Handelsbanken Navigates Rate Headwinds with Cost Discipline, but Margins Under Pressure

Handelsbanken delivered a solid first-quarter performance, outperforming market expectations with a net profit of SEK 6.336 billion—a 6% beat that underscored its ability to manage costs and navigate a challenging interest rate environment. However, underlying pressures on net interest margins and fee income suggest the Swedish lender faces a bumpy road ahead as it balances cost discipline with the need to sustain profitability.

Earnings Beat Driven by Cost Discipline

The quarter’s standout achievement was a 4% year-on-year drop in operating expenses to SEK 6.025 billion, fueled by a 2% reduction in full-time employees and restrained salary growth. This cost control, combined with a 3% sequential rise in net interest income (despite margin pressures), allowed pre-provision profit to beat estimates by 5%.

The bank’s credit portfolio also brightened: a SEK 54 million reversal of credit losses—a sharp contrast to consensus expectations of a SEK 158 million charge—highlighted improving borrower health. This follows a SEK 95 million reversal in Q4, pushing the credit loss ratio to -1 basis point.

Headwinds Emerge in Net Interest Margins

While cost discipline shone, Handelsbanken’s net interest income fell 3% sequentially to SEK 11.347 billion, pressured by rising funding costs and weaker loan volumes. Analysts estimate margin-related headwinds shaved SEK 285 million from results compared to the prior quarter. Year-on-year, revenue dropped 3.5% to SEK 14.789 billion, underscoring a persistent struggle in a low-rate environment.

Fee Income Struggles Amid Volatile Markets

Non-interest income also faltered, with fee revenue missing expectations by SEK 87 million. Asset management and payment fees declined, while trading income collapsed 32.5% year-on-year to SEK 506 million—a reflection of subdued market activity. This underscores reliance on a robust lending environment to sustain fee growth.

Capital Position Solidifies, but Dividend Cuts Loom

The CET1 ratio dipped to 18.4%, 30 basis points below estimates, as the bank accrued a SEK 5 per share dividend for Q1. Management trimmed the full-year dividend forecast to SEK 11.50 per share—a 23% cut from 2024’s SEK 15—highlighting cautious capital allocation. Despite this, the ratio remains 50 basis points above the bank’s long-term target, offering flexibility.

Valuation: A Premium Under Pressure

Handelsbanken trades at an 11.3x price-to-2026 EPS multiple and 1.2x tangible book value, implying an 11% return on tangible equity. However, analysts warn the valuation premium relative to Nordic peers may erode unless margins stabilize.

Conclusion: A Resilient Bank Faces Structural Challenges

Handelsbanken’s Q1 results demonstrate resilience through cost control and credit improvement, but the profit beat masks deeper concerns. Margins are contracting due to rising funding costs, fee income is inconsistent, and the dividend cut signals caution. While the CET1 ratio provides a buffer, investors must weigh the bank’s strong capital position against a macro backdrop that continues to squeeze profitability.

The stock’s 14.4% YTD gain suggests optimism, but sustainable outperformance hinges on stabilizing net interest margins and reviving fee income. With the bank’s ROE slipping to 12.9%—a 0.8 percentage point decline year-on-year—the path to higher returns remains uncertain. For now, Handelsbanken’s results are a mixed bag: a testament to its operational agility, but a reminder that banking in a low-rate world demands more than just cost-cutting.