Handelsbanken's Q2 Earnings Miss: Can Dividends Stay Strong in a Weaker Profit Environment?

The Swedish banking giant Handelsbanken reported weaker-than-expected results for Q2 2025, raising questions about whether its legendary dividend stability can endure amid deteriorating profitability. While the bank's fortress-like capital position and cost discipline remain intact, the dual headwinds of declining net interest income and trading losses highlight vulnerabilities that investors must weigh against its historically robust payout tradition.

The Earnings Miss: A Perfect Storm of Rates and Currency
Handelsbanken's net interest income fell to SEK 10.69 billion in Q2, a 9% drop from the same period in 2024, primarily due to the Swedish krona's sharp appreciation and the fading benefits of prior deposit-lending rate repricings. This metric missed consensus estimates by 2.1%, underscoring the pressure on traditional banking revenue streams. Compounding the issue, trading income turned negative for the quarter at SEK -64 million—a stark contrast to SEK 580 million in the prior quarter—highlighting the risks of market volatility in non-core activities.

The result? Operating profit slid to SEK 7.16 billion, below the SEK 7.50 billion expected by analysts. Yet, the bank's cost discipline shone through: underlying expenses fell 5% year-on-year to SEK 6.02 billion, even as it absorbed general inflation and salary increases.

The Dividend Dilemma: 120% Payout in a Lower-Growth World
Handelsbanken's dividend payout has long been a beacon of stability, with a track record of annual increases and a yield now at 11.76%—among the highest in European banking. But the Q2 results underscore a critical tension: the bank's dividend for 2025 is set at SEK 15.00 per share, or 120% of Q2's profit. This is a notable jump from the 108% payout ratio in 2024, even as net interest income trends downward.

The CET1 ratio of 18.4%—far above the 14% regulatory minimum—provides a buffer, but the bank's ability to sustain dividends depends on whether it can stabilize net interest income and avoid further trading losses. Cost cuts have helped, but they're a one-time fix. “The dividend is still safe for now,” says one analyst, “but if net interest income continues to shrink, shareholders may see pressure on payout growth.”

Valuation: Overpaying for Stability?
Handelsbanken's valuation metrics present a mixed picture. Its price-to-book ratio of 1.39 is above its Nordic peers (e.g., SEB's 1.1x or Nordea's 1.0x), reflecting its premium dividend yield and conservative balance sheet. However, its P/E ratio of 14.4x is elevated relative to the broader financial sector (8.9x), suggesting investors are pricing in resilience even as earnings falter.

Analysts have taken notice: the stock's average price target is SEK 120.94—11% below its current price—reflecting skepticism about whether profits can rebound. The disconnect is stark: while the dividend yield is compelling, the stock's premium valuation may not be justified if profitability stagnates.

Investment Takeaway: A Dividend King in Transition
Handelsbanken remains a paragon of banking stability, with minimal credit risk and a fortress balance sheet. Yet its Q2 results expose vulnerabilities in an era of compressed net interest margins. The dividend is safe for now, but investors should brace for slower growth in payouts or even a freeze if profitability doesn't stabilize.

For income investors, the 11.76% yield is tempting, but the stock's premium valuation and earnings headwinds warrant caution. A “hold” stance makes sense: consider the dividend, but monitor net interest income trends and cost controls closely. If the bank can't reverse its revenue slide, the stock's current price may overstate its future earning power.

In short, Handelsbanken's dividend machine isn't broken—yet. But investors should treat the stock as a long-term bet on stability, not growth.