One Great Bank You’ve Never Heard Of and What We Can Learn from It

Ser Jing - One Important Thing To Remember in Falling Markets (pic)In all fairness, if you live in Sweden, or have stayed there for some time, there’s probably almost no chance you haven’t heard of Svenska Handelsbanken AB. But for those who’ve never stepped foot on the Scandinavian country, you’ll probably have never heard of one of Sweden’s largest banks.

It’s a shame, really, that Singaporean investors aren’t more familiar with Handelsbanken – it is a great example of how a major financial institution laughed in the face of a massive global financial crisis.

Over in the USA, investors like to think of Wells Fargo, US Bancorp, and even JPMorgan Chase – remember, the London Whale fiasco didn’t happen until more recently – as shining examples of banks that did well during the crisis.

After all, none of the three reported a full-year loss during the years of the crisis even though Wells Fargo and JPMorgan’s earnings fell by as much as 70% from 2007 to 2008, and US Bancorp’s profits dropped by close to 60% from 2007 to 2009. Their shares have also showed gains in the 30%-plus range since the start of 2007.

That’s not bad, especially when compared with American bank Citigroup’s US$29.7b loss in 2008. But, Handelsbanken takes it one notch further. Its earnings fell by just a third from the peak in 2007 to the trough in 2009 and not only that, its shares have nearly doubled since the start of 2007. Take that, global financial crisis!

So, an obvious question would be: How exactly did Handelsbanken manage to avoid getting tripped up the way other banks did?

Given how our three local banks DBS Group Holdings (SGX: D05), Oversea-Chinese Banking Corporation (SGX: O39), and United Overseas Bank (SGX: U11) dominates the Straits Times Index (SGX: ^STI) in Singapore with a combined weight of around 30%, knowing what makes Handelsbanken tick seems to be worthwhile knowledge to have for investors in the stock market here.

Fortunately for us, that answer is covered in great detail by Niels Kroner in his book A Blueprint for Better Banking, which is focused on Handelsbanken and the magic behind its performance.

In the book, there is one key list that Kroner highlights as what separated banks like Handelsbanken from the fakers that got a rude awakening during the crisis. Kroner called that list the banks’ “Seven Deadly Sins.”

Here’s how Kroner believes a bank becomes a sinner.

1. Asset/liability mismatches

The failed American investment bank Lehman Brothers is infamous for its use of short-term financing to fund longer-term assets. The approach worked well when times were good, but when the going got rough, short-term financing was pulled and Lehman was snuffed out.

And while it’s easy to finger-wag at Lehman, things got so dicey for many major banks around the world because they were likewise relying on short-term financing.

Like what billionaire investor Warren Buffett once wrote (emphasis his):

[C]redit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed. Even a short absence of credit can bring a company to its knees.” How apt.

2. Supporting clients’ balance sheet mismatches

A bank can keep on top of its own asset/liability mismatches, but if it’s financing customers that have mismatches of their own, it can open up the bank to problems.

3. Lending to over-indebted customers

Don’t lend to people who can’t pay back the loans. It would seem that banking doesn’t get any simpler than that, yet we’ve heard endless stories stemming from the financial crisis of wildly over-indebted customers being loaned piles of cash.

4. Investing in non-core assets

Reaching for returns or yield is the classic way that banks get themselves wrapped up in this sin. But time and again through history, we’ve seen banks putting all sorts of whacky things on their balance sheets. It’s a move that often ends in tears for shareholders.

5. Dealing with the non-bank financial system

What you didn’t see could, and did, hurt you during the financial crisis. Off-balance sheet vehicles and dealings with more lightly regulated “banks” like Lehman and Bear Sterns got many other American banks trapped in schemes that never should have passed the smell test.

6. Emerging markets and real estate

You know what they say about things that seem too good to be true? That’s often the case for banks investing in emerging markets. While emerging markets often exhibit growth that makes developed-markets banks’ mouths water, those booms often come with crippling busts.

Those busts are devastating for banks based in those countries, but they can also blow a hole in the balance sheets of foreign banks that aggressively moved in to ride the growth wave.

7. The continuity of the past to the future

We hear all the time from finance types that past performance is not indicative of future results. Yet bankers often seem most attached to that idea.

U.S. housing prices never go down? Sure! Build into to the model. Nothing will go wrong…

Putting it to practice

Despite its thorough-ness, there’s reason to be disappointed with the “Seven Deadly Sins” above. The list of sins doesn’t lend itself well to number crunching. Some – off-balance sheet assets, for instance – will be all but unseen until it’s too late. So running a bunch of statistics through Excel won’t be of much help.

Instead, it’s critical that the investor get to know and understand the strategy of the bank they’re investing in as well as who’s steering the ship. You may not know specifically that there aren’t closets full of skeletons just waiting to blow up, but you can know whether you’ve invested in a conservative bank with management that looks 10 years down the road, not a few quarters.

This entails more work than blindly plugging return-on-asset numbers into a spreadsheet, but it’s far from impossible.

If we rewind to July 2007, for instance, Citigroup’s then-CEO, Chuck Prince, made an infamous “dancing” comment. He said:

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

At around the same time, Bruce Helsel, an executive vice president at Wells Fargo, had this to say at an investment conference:

Our credit quality reflects the advantage of our diversified business model… we have not had to offer option ARMs or low no-doc type of product as we are not forced to be that competitive. And we are willing to lose market share by not offering those products.”

Quite a disparity in approaches to the business. Also, quite a disparity in investment performance for shareholders. Citigroup’s shares are down 90% since July 2007, while Wells Fargo’s is up 24% over the same period.

Foolish Bottom Line

Back home in Singapore, the share price performance of the local banks can’t match up to that of Handelsbanken since the start of 2007. DBS has managed a return of only 14%; UOB is slightly better with its shares up by 37%; and OCBC rounds up the trio with gains of 66%.

So in terms of share price gains, Handelsbanken has roundly routed Singapore’s banks. But in terms of corporate performance, we see DBS, OCBC, and UOB sharing some great similarity with the Swedish bank. From 2007 to 2009, the worst performer among the local trio was DBS, whose earnings fell by only 11%.

It would seem logical to conclude that Singapore’s three banks have been somewhat “sin-free” so-to-speak. Do you see DBS, OCBC, or UOB committing any of Kroner’s seven sins?

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written by Matt Koppenheffer, and first published on It has been edited for