Netherlands joins Handelsbanken ‘home markets’, plus Danske, DNB results

Handelsbanken reported a pre-tax profit of SEK4.1bn (Q4 2011: SEK4.1bn), which was 4% below consensus expectations, driven by higher one-off costs in a modest housekeeping drive similar to SEB’s announcement two weeks ago. We find the corporate development announcements more interesting than the — as usual — stable underlying result, while the drive outside the Nordic region continues.

Dividend and distribution

A dividend of SEK10.75 (SEK9.75) has been proposed by the Board to the AGM. Following the raised dividend announcements by peers last week some market participants had hoped for a raised distribution outlook from Handelsbanken. As we had expected, the bank abstained from spectacular moves in this area, proposing an increase of 10% and implying a pay-out ratio of 46% (50%), which, adjusted for the change in Swedish corporate tax rate, is 52% of adjusted EPS. However, management emphasised — cautiously as ever — that in its view it is too early to decide on capital as regulation has not yet played out. Interestingly enough, though, they also emphasised the buy-back mandate sought by the Board from the AGM as a matter of routine of 40m shares, equal to 6.3% of the total.

With the Swedish finish to CRD IV likely to be adopted by mid-year 2013, Handelsbanken’s management and Board are keeping their options open and “powder dry”. After all, as management usually tells us: Handelsbanken has pursued an active capital management policy for 40 years, they are well aware of the impact of all parts of the RoE equation.

Corporate development

Handelsbanken also announced that the Dutch operation (presently 13 branches operating and a lending book of approximately EUR1.5bn) is being promoted into the group’s sixth home market, together with the four Nordic countries and the UK. In this way the operation becomes one of the regional banks of the Handelsbanken group. Apparently, the tests run over the past couple of years have been successful. The regional bank in the Netherlands looks set to become the next growth engine in the Handelsbanken group when the UK expansion matures sometime around 2020.

Handelsbanken is also acquiring a small British wealth manager, Heartwood Wealth Group, with assets of GBP1.5bn. The acquisition is very small but of strategic importance as it will plug the savings hole in Handelsbanken’s UK product offering. There has been a lack of savings products apart from ordinary bank accounts. Interestingly enough, and as management itself loves to point out, Handelsbanken was voted Private Bank of the Year in the UK in 2011, despite only being able to offer bank accounts as savings products. With this acquisition Handelsbanken aims to offer the full product range to its rapidly growing and affluent British client base.

Revenues

Handelsbanken reported total income of SEK8.9bn (SEK8.4bn), which was 3% better than expected by consensus and up 6% y-o-y. Net interest income (NII) was 1% ahead of expectations at SEK6.5bn (SEK6.4bn), while commissions of SEK1.9bn (SEK1.9bn) were 2% better than expected. The better than expected commission generation is, although positive, a slightly less positive surprise than the surprises reported by Handelsbanken’s Swedish peers last week. Still, a pick-up in customer activity pushed the net items closer to SEK0.4bn (SEK0.1bn), against the expected figure of SEK0.3bn.

Costs

For this master of cost control, in this quarter costs were the negative surprise, although this has its explanations. Total costs amounted to SEK-4.4bn (SEK-4.0bn), which was 9% above consensus expectations. Handelsbanken is taking similar measures as those SEB announced in its profit warning from late January, although the impact is much smaller and consequently Handelsbanken is taking it directly over the P&L.

Following the raised dividend proposal, the allocation to the profit sharing foundation Oktogonen is increased by SEK-104m to SEK-333m (SEK-229m).

A further SEK-91m is paid to terminate rental contracts for premises in the central area of Stockholm so that staff will be more concentrated into the main office, reducing the number of (expensive) square metres per employee and reducing future premises costs while increasing efficiency and productivity. Furthermore, the bank is taking an additional SEK-77m in pension costs outside of the corridor. With the introduction of IAS19 as of Q1 2013 such an impact will disappear, but the overall cost base will increase with pension costs at a run rate presently of, according to management, SEK-429m per year.

Credit quality

Loan loss provision amounted to 9bp (6bp) compared to expected 9bp. There is a marked pick-up from very low levels in the UK, Denmark and Sweden. Nevertheless, we remain unconcerned, noting the overall low level.

Tax rate

The tax benefit derived from the lowered corporate tax rate and the dissolving of tax liabilities at the lower corporate tax rate of 22% (26.3%) amounts to SEK1.7bn, compared to expected SEK1.5bn.

DANSKE BANK (1/Sl, TP DKK140, +31%) — first glance

• DDB (1/Sl, TP DKK140, +31%) reports a 4Q 2012 pre-tax profit of DKK2.3bn (DKK0.6bn), which is 21% ahead of consensus expectations
•  Drivers are commissions, +16% ahead of expectations, and loan loss provisions, -9% below consensus expectations.
• No dividend, as stated in the autumn in the context of the capital increase.

A cautious guidance for 2013E, guiding for a net profit in the range DKK7.5bn-DKK10bn, which can be compared to consensus expectations of a net profit in 2013E of DKK9.75bn.

Danske Bank did face falling rates in the fourth quarter, which put pressure on the net interest income (NII) as deposit margins has been under further downward pressure combined with falling yield on invested equity. However, the NII has been defended, with the bank reporting a NII of DKK6.2bn (DKK6.2bn), in line with expectations. A strong positive is the 20% increase in net commissions, a trend seen in the other Nordic banks, coming in at DKK2.7bn (DKK2.2bn), +16% ahead of consensus expectations. The net items came in below expectations, at DKK1.4bn (DKK1.6bn), bringing total revenues to an unchanged DKK11.9bn (DKK11.9bn), +2% ahead of consensus expectations.

Danske Bank is aggressively reducing staff, cutting costs and reengineering the bank. The costs amounted to DKK7bn (DKK6.5bn), 2% higher than expected by consensus and in line with the guidance. The bank reports better than expected loan loss provisions of DKK-2.6bn (DKK-4.8bn), which is 9% lower than expected.

DNB (2/OP, TP NOK90; +18%) — slightly weaker than expected

• DNB (2/OP, TP NOK90, +18%) reports a 4Q 2012 pre-tax profit of NOK4.4bn (4Q 2011; NOK5.9bn), which was 3% below consensus expectations
•  However, the result was high in quality, with NII and commissions stronger than expected.
•  The dividend suggestion is key. The Board propose a dividend of NOK2.10 (NOK2.00), compared with consensus expectations of NOK1.80.

DNB reported a Q4 2012 pre-tax profit of NOK4.4bn (Q4 2011; NOK5.9bn), which was 3% below consensus expectations. However, the result was high in quality, with NII and commissions stronger than expected. The dividend suggestion is the key though: the Board proposes a dividend of NOK2.10 (NOK2.00 in 2011) compared with consensus expectations of NOK1.80. In some quarters there was a fear of no pay-out at all at the request of the regulator to accelerate the build up of capital in the bank.

Similar to the other Nordic banks, DNB faced falling rates in the fourth quarter, which put pressure on the net interest income (NII) through deposit margins. Still, the NII is 2% ahead of expectations, at NOK7.1bn (NOK6.8bn), reflecting both lending and deposit volume growth but, more importantly, lending margin increases. Also similar to the Swedish bank reporting last week, DNB reports net commissions that are 8% ahead of consensus expectations, at NOK1.9bn (NOK1.5bn). Fixed income activity remained strong through brisk Norwegian activity in combination with continued falling cost of risk throughout Europe, bringing the net item line to NOK2.2bn (NOK3.4bn) including the basis swap impact of NOK0.2bn (NOK-2.1bn).

Costs of NOK-5.5bn (NOK-5.6bn) were 3% higher than expected by consensus, but reflect a number of one-off items such as pensions and the move of the head office in Oslo. On credit quality DNB reports provisioning of NOK-1.2bn (NOK-0.9bn), which includes a general provision on shipping of NOK-0.3bn. DNB delivers in line with guidance, which gives confidence for the outlook for 2013E of unchanged provisioning on the 2012 level.

Mats Anderson

Bank Equity Analyst

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