Svenska Handelsbanken Earnings: Addressing Efficiency Concerns

Handelsbanken reported a good second quarter. Total income grew 1% to SEK 15.5 billion on a robust net interest income performance (up 1% year over year) and a good net fee and commission income growth of 7% more than offsetting lower net gains on financial transactions. Operating expenses, which disappointed in the first quarter, rose 14% compared with the same period a year ago driven by higher IT investments and staff costs. However, Handelsbanken has started to address its efficiency issue by reducing its headcount by 200 and scaling back its agreements with external consultants by 15%. The bank booked a SEK 302 million charge for the headcount reduction. We believe that the cost actions taken could strengthen the market's confidence in Handelsbanken's new CEO. His initially voiced focus on efficiency yet worsening cost base in the first quarter this year had weighed on share price performance and muddied Handelsbanken's investment case. We continue to believe that there is upside in Handelsbanken and maintain our SEK 137 per share fair value estimate and narrow economic moat rating.