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Handelsbanken makes loan loss reversals amid record-low provisioning levels

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Handelsbanken makes loan loss reversals amid record-low provisioning levels

Having already taken record low loan loss charges in 2020, Svenska Handelsbanken AB (publ) kicked off the first-quarter earnings season for Nordic banks by booking no provisions at all.

In fact, the Swedish lender made credit loss reversals of 8 million kronor, compared with a charge of 538 million kronor a year earlier.

Growing GDP, decreasing unemployment and an increase in the future value of collateral were among the drivers that impacted the bank's calculation of forward-looking macroeconomic risk factors, with the U.K. seeing the most improvements, it said.

Handelsbanken's U.K. business recorded net credit loss recoveries of 33 million kronor in the quarter, having taken a 50 million kronor charge a year earlier.

Those factors counterbalanced an otherwise higher provisioning requirement as a result of negative rating migrations during the first quarter, as well as "a continued conservative management overlay approach to COVID-sensitive exposures," said CEO Carina Åkerström on a call with analysts.

Handelsbanken has in place a COVID-19 reserve to cover potential losses for stressed exposures that are not included in its model. In the first quarter it increased this reserve to 603 million kronor from 564 million kronor at the end of 2020.

So far, the Swedish bank has seen virtually no impact from the pandemic on its expected credit losses and was the only of its European peers to report a year-on-year decline in provisions in 2020.

CFO Carl Cederschiöld has previously credited the bank's conservative credit risk culture, close customer relationships and highly collateralized lending book as driving factors for its "exceptionally low" levels of credit losses. A large proportion of Handelsbanken's lending portfolio is within mortgages and property management and, unlike its peers, the bank has little exposure to the oil-related sectors.

Yet the record-low loan loss levels during a global pandemic have been considered unsustainable by some analysts, who have previously predicted that the bank's cost of risk will have to more than double in 2021.

Analysts have pointed to the bank's stage 3 loan loss coverage ratio as being significantly lower than peers. It fell to 29.99% in the first quarter from 31.97% at the end of 2020 and 41.62% a year before. In comparison, this number was 47.46% for Swedbank and 48.42% for SEB at the end of 2020. Both Swedish peers are due to release their first-quarter earnings next week.

Questioned by an analyst on the lower stage 3 coverage ratio in the first quarter, Lars Höglund, Handelsbanken's head of group financial strategy and investor relations, said that "this is really because of the nature of the exposures that went into stage 3."

"You can have exposures going into that stage, but where you still deem that you will make no losses, and typically that's because of the collateral you have on those exposures," he said. The growing stage 3 volumes in the quarter related to property lending, which have collateral and low LTVs, he added.

The Swedish lender's first-quarter profit attributable to shareholders rose 11% on a yearly basis to 4.38 billion kronor. Despite the positive credit loss expectations, the U.K. market "has definitely been more challenging" due to hard lockdowns and interest rate reductions, said Åkerström. Operating profit for the U.K. fell 22% year-over-year, owing to lower income, and was the only of Handelsbanken's home markets that did not record a yearly profit growth.

As of April 20, US$1 was equivalent to 8.44 Swedish kronor.