Handelsbanken's Q2 Results: A Stormy Quarter, But a Steady Compass Ahead?

Handelsbanken's Q2 2025 results painted a mixed picture of resilience and headwinds, with currency fluctuations and evolving interest rate dynamics testing its profitability. While net interest income (NII) dipped due to the Swedish krona's (SEK) strength and fading repricing benefits, the bank's core lending growth and fortress-like capital position suggest that investors looking for stability in a volatile market may find value here. Let's dissect the numbers and weigh the risks against the opportunities.

The NII Dilemma: Currency and Rates Collide

Handelsbanken's NII fell 3% quarter-on-quarter, with 1 percentage point of the decline directly tied to the SEK's 5% year-to-date appreciation against major currencies like the euro and British pound. This currency effect hurt income from cross-border exposures, such as loans or assets denominated in weaker currencies. Meanwhile, the remaining 2 percentage point drop stemmed from narrowing loan-deposit spreads as central banks in Sweden, Norway, and the UK cut rates to combat economic slowdowns.

The bank's NII also dipped 2% year-over-year, though this reflects its ability to stabilize margins despite aggressive rate cuts. The absence of repricing tailwinds—seen in prior quarters as deposit rates lagged behind lending rate hikes—meant that the bank couldn't offset the SEK's gains. However, the resilience here is notable: NII held up better than feared, suggesting robust deposit growth and disciplined risk management.

Lending Growth: Caution, but Consistency

Lending volumes rose across all core markets—Sweden, Norway, the UK, and the Netherlands—but at a measured pace. Sweden, the bank's largest market, maintained its dominance in both private and corporate lending, while Norway saw a balanced expansion in deposits and asset management, reducing reliance on riskier lending. The UK, though hamstrung by high mortgage amortization, showed early signs of customer activity recovery.

The bank's cost discipline also shone: staffing levels fell 7% year-on-year, with cuts concentrated in non-client-facing roles. This allowed reinvestment into digital tools (e.g., CRM upgrades) and client-focused teams, a strategy that should pay dividends as efficiency gains materialize.

CET1: A Cushion for the Stormy Seas

Handelsbanken's CET1 ratio remained rock-solid at 18.4%, far exceeding the 14.9% regulatory minimum and comfortably above its 15.9%–17.9% long-term target range. While the ratio dipped slightly from 18.9% in Q2 2024, CEO Michael Green emphasized that the excess buffer—3.5 percentage points over regulatory requirements—is a prudent hedge against macroeconomic shocks, not a sign of fragility.

The bank's liquidity reserves (SEK 950 billion) and low credit risk—marked by a sixth straight quarter of net credit loss reversals—reinforce its defensive stance. Management plans to gradually reduce the buffer toward its target, but only if macro risks subside. For investors, this capital strength is a critical safety net in an uncertain environment.

Why This Miss Could Be a Buying Opportunity

The market may overreact to the NII dip, but Handelsbanken's fundamentals remain strong. Key positives:
1. Currency Exposure Mitigation: The SEK's appreciation is a short-term headwind. If the krona stabilizes or weakens (as central banks in the Nordics and UK may eventually raise rates again), cross-currency pressures could ease.
2. Lending Growth Momentum: The cautious expansion in all markets suggests underlying demand, even in a slowing economy. Norway's balanced business model and Sweden's dominance are strategic advantages.
3. Capital and Dividends: The CET1 buffer and 120% dividend payout ratio (SEK 7.15/share) reward shareholders while maintaining financial flexibility.

Investors should also note that Handelsbanken's shares are trading at a 10% discount to its 5-year average price-to-book ratio, despite its fortress balance sheet. If macro risks—such as a sharp recession or prolonged low rates—ease, the stock could rebound sharply.

Risks to Consider

• SEK Volatility: Further krona gains could prolong NII pressure.
• Rate Cuts: If policy rates fall further, margin compression could persist.
• UK Market Challenges: The UK's cost/income ratio (44%) remains elevated, requiring sustained restructuring.

The Bottom Line

Handelsbanken's Q2 results highlight short-term turbulence but underscore its long-term resilience. For conservative investors, the bank's capital strength, dividend yield (~4% based on current stock price), and focus on core markets make it a compelling play if macro risks retreat. While the NII headwinds are real, they are manageable, and the CET1 ratio acts as both a shield and a springboard for recovery. This is a stock to watch closely as the macro backdrop evolves—and a potential bargain for those willing to bet on stability over volatility.