPK:SVNLF) (OTCPK:SVNLY) a “BUY” for some time as I am writing this article. The last I wrote about the company was actually back in September of 2023 in this article which you can find here. At the time, results showed expected improvements due to beneficial NII/Interest rate trends, and these trends have continued going into this period.

In my previous article, I specified that the company has provided a safe 5-9% yield over the years and remains a strong investment in the Scandinavian finance market. That is still the case, except the yield is now well over 8% and the company has returned over 38% for me, and that is excluding dividends, given a massive move upward to levels even I did not expect the company to move to.

My position in Handelsbanken is one of the largest Swedish/Scandinavian bank positions I have, both on the private and corporate investment side.

We recently had a massive dividend payout from this company – that is also the reason why the company dropped so significantly. But there is no doubt that this is, or has been a successful investment, given RoRs like this.

Remember that this is without the payment of the dividend and after a drop. My actual returns for this investment are even better.

Let’s look at exactly what has driven this.

Handelsbanken – 2024E and Beyond

First off, let’s be clear that Handelsbanken only has an annual dividend – one payment. That means that the next dividend you’re going to get from this company isn’t going to be until March/April of 2025, provided they do pay one (which I believe). The other Scandinavian banks are in the process of, over the next few weeks, paying out their fairly impressive dividends as well.

As you might expect, given the interest rate development, the bank has done very well – and Handelsbanken obviously isn’t the only bank that has done well either. Most of the Swedish banks have done very well also, and given my investments into these banks, including Swedbank (OTCPK:SWDBF), Nordea (NRBAY) as well as others, these are good years for those of us investing in finance and banks like this.

The 4Q23 results are the latest we currently have. With a very solid near-16% RoE, a 37% growth in operating profit, income up faster than bank expenses, and a C/I ratio of lower than 37.5%, I urge you to find a “better” bank than Handelsbanken.

This was, in fact, one of the things I said in one of my very first articles on this bank. I called it one of the best banks in the world. I stand by this assessment. Only the Norwegian DNB is better or at an equal state, and then not by much.

More proof?

Handelsbanken is AA rated by eevry major agency. This is even better than the AA- ratings in the peer groups, which are already incredibly solid. Handelsbanken, as such, has the highest combined credit ratings among comparable global banks. In fact, when combining these ratings, the company has the highest rating globally when combining all of these three ratings (Source: Handelsbanken IR), all of them affirmed as late as June/July 2023.

Given the relatively rapid pace of Swedish interest rate increases, the company already has seen much of the NII impact.

As before, one of the primary reasons for investing in Handelsbanken is its safety. What I mean by this is that Handelsbanken has a net credit loss ratio of 0.01% (Source: Handelsbanken IR) for the fiscal of 2023 and a CET-1 ratio approaching 19%.

I urge you again to find me a bank that has these fundamentals, and that for this year, or any year, also has a safe dividend yield of 12%. My own YoC is closer to 15.5% given my focus on valuation when I invest.

Every major KPI is up in some way. The net fee/commission income is up, NII is up, and Swedes are saving more than before with significant net inflows to the bank’s various funds. Expenses are rising as a product of other expenses, some staff cost increases, a small move to Oktogonen (read my last article for details on this arrangement), and some small other moves.

I truly believe that Handelsbanken merits some more highlighting in just how solid the company’s NPLs/credit losses truly are, and just how “safe” the company is.

Can you see how very conservative the company’s losses were, even during a time when the rest of European banks, not to mention US ones, went through the GFC? Remember that the GFC hit US real estate harder than it did European ones.

The company has a market split of Sweden, Norway, England/GB, and the Netherlands. Sweden is by far the home base, with an operating profit that’s more than 70% of the total – however, the company’s non-Swedish markets are growing faster than the home market. UK and NL is up almost 60%. In Norway, the bank has a harder time, coming in at “only” a 9% operating profit growth – but still growing.

Now, when you look at Handelsbanken’s chart, it’s easy to see that the actual share price development has been somewhat mediocre. That’s why it’s so crucial not to “BUY” Handelsbanken at a triple-digit native share price if you can avoid it.

But if you include dividends, those returns, such as mine, look very different.

Overall, this company has very few risks – one of those that exist is the exposure to personal/home loans and mortgages, which make up a large part of the company’s capital/portfolio. However, this risk needs to be put into context with Handelsbanken’s NPLs, which as I’ve already said, are very solid, both on a current, historical as well as forecast ratio.

The company’s lending to to property management companies is limited, and over 50% of that is to Residential or Logistics and Industrial, with the office loans at an LTV average of around 45%, and 99.8% of loans being at an LTV below 75%. Very, very few problematic potentials exist here, and the 30 largest property customers have an interest coverage ratio of over 3.1x reported. Handelsbanken has made its own assessment here, and even in conservative estimates with interest refinanced at 6-7% until 2025, the Interest coverage here is over 2.4x. In short, it’s very hard to see issues in a segment where many other banks, including US-based ones, have fairly significant issues.

What other risks and upsides exist to the bank?

Let’s take a look.

Handelsbanken – Upside and risks

I’ll go into this more later, but I believe most analysts following the bank have a far too lofty target for this bank’s price. Morningstar, just as an example, has a target of almost 140 SEK/share.

By comparison, I had 95 SEK and will be raising it to 100 SEK in this article due to a more generous-than-expected dividend policy. But 140 is “looney tunes” to me, given the relatively limited growth prospects that this bank has. At the right price, it’s an absolute must-buy, but that is not the case when the shares are above 115-120 SEK, even if the current extraordinary dividend makes the yield look very appetizing.

The upsides of the bank are also its downfall in terms of risk.

The company’s income is mostly generated in a very stable economic climate with few downsides and little competition – Sweden. But this exposure also means that it poses a risk to the portfolio and asset quality in case of a downturn. Given the few players on the market, the money these banks are making, and given Sweden’s political climate, political action is not only possible but likely given the right (or wrong circumstances). An example of this is the recent regulatory pressure leading to higher provision costs and resolution fund requirements. There is, as I see it, a “limit” to how much any bank in Sweden will be allowed to grow, or what it will be “allowed” to make within the Swedish borders. This credit and interest rate cycle is testing that tolerance, with many political directions calling for a “bank tax” due to the amount of profit they are making.

Some analysts expect Handelsbanken to be able to gain market share in a turning credit cycle, or that Handelsbanken will gain increased market share in private banking and other advisory businesses. I view these risks as limited, given Handelsbanken’s client and portfolio profile. Any gains here will be small because other banks in Sweden will likely follow suit.

Handelsbanken is, without a doubt, one of the most prudent and solid banks in Scandinavia, Europe, and the world. However, its appeal is very much limited by a slim “corridor” of valuation, and the bank is rarely there. Whenever it is, I “BUY”. And I buy a lot. The last time it dipped, I bought over 3.5% of my portfolio on the commercial side in this bank. That is why I am up so significantly with them today.

But valuation is core here – so let’s see where we are.

Valuation for Handelsbanken – a No go here for me

There is a common theme, as I see it, that many analysts give the Scandinavian banks a very high valuation target. The same is true at this time, with targets moving to 137-140 SEK, and peers like Swedbank moving to 250, and Nordea to 155 SEK. If these banks were to reach this level, it’s likely that I would begin rotating my investments for more attractively valued investments.

The A-share of Handelsbanken is currently trading at 108 SEk, making it about a 12% yield (but this has already been paid). There is no doubt in my mind that we are in a “peak” earnings period due to the interest rate trends, but we’ve already received confirmation that interest rates are going to start to drop – likely as early as May or June here. That is also why analysts are expecting EPS drops for 2024E of 14% YoY, followed by negative 5% in 2025E and another 7% in 2026E.

This is nothing strange. The company’s income spiked from an adjusted EPS of 7.14 SEk in 2020 to almost double that during the 2023E fiscal. That’s what interest rates will do. But now comes the “other side” of that cycle.

And that means that while I will hold my shares because I believe the A-shares could rise to around 120-130 SEK in a bubble, at which point I would consider trimming and rotating, I do not believe they will outperform if I buy at this price. The reason I believe the company could rise to such heights, conceivably, is a sort of “virtuous cycle” during this year where it will likely be a fairly “end-loaded” sort of EPS drop, with rate cuts not coming until early 2H24 (as things with the Swedish FED currently stand – May/June at the earliest). Handelsbanken, being one of the best-rated banks with the strongest fundamentals, will take longer than more volatile banks such as Swedbank and Nordea to drop – and this is why I believe 120-130 SEk is possible – aside from the fact that one of the few reasons the bank dropped this time around is due to the ex-div, which at over 10 SEK was obviously significant.

Take a look at what you’d get even with dividends if you were to assume a 20-year average of 11.6x in the next few years. And that, by the way, is higher than the 5-year average, which is in the single digits.

You can see why I’m not all that excited, and why I believe that if you didn’t buy the company at double digits, you might have “missed the boat” on this one.

Handelsbanken, like any Swedish bank major, is one of those companies you want to have on your permanent watchlist – and you want to make sure that you buy it at the right price, and then don’t let it go until it’s in a bubble state. They do happen – 2018-2019 for this bank was the last time around.

For now, I say that this bank is no longer worth buying due to what I view as an elevated valuation in the context of the downside of a lowering rate cycle, even with a generous dividend. I will keep my shares, but if the bank climbs to 120-125 outside of the dividend-paid context, then I will consider rotation here. There are alternatives if that happens.

Here is my current thesis for Handelsbanken.

Thesis

• Handelsbanken is a theoretically attractive and fundamentally appealing bank with a sound set of capital safeties, a 12%+ yield (but it’s been paid for this year), and overall one of the more conservative banks in the entire Swedish banking market. It’s also one of my largest financial holdings, and I frequently sell both puts and calls on the bank.
• At a triple-digit price inching closer to 110 SEK, I believe this bank no longer offers enough safety and conservative appeal to make it a “buy” here. I am in fact moving to a “HOLD” as of this article, even if I am raising my PT.
• I raise the bank to a conservative PT of SEK 100/share, which at this point means the bank is a “HOLD“. This update is for the 2024E period.

Remember, I’m all about:

1. Buying undervalued – even if that undervaluation is slight, and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.

2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.

3. If the company doesn’t go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.

4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them (italicized).

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansion/reversion.

This investment currently lacks the fundamental appeal and upside that I look for in a major investment. Because of that, I say that this is a “HOLD”.

This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.