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Brexit uncertainty makes cost of new unit hard to define, Swedish bank exec says

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Brexit uncertainty makes cost of new unit hard to define, Swedish bank exec says

Svenska Handelsbanken AB (publ)'s plans to create a U.K. subsidiary to prepare for Brexit will add extra costs, but the magnitude will depend on political developments, CFO Rolf Marquardt told analysts Oct. 18 during a third-quarter earnings call.

Should the U.K. fail to strike a deal with the EU to maintain so-called passporting rights, which allow companies based in one EU country (such as Sweden) to do business across the bloc without having to obtain separate licenses, companies like Handelsbanken that operate in the U.K. may have to create subsidiaries there to continue doing business.

Handelsbanken first announced the potential transition of its U.K. operations into a subsidiary with second-quarter results. A spokeswoman for the lender noted after the call that the change remains only a "planned" move, rather than a fully confirmed one.

Marquardt said he expects the process to take around two years, but added that "political uncertainty" made it difficult to give an estimate of how much the transformation would cost. Handelsbanken will need to spend money on governance and risk reporting-related issues, as well as IT development, he said.

Business in the U.K. is growing at a "stable" rate, and the bank will continue to open branches in the country, "but not at the same pace as a few years ago," he said. Lending in the U.K. business grew by 11% in the nine months to the end of September, while deposits were up 27%.

Net interest income from the business rose 3% year over year in the nine-month period, to 3.41 billion Swedish kronor, while total expenses were up 4% to 2.21 billion kronor. Operating profit fell to 1.60 billion kronor from 1.62 billion kronor.

At a group level, net interest income increased by 7% to 21.99 billion kronor over the nine months to the end of September, which is "the highest level so far" for the bank. The rise was driven by increased business volumes and lower funding costs, according to Marquardt.

Net profit attributable to shareholders fell 9% year over year in the third quarter, to 4.17 billion kronor, and by 4% year over year in the first nine months, to 12.34 billion kronor. The third-quarter decline was attributable to a fall in net gains on financial transactions, which the company attributed to seasonally lower activity in customer-driven foreign-exchange trading.

Handelsbanken's common equity Tier 1 ratio was 23.6% at the end of September, compared to 23.4% at the end of June and 24.0% a year previously. The figure is 0.5 percentage point above the bank's target range.

The bank's "strong" net interest income was 2.6% ahead of estimates from the team of analysts at UBS, an Oct. 18 research note said. However, shares "remain too expensive" according to Johan Ekblom, an analyst covering Nordic banks.

"While shares are likely to react positively today, we think the valuation premium will come under pressure over time, and we reiterate our sell," he said in the note.

Shares in Handelsbanken were trading at 121.7 kronor apiece as of just after 3 p.m. local time, down from an opening price of 125.1 kronor per share and from the prior-day close of 123.6 kronor per share.

As of Oct. 17, US$1 was equivalent to 8.16 Swedish kronor.