Handelsbanken Earnings: Commercial Real Estate Exposure Moves Into Focus

Narrow-moat Handelsbanken SHB A reported good first-quarter results with operating profits up 12% to SEK 8.52 billion on a sequential basis. Income, up 7%, supported by good growth in net interest income as well as net fee and commission income met with marginally lower expenses (negative 1%), reducing the cost/income ratio to 38.5% from 41.5% last quarter. Return on equity came in at 15.0%. We maintain our SEK 115 fair value estimate.

Net interest income benefited from higher margins, more than offsetting virtually flat lending growth. Handelsbanken pointed toward greater expected deposit betas in future as competition for deposits intensifies. At the same time, product margins are expanding, while lending volume as well as deposit volume growth should slow. The multitude of moving pieces in the net interest margin equation complicate any precise prediction when NIMs may peak for Handelsbanken, but it may be as early as this year, even as central banks continue hiking rates.

Credit quality remained solid. Handelsbanken posted a net credit loss ratio of just 1 basis point or SEK 30 million. The bank continues to outperform peers on nonperforming loans, boasts a high share of collateralized lending, and has what we view to be a well-managed commercial real estate portfolio. Loan/value averages between 41% and 48% in its property management lending book, as well as limited tail risk with less than 0.2% of property management loans with an LTV larger than 75%, put the bank in a solid position despite greater concerns emerging about the commercial real estate markets in Europe. Even considering that the reported LTV values are likely calculated using lagging data from the previous quarter, Handelsbanken looks well positioned.