As Big Banks Flee U.K., a Small Swedish Challenger Sits Tight

(Bloomberg) — It was a “golden age” for British finance, in the words of then Chancellor of the Exchequer Gordon Brown, when Sweden’s Svenska Handelsbanken AB targeted the U.K. for international expansion.

The years that followed, however, brought bank failures, bailouts, austerity, recession and now Brexit.

But unlike other major foreign institutions that are shifting billions out of the U.K. and into the European Union, Handelsbanken is sticking to its strategy and preparing to ride out the storm.

Mikael Sorensen, chief executive officer of Handelsbanken’s U.K. operations, says it has deliberately targeted customers that will leave it “less impacted” by Brexit than its competitors. “We have done whatever we can to prepare,” he said in an interview.

Loan-to-value ratios on real estate that Handelsbanken clients have used as collateral — a key measure of risk — are the lowest in the U.K., both for residential and commercial properties, according to the bank’s third-quarter report. Corporate deposits, meanwhile, are up by about a fifth from a year earlier.

According to Bloomberg Intelligence, Handelsbanken has “successfully carved a niche franchise in the U.K., avoiding the price-driven mass market.”

But some analysts question how much value the U.K. really adds, given the risks involved compared with its home market. Return on capital allocated to the U.K. business fell by almost 25% in the third quarter amid a drop in income. The return of 9.5% was about two-thirds of that generated by the Swedish business.

“Am I really willing to pay for a growth-based strategy where the U.K. is the key component?” Johan Ekblom, a London-based analyst with UBS, who has a neutral rating, said. “The U.K. business isn’t nearly as profitable as the rest of the group. It brings to the forefront an important question which is: Is there a path to improving the profitability in the U.K.?”

Old-Fashioned Banking

Handelsbanken, which is the only Nordic lender left with substantial operations outside Scandinavia and the Baltics, says it wants to repeat its Nordic successes in the U.K. And unlike its competitors there, it’s not “hampered by legacy systems,” Bloomberg Intelligence says.Old-Fashioned Banking

At home in Sweden, it’s the biggest and historically the most profitable of the country’s largest lenders, having dodged the money-laundering scandals that afflicted Danske Bank A/S and Swedbank AB.

Handelsbanken is relying on physical offices in the U.K. to attract customers — a model it used in Sweden. It has over 200 branches in the U.K. while headcount is up about 5% this year. (Meanwhile in Sweden, it’s cutting branches, though it will continue to have more physical offices than competitors).

Led by now-chairman Par Boman, Handelsbanken decided back in the 2000s that its business model, which emphasized close customer contact, would work outside Scandinavia. Around 2006, the bank singled out the U.K., building it into its second-largest market, after Sweden.

Handelsbanken wants to avoid the trap that some other challenger banks have fallen into, namely over-stretching only to crash when the first crisis hits. The Swedish lender has also had to change its structure in the U.K., at the behest of local regulators.

Handelsbanken says lessons learned in the Nordic region give it a sense of what’s to come in the U.K. Based on its observations, fee income is set to climb, as more of the bank’s U.K. depositors move their savings into its asset management unit to avoid ultra-low interest rates. That’s a shift worth sticking around for, according to Sorensen.

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