Handelsbanken: There's Upside, But It's Too Small

Summary

• Handelsbanken, like many other banks, has reversed and performed well following the pandemic. Unlike other banks, however, and other finance, it has reversed almost fully.
• While the outlook for the bank is positive, the question becomes under what circumstances this bank is investable.
• My answer is "at a cheaper price." Let me show you why on a peer comparison, this bank is currently somewhat overvalued.

Nicholas Ahonen/iStock Editorial via Getty Images

I've written about Handelsbanken (OTCPK:SVNLF) plenty of times before. In my view, it's one of the most qualitative banks in all of the Nordics, perhaps the most qualitative. This strength was proven during the pandemic in the share price, which did not decline as deeply, or for as long a time as its competitors. In most respects, valuation is reversed back up to normal levels.

However, this raises the question of whether we should actually invest here or not.

Let's take a review of Handelsbanken and where things have been going for them.

(Source: Handelsbanken)

Handelsbanken - How has the company been doing?

I've held this bank for almost as long as I've invested. In fact, it's my second-largest financial position, and returns, while not as great as some, are still quite impressive.

I've also written, lately, of banks in general across the world as they surge back from the pandemic with positives. Handelsbanken is no different in this respect. In fact, they're better than most. 2Q21 brought very clear improvements to profit, putting the bank on track for its pre-pandemic growth trend.

(Source: Handelsbanken)

For a bank with Handelsbanken's market share and maturity, I view 4-5% CAGR in operating profit to be excellent. There was a 1H21 14% YoY increase here, improvement in RoE, 15% EPS improvement, a 20.5% CET-1 ratio (the highest of a bank I've ever written about), and a 0.00% Credit loss ratio for the entire 1H21.

Once again, showcasing this bank's strength and conservative nature. It's not as though Handelsbanken has no credit losses due to a small loan portfolio. Their portfolio is massive. It's just good.

Furthermore, Handelsbanken saw very similar trends to other banks, with large customer inflows to funds, and commission income from funds rising rapidly. The company also managed to get its cost/income ratio below 50%, to 49.6%.

Lending increased in both segments...

(Source: Handelsbanken)

...and net new mortgages ran high, higher than any other bank in Sweden. The company maintains a mortgage market share of around 17-20% for the past 10 years, and an outstanding lending market share of 22%, with average volumes of 4-5B SEK per month.

(Source: Handelsbanken)

Highlights for the quarter, as mentioned, include absolutely stellar fee and commission income growth. Nothing different from any bank we've written about before - it seems to be the trend now, and Handelsbanken managed a 5% 4-year CAGR in fee and commission income growth, with fees especially growing in savings-related fees and commissions (37% YOY).

At the same time, as indicated by the C/I ratio, the bank managed to cut down expenses by over 160M, or 1%, YoY. The bank's cost targets are on track, with a 20B target cost base at the end of fiscal 2022. The bank is on track to achieve this. Credit losses, as mentioned, were zero, which puts the bank apart even from the positive nature of overall Scandinavian banks.

(Source: Handelsbanken)

In terms of its geographic segments, Sweden was very strong with double-digit profit increases but still beaten by Norway, Denmark, and the Netherlands. The company's British and Finnish branches were not doing as well and actually saw operating profits go down - though these remain very small segments for the bank. COVID-19 effects are subsiding, even though there's still some net interest income volatility from the pandemic. We are, however, very far from the trends of around a year ago. Like with most banks, deposits are increasing from both customer groups, seemingly unimpacted by the overall pandemic.

(Source: Handelsbanken)

In terms of the company's loan sectors, only a very small sector is considered to be COVID-19 exposed.

(Source: Handelsbanken)

The company has provided additional reserves to make certain it has enough to cover any eventuality. However, there likely won't be any more major provisions for COVID at this stage from the bank. The company also doesn't have any major exposure to Loans with an LTV higher than 45% on the commercial side, and over 50% on the housing property side.

Overall, the bank had a superb development YoY - like any bank I've written about for the past half-year or so. Unlike other Swedish banks, Handelsbanken hasn't right-sized its dividend from the COVID-19 cut to the full yet, such as Swedbank (OTCPK:SWDBF) plans to do in September. We'll have to wait and see what Handelsbanken intends to do about the lower dividend paid, and with dividends coming for 2020 and 2021.

Let's look at valuation, to see where things are and why I believe this great bank offers not-so-great value.

Handelsbanken - What is the valuation?

My main problem with the bank is the multiples the market is demanding for a share of the profits here. While analysts continue to have a major upside of 12% to a high price target of 110 SEK/share for the bank, I view this as too expensive at a range of 10-12X P/E. When looking at financial peers, both domestically and internationally, you're very often able to find quality finance companies for as little as 7-9X P/E - even in today's market. Granted, they may not be the comparable quality of Handelsbanken, but I would be wrong to say that Handelsbanken is risk-free.

(Source: TIkr.com)

I've written about the bank's structure in previous articles, as well as some of the risks faced by legacy drop-off as the bank's previous selling points - customer proximity - are being dismantled across Sweden. While it would be downright wrong to call Handelsbanken grossly overvalued here, because it's not, it's not cheap either. At an NTM P/E of 10.5X, it's almost at its average historical of 11X. Some banks, like DNB (OTCPK:DNBHF) actually trade higher, but that bank never cut its dividend, making it a better choice for investors due to income stability and quality, being the premier Norwegian bank.

Handelsbanken on the other hand is still straddled with Oktogonen in its ownership which has become a potential negative in the bank's new structure and future.

Again, it's not a risky bank, but there is risk.

The upside here is equally clear. Even at 10.5X P/E, while not being excessively cheap for a financial, it's not expensive for what it could offer. S&P Global analysts expect that after the 25% dividend cut for the 2020 year, the bank will boost the dividend in 2021 (payable 2022) to 6.67 SEK/share, followed by a dividend of 6.5 SEK in 2022/2023. Even with the 25% cut, this comes to a 6-year 4.4% DGR, which isn't terrible. It's also fair to say that Handelsbanken, unlike DNB, had very little choice in the sizing of its dividend. COVID-19 statutes from the Swedish FED dictated that they had to cut. At expected dividend levels, the current yield for Handelsbanken at a price of 97 SEK/share is almost 7% for 2021/2022, and 6.7% for 2022/2023.

While you may not see much share price/capital appreciation during those years, because I don't see Handelsbanken climbing that far above 100-105 SEK/share, you will earn a decent dividend. It's also important to note that while dividends will likely grow - 62% by the estimates of S&P Global, EPS will likely not grow as much.

Handelsbanken is slated to return to a pre-pandemic GAAP EPS of between 8.3 and 9.3, with 9.33 SEK in 2022E. 6-7 year average EPS growth is 2 p.a, which is modest.

Also, the dividend numbers are forecasts - not actually decided. S&P Global has a tendency to underestimate the Oktogonen impact, and time will tell exactly what payout the bank decides to make.

(Source: Tikr.com)

What we can say is that analysts don't have the history of actually massively overestimating the company's stock valuation for the past 10-15 years. I do believe that Handelsbanken will easily climb back above 100 SEK/share, but beyond that, a lot will hinge on exactly what the bank does in terms of shareholder returns.

Investing in Handelsbanken is not something that you do because you're expecting massive amounts of outsized growth. It's a hopefully stable dividend income, coupled with stability. When the company cut the dividend, they killed part of that thesis. At current valuation and with current forecasts (S&P Global), I view a likely upside for the bank to be around 9-13% to its normal valuation of 11X NTM P/E, followed by another 4-6% per year for the next few years.

That's not bad, but it's certainly not something that will send you buying the stock. Nor, I believe, should it.

To my mind, Handelsbanken becomes appealing when it starts trading below 93 SEK/share, and a solid "BUY" below 85 SEK/share. At that valuation, it provides a very solid discount to its earnings and assets, and with a coupled valuation upside to a normalized 11-12X P/E, as well as a 4-6% dividend yield, you're looking at a combined annual upside of 10% for a longer period of time.

That's when I bought - and that's when I believe you should invest in Handelsbanken.

That is also why I see it as a "HOLD" above 93 SEK.

Thesis

I can summarize my current stance on Handelsbanken as follows:

• Handelsbanken is a great bank, but not necessarily a great investment at current levels. While you might be able to gain a solid 10-12% this year if it normalizes, returns beyond that would be less solid.
• At a lower valuation below 85-90 SEK, your upside is far better and suitable for the longer-term in terms of CAGR - though it's important to note that this bank's earnings growth is on the slow side.
• The arguments for investing in Handelsbanken are stability and dividend payouts - and these look a lot better when the price is somewhat cheaper
• It's difficult to claim that you're doing wrong by investing in Handelsbanken here. I just think you can do better.

How? Well, take a look at Unum (UNM) for instance, an IG-rated finance/insurance buyable at 5.6X P/e, with a realistic conservative upside of at least 26% p.a. on a 3-year basis and a 4.4% yield. That would easily be a choice over Handelsbanken at this point, even if the companies are somewhat different.

Remember, I'm all about:

1. Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

This process has allowed me to triple my net worth in less than 7 years - and that is all I intend to continue doing (even if I don't expect the same rates of return for the next few years).

If you're interested in significantly higher returns, then I'm probably not for you. If you're interested in 10% yields, I'm not for you either. I'm not interested in those potential 1,000-5,000% returns. They're too risky. I'm interested in consistently not making mistakes (or as few as possible), by investing in well-covered, undervalued cash flows and dividends.

If you want to grow your money conservatively, safely, and harvest well-covered dividends while doing so, and your timeframe is 5-30 years, then I might be for you.

Handelsbanken is a "HOLD". At this price, I don't consider it #1 or #2, but rather wait for it to either go above 125-130 (selling/profit) or below 85 (buying more).

Thank you for reading.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SVNLF, SWDBF, DNBHF, UNM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

While this article may sound like financial advice, please observe that the author is not a CFA or in any way licensed to give financial advice. It may be structured as such, but it is not financial advice. Investors are required and expected to do their own due diligence and research prior to any investment. Short-term trading, options trading/investment and futures trading are potentially extremely risky investment styles. They generally are not appropriate for someone with limited capital, limited investment experience, or a lack of understanding for the necessary risk tolerance involved. I own the European/Scandinavian tickers (not the ADRs) of all European/Scandinavian companies listed in my articles. I own the Canadian tickers of all Canadian stocks i write about.