Biggest Swedish Bank Chases U.K. Growth Despite Brexit Risks

(Bloomberg) -- Svenska Handelsbanken AB, Sweden’s biggest bank, is plotting an expansion in the U.K., which it says is a promising market despite the risks posed by Brexit.

Mikael Sorensen, chief executive officer of Handelsbanken’s U.K. operations, says the lender has “done whatever we can to prepare.” The bank will probably be less affected by Brexit than U.K. peers, because its customers “tend to have good repayment capabilities, as reflected in our historic loan-loss ratio.”

At home in Sweden Handelsbanken is not just the biggest, but historically also the most profitable of the country’s main lenders, having dodged the money-laundering scandals that afflicted Danske Bank A/S and Swedbank AB. Handelsbanken, which says it currently sits on just 1% of Britain’s loans and deposits, wants to expand that market share roughly five-fold over the coming years.

But some analysts question how much value the U.K. really adds, given the risks involved compared with its home market. Return on capital allocated to the U.K. business fell by almost 25% in the third quarter amid a drop in income. The return of 9.5% was about two-thirds of that generated by the Swedish business.

“Am I really willing to pay for a growth-based strategy where the U.K. is the key component?” Johan Ekblom, a London-based analyst with UBS, who has a neutral rating, said. “The U.K. business isn’t nearly as profitable as the rest of the group. It brings to the forefront an important question which is: Is there a path to improving the profitability in the U.K.?”

Handelsbanken is relying on physical offices in the U.K. to attract customers -- a model it used in Sweden. It has over 200 branches in the U.K. while headcount is up about 5% this year. (Meanwhile in Sweden, it’s cutting branches, though it will continue to have more physical offices than competitors).

Led by now-chairman Par Boman, Handelsbanken decided back in the 2000s that its business model, which emphasized close customer contact, would work outside Scandinavia. Around 2006, the bank singled out the U.K., building it into its second-largest market, after Sweden.

Handelsbanken wants to avoid the trap that some other challenger banks have fallen into, namely over-stretching only to crash when the first crisis arrives. It also says that a regulatory hit in September -- the bank was forced to adopt a less favorable calculation for its U.K. capital adequacy -- will be reversed in a few years.

Loan-to-value ratios on real estate that Handelsbanken clients have used as collateral -- a key measure of risk -- are the lowest in the U.K., both for residential and commercial properties, according to the bank’s third-quarter report.

Corporate deposits, meanwhile, are up by about a fifth from a year earlier, and the bank wrote back 1 million kronor ($115,382) in net credit losses in the third quarter.

Handelsbanken says lessons learned in the Nordic region give it a sense of what’s to come in the U.K. Based on its observations, fee income is set to climb, as more of the bank’s U.K. depositors move their savings into its asset management unit to avoid ultra-low interest rates. That’s a shift worth sticking around for, according to Sorensen.

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