Banks in the current financial climate have been increasingly forced to rely on state and shareholder support to keep their balance sheets healthy and bring more customers to the fray. The recent crisis has done much to dampen the sector’s progress, and only those with a handle on the changed financial landscape will thrive in the present. Sweden’s Handelsbanken remains the only bank that has not accepted state or central bank support, nor asked shareholders for new funds – achieved through decentralisation.
“During this financial crisis there have been constant challenges of various kinds: the Lehman crisis, the Nordic-Baltic crisis, the US subprime crisis, the liquidity crisis, rather high interest rates and now negative interest rates, which reduce the margins on deposits”, said Ulf Riese, Handelsbanken’s CFO, who spoke to World Finance on the bank’s position in Sweden. “In spite of this, Handelsbanken has had an extremely stable performance quarter-to-quarter, with a constant increase in shareholder value of 15 percent per year.”
During this financial crisis there have been constant challenges of various kinds: the Lehman crisis, the Nordic-Baltic crisis, the US subprime crisis… which reduce the margins
on deposits
Founded in 1871, Handelsbanken has become one of the leading banks in the Nordic region (see Fig. 1), with superior cost efficiency and customer satisfaction. With more than 800 branches to its name in its six home markets and presence in another 19 countries, the bank’s financial goal is for its profitability to be greater than that of its competitors; a goal that is reached consistently every year since 1972. By understanding that many of the challenges gripping the financial sector should not be seen as obstacles but opportunities, and by focusing on customers and not products, Handelsbanken has succeeded where many have not.
“All these external events and challenges – but also opportunities – mean very different things to our customers, and therefore to the bank, in different places. An external event that is negative in one local environment may at the same time be a positive opportunity in another local environment. How to tackle them – the right business reaction – is different from place-to-place”, said Riese. “Fast, local decision-making is key for servicing customers in the right way and consequently for the bank. At Handelsbanken, all these decisions are taken locally – credit decisions, what product is right for a particular customer, pricing, staffing, and so on.”
Personalised banking
Running a bank in this manner involves local decision-making, and means that every branch must take immediate action and constantly adapt to changing conditions. All of Handelsbanken’s branches are free to set their own salaries, decide how many employees it needs, choose its own customers and set its own prices for them. Sources at the bank say that no credit is ever granted at Handelsbanken unless the local branch takes full responsibility for it.
Seeing Sweden, Denmark, Finland, Norway, the UK and the Netherlands as home markets, the key to Handelsbanken’s growth lies in its commitment to local concerns, and on the issues that concern the banking community most. There is also much to be said about the bank’s focus on responsibility: “It is part of human nature to do your very best if you get the mandate. You know that you are in charge and accountable for what you do. There is no other person to blame and you get the full credit for your success. This is combined with the fact that the bank’s employees are also the largest shareholders of the bank.
“When we lend money, we think of it as our own, because it almost is, and the same applies when we spend money – cost-effectiveness is very important when it comes to being competitive on pricing. The fact that we have never fired anyone because of lack of work is also something that makes everyone take a very long-term approach and act responsibly.”
Closely in keeping with the bank’s focus on responsibility, Handelsbanken has also taken pains to unshackle itself from the culture of short-term banking, best characterising those responsible for the crash, and, in doing so, has greatly enhanced its reputation as a responsible and forward-thinking entity; “I think it is very important to take away all short-term incentives”, said Riese. “In banking, it is so very easy to create short-term results that are not sustainable in the long-term. In the early 1970s we removed all short-term incentives. Since then we have had no budgets, no bonuses – neither for management nor staff at our branches – we have no sales campaigns, no central advertising, and no volume goals.”
In place of these incentives, the bank has introduced a long-term participation system called Oktogonen, in which the bank, reaching its goal of having higher ROE than the average of its peers, each year channels a third of extra profits into the participation foundation. “Oktogonen in turn buys Handelsbanken shares and since we have fulfilled our company goal for 43 years in a row, it means that the employees through Oktogonen have become the largest shareholder of the bank. And you can’t take out your money until you are 60 so it is very long-term”, said Riese.
This air of responsibility carries over into the bank’s approach to risk, and by monitoring its exposure to certain areas, Handelsbanken can mitigate against risks outside of its control. “We don’t know where the dollar is going, or next week’s interest rates, but we certainly know our customers locally and how to provide value to them. We have therefore minimised all market risks, and we do not take any positions. We do not like macrorisks, so we are only in very well developed markets”, added Riese.
“The only risk we are prepared to take is credit risk, because we know that our local profound knowledge of our customers makes us much better in assessing this and handling this risk than other banks. Although we have the lowest risks we combine this with the strongest financial position of all European banks, simply because we do not like risk and want to be sure to have the resources to serve our customers, regardless of the financial stress in the system. We want to be sure to cater for our own needs, being the only peer bank that has never taken any state support, nor central bank funds, nor asked our shareholders for new equity, either in this financial crisis or the one in the 1990s.”
Pieces of the puzzle
Handelsbanken’s organic growth model is also a key area in which it minimises risk, in that the model has proven itself to be scalable and repeatable. “We start new branches, one at a time, brick by brick with exactly the same philosophy that we have worked with for some 50 years. We do not believe in large acquisitions, or ‘strategic’ bold decision-making at the top. To be local is key if you want to keep the risk low and really provide excellent service. Then, when you add up all these local efforts in our now 840 branches, the numbers become very substantial.”
Another crucial facet of Handelsbanken’s winning formula is its digital banking tools, which constitute a key part of maximising customer engagement. However, unlike rival banks, Handelsbanken choose not to force customers into a specific digital highway, allowing them more freedom in choosing how it is they want to access the branch.
“Digital banking solutions are very important. You have to be top notch here. We are, but the problem is that many other banks are too. It is only the colour on the screen, app or whatever that differs”, said Riese. “The differentiation never comes from this – it is simply something you have to provide. What we have is a unique way of combining these possibilities for the customer to access the bank with the physical branch. We see these digital highways as just other ways for the customer to visit the branch, digitally rather than physically. Our branches are what make us different and the customer responsibility always stays with the local branch, regardless of how the customer chooses to reach the branch.”
What makes Handelsbanken different from its competitors is the fact that the bank is organised in geographical terms, and that they have linked the local branch with customers’ various technical opportunities for communicating. The aim is that regardless of how the customer communicates with the bank, the local branch and customer account manager are always available. This focus on the branch ahead of perhaps more modern alternatives is unusual for one of Europe’s leading industry names, though it is through this approach that Handelsbanken has been able to reinforce its commitment to local affairs and keep customers and staff satisfied.
“We have been in business since 1871”, concluded Riese. “We have no budget or long-term plan, but our intention is certainly to keep on doing things with the proven business model we have for at least the next 144 years, but of course with the ambition to become even a bit more Handelsbanken every day. In other words, to constantly improve.”
