Svenska Handelsbanken AB (publ)'s conservative risk culture and highly collateralized loan book have helped it achieve record low loan losses during the coronavirus pandemic. But analysts believe it will be hard for the Swedish lender to sustain these levels and expect its cost of risk in 2021 to more than double, if not triple, contrary to the trend anticipated for other large Nordic banks.

Having posted a cost of risk of just 3 basis points in 2020, it is no surprise that Handelsbanken is considered a safe haven for investors during crises. In comparison, the average cost of risk for large European banks was 70 bps, while for its Nordic peers Nordea Bank Abp, Danske Bank A/S, DNB ASA, Skandinaviska Enskilda Banken AB and Swedbank AB (publ) this figure was 36 bps, according to S&P Global Market Intelligence data.

CFO Carl Cederschiöld, presenting Handelsbanken's full-year earnings, credited the lender's conservative credit risk culture, close customer relationships and highly collateralized lending book as driving factors for its "exceptionally low" levels of credit losses. He further reminded analysts — as has become tradition on the bank's quarterly earnings call — that Handelsbanken has historically managed through crises with lower losses than its Nordic peers and has the lowest share of problem loans across Europe.

More than 87% of Handelsbanken's lending portfolio is within mortgages and property management, with relatively low loan-to-value levels. The bank has little exposure to the oil, gas and offshore sectors, at just 0.2% of its loan book, a segment that has been particularly vulnerable during the pandemic and has driven up provisions for other Nordic banks in 2020.

Analysts recognize Handelsbanken's strong underwriting standards and lending portfolio structure as key factors in its consistently low loan losses, but they also believe the small size of its current credit loss reserve reflects that more coronavirus-related provisions are to come.

S&P Global Ratings expects that Handelsbanken's cost of risk will rise to 10 bps in 2021 and 8 bps in 2022, while UBS analyst Johan Ekblom foresees these numbers to land at 9 bps and 8 bps, respectively.

While for other Nordic banks 2021 looks set to be a "transitional year" toward normalized loan loss levels in 2022, Handelsbanken is an "outlier" to this prediction, given it has not incurred any substantial credit costs in 2020, Ekblom said in a note Feb. 16.

Berenberg analyst Adam Barrass said Feb. 4 that "sustaining such low losses may prove difficult" for Handelsbanken, forecasting that cost of risk will more than triple to 13 bps in 2021, before reaching 10 bps in 2022. He pointed to the bank's stage 2 and 3 coverage ratios, at 1.09% and 31.97% respectively, as being comparatively low. These numbers were 2.14% and 47.46% for Swedbank, and 1.77% and 48.42% for SEB, for example.

General provisioning

Handelsbanken appears to have taken "a somewhat different approach to general provisioning" — that is provisioning driven by macroeconomic modeling and management overlays rather than specific exposures — according to Louise Lundberg, Nordic bank analyst at Moody's.

So far, the pandemic has had little impact on the asset quality of the largest Nordic banks, so they have instead frontloaded loan losses through significant general provisioning. Handelsbanken also made general provisions in 2020, but the levels are significantly lower compared to its peers, Lundberg said.

Of Handelsbanken's 781 million kronor loan loss provisions in 2020, 564 million kronor was set aside as a specific COVID-19 reserve to cover stressed exposures. While this management overlay represented a significant part of its cost of risk in 2020 — about 74% — it only covered 42% of its normalized cost of risk, according to UBS calculations.

Ekblom found that Danske and Nordea in particular appear to be more "conservatively provisioned," with Nordea's management overlay covering 134% of its normalized cost of risk, while for Danske this figure was 72%.

Lundberg does not believe Handelsbanken has necessarily "under-provisioned." She said if current macroeconomic projections hold true, those Nordic banks that took a more prudent approach in their loan loss provisioning in 2020 will likely be able to make reversals once uncertainty lessens, while for Handelsbanken this is more improbable.

Property management, U.K. business

The asset quality of Nordic banks has been supported by various government coronavirus support efforts, meaning there is a risk that the phasing out of such measures could trigger asset quality deterioration.

Some areas of Handelsbanken's loan book are vulnerable. DBRS Morningstar will pay particular attention to the bank's property management portfolio, which could weaken if retail activities and office management turn out to be significantly impacted by the pandemic, and its U.K. portfolio, which carried a relatively low cost of risk of 4 bps in 2020 given the macroeconomic outlook for the market, said Mario De Cicco, vice-president for global financial institutions.

On a positive note, even if analysts' cost of risk expectations hold true, Handelsbanken's loan loss levels will likely still remain below the average of its Nordic peers. The bank's earnings and capital also mean it is well placed to weather any impact, according to De Cicco.

Handelsbanken's CET1 ratio stood 6.5 percentage points above the regulatory requirement at 20.3% at the end of 2020, giving the lender "a strengthened buffer to absorb unexpected losses," said Salla von Steinaecker, director and lead analyst for Nordic banks at S&P Global Ratings.

As of March 18, US$1 was equivalent to 8.51 Swedish kronor.