Andy Copsey, COO, Handelsbanken: the UK’s Fastest Growing Bank

I'm here this morning to talk about Handelsbanken. It is a Swedish company, and it's a bank. But that doesn't mean that what I'm going to talk about today is kind of somehow Swedish, or especially related to banking. Our way, as we call it, is perhaps an organizational structure and a management style that could have appeal in other industries and in other countries.

.So just a little bit about Handelsbanken for a little bit of context, shall we say. So we've been around a long time, since 1871. We're a bank, so you'd expect us to have loans. We're a bank, so ordinarily you'd expect us to make money, although that's been a bit of a novelty in the last few years in banking.

We're a good sized company, 11, 700 employees. It's not the biggest company on the planet. It's not a particularly small company either. We're It's a quoted company, it's the company with the longest standing listing on the Swedish Stock Exchange. We're an international company. We have 25 countries where we have operations.

Six of those countries are what we describe as our home markets, which are the Nordic countries, Holland and the UK. So what you hear about today, as I said before, is not a Swedish phenomena. It's It's something that works in different countries with actually quite distinct perhaps cultures. And we're a branch led bank.

There's lots of banks starting up at the moment that think that branches are sort of last millennium. We don't believe that, because our customers tell us that they like branches and in a service industry, we believe it's a good idea to listen to your customers. So the model that we're going to talk about operates, if you like, in a retail environment.

We're a bank, but a retail bank as opposed to some kind of centralised city of London, New York kind of investment bank operation. So as I mentioned we're international. These are our home markets. The UK is where we are today and is actually our biggest growth market. We have 201 branches in the UK and they've steadily grown over the last 14, 15 years in particular, which of course has been, the latter half of that period has been a pretty tricky period economically and especially for banks.

We believe that it's our management model and the way we do business that's enabled us to push ahead when the competition has had other things to focus on, shall we say. Now, we've been around since 1871, but actually the CEO, Jan Verlander, from the early 70s, set us off on the journey that we've been on in the last 40 years or so.

In the early 70s, Handelsbanken looked like lots of other companies and lots of other banks. We were very hierarchical, very top down management. The branches weren't really that important. The branches implemented the head office strategy. Head office was king. That's where the decisions were made, not dissimilar to many large companies.

Now, Verlander was running a small bank at the time in Sweden. We are kind of a big bank in Sweden. We're a high street bank with 20% market share of thereabouts. And Verlander was running a small bank and actually running it better than the then CEO of Handelsbanken was doing because we'd become too bureaucratic, too slow, too cumbersome.

And Verlander said, I will run Handelsbanken, providing you allow me to run it the way that I want to run it, and the way I'm running this small bank successfully. And he introduced a devolved leadership model. And had he not done so, I wouldn't be here today, because I wasn't going to leave a UK bank to join a bank from Sweden, or anywhere else for that matter, that looked exactly the same as the bank that I'd left.

Verlander believed, and still does, because he's still with us, in people. He believes in human nature. And he said that he believed that the staff in Handelsbanken went to work with the intention of doing a good job. They wanted to do a good job. So why wouldn't you trust them to make decisions? And in banking, now as then, customers really appreciate dealing with bankers that are well trained, well informed, That can make decisions in their local branch.

And that's really where the story, the modern history of Handelsbanken began and why BBRT and others since then have studied the Handelsbanken way. Because Verlander was a visionary. And as we'll see in the next coming slides, his ideas, which I guess at the time must have been very difficult to take on board.

Even today we're having a discussion as to whether a devolved leadership model can work. But nobody had done it then. Now you can buy books about Handelsbanken, and you can read our annual report and see that it can work. And of course, there's an awful lot happened, digitally, internet, social changes, et cetera, political changes, in the intervening 40 years.

So Verlander wanted to keep it simple. We should only have one corporate goal. That's to attain a higher return on equity than the average of our competitors. And this is really the embryo of moving away from budgets. So this year, this time of year, we're not predicting what our result will look like next year.

We're not budgeting. What we hope and expect is that, like, for the last 43 years, when we get to the end of this year, our ROE will be better than the average of our peer group. That's a pretty stretching target to say that every year you want to be the best. If you follow sport, for example, nobody knows how many points it's going to take to win the Premier League or the Championship next year.

But if you get more than everybody else, you'll win. So Verlander said we should aim to be the best in terms of profitability. And to achieve that, we should have more satisfied customers. Our customers should be happier with us than they could be with any other bank in town. And we should also provide that service really cost effectively.

And that's really our day to day focus in Handelsbanken, in the UK, in Scandinavia, in all of the countries where we operate, is for our customers to really, really be satisfied, so that they tell their friends and business associates. That there's a good bank down the road, which kind of runs a bit differently.

It's got a different culture, very decentralised. You meet kind of proper bankers who can make decisions, and it's commercially successful. And as we've seen in recent years, choosing a bank that's commercially successful is important because it means that they can continue your overdraft and your loan, and they don't go through continual changes.

So since then, Handelsbanken has evolved. But basically, we have the same management structure. And this is how we describe Handelsbanken. We work with human nature. Verlander believes, and still believes, as we all do, that people want to do a good job. They don't want to be told what to do. They don't want to be micromanaged.

They want the freedom to operate within the context of their own personality to operate locally to focus on customers. There's such a lot of discussion these days, especially in my industry around behavior and ethics. Handelsbanken has proven for the last four decades that actually if you allow the frontline staff to make decisions, they make pretty good decisions.

Because they're making decisions about which businesses to support and on which terms in their local community. Their kids go to the same school as their customers kids, they shop in the same supermarkets, they play golf at the same golf course, etc. So we work with that, and we really empower the frontline staff in the branches, and boy do they pay back.

They really, passionately believe in Handelsbanken. And they actually appreciate that the level of trust and respect that they're shown is maybe not achievable in other employers in our industry. So I've got a question for you, because I was asked to make this interactive. As you probably gathered, I could talk for a long time about Handelsbanken .

So I've described a decentralised organisation, where I now work in the head office. That role is actually to support the staff that are close. So the, this morning I've been, I was beckoned to a branch manager's meeting just down the road in Holborn. They wanted me to go and explain what I'm doing in my segment of the business to support their branches.

It was quite a robust discussion. And that's how it should be. I supply them with the services, the products and the systems to enable them to attract and retain good customers and give them a better service than they can get anywhere else. So, this is a decentralised organization. So, I think it would be worth just maybe reflecting for a few minutes, maybe within your own table groups, what you think our organisational structure looks like, or maybe what your organisational chart could look like, if you were running a decentralised orginisation .

Okay. Well, should we call that session to a close, please? It's obviously been, it's created a lot of discussion, a lot of chat. It's not often, or it's not always the case that people are so engaged about an organizational chart.

Host: I'm ready to throw this out. If someone would like to say something about what we're discussing at that table.

So please, anyone?

Andy: Maybe you're talking about something else.

Host: I've got one down here. Ready?

Audience Member 1: Okay, I was thinking about a circle where the corporate function would be in the middle and then the branches would be around it, so that its services are pushed or backed up or supported from the middle.

Host: Any other comments, reflections?

Andy: Okay.

Let's have a look. Let me introduce you to the arrow. I usually start by explaining what the arrow isn't. It's kind of self evident what it isn't but in most organisations you have head office at the top and those people that kind of look after your customers somewhere near the bottom and very many layers in between.

And certainly in the industry that I operate in, and I've recruited staff from many banks. They described to me maybe 10, 15 layers between the customer and head office and even then segmented between maybe larger customers and smaller customers and mass market. Ours is a pretty simple logic really.

The customers, of course, pay our salaries without them, we have no business. Customers have relationships with their relationship managers in the branches . They want bankers that are local, empowered, ethical, not distracted by bonuses which we don't pay, not distracted by head office set targets which might create the wrong kind of behaviour.

So the branch is at the front of the arrow. It's the branch that has the customer responsibility. And the branch pay for and receive the support that they demand from the people at the back of the arrow. So my first role in Handelsbanken was as a branch manager. I'm a banker. And then we established a regional head office in the north, in Manchester, and I became an area manager in the second segment of the arrow.

And then that was my first role responsible for supporting the branches in the north with whatever they needed support with. My role now is in the central, one of the central departments looking after the products and infrastructure. So the meeting that I've had this morning was because half a dozen or so central London branch managers asked me to go to one of their breakfast meetings because there were some issues they wanted to talk about, whether it be product development, system enhancement, streamlining, customer service issues.

So they invited me to come along and have a chat with them. Now they pay my wages as they pay everybody's wages behind them in the arrow . And in my area we manufacture products effectively, but not products that we think our customers should be interested in, and not products that we think our branches should sell.

We create the products that the branch customers tell them they need. So we, we introduced a new card product for instance last, last month. We manufacture to order based on customer demand. It's a very efficient model. We don't tell the branches how many of that particular card product they should sell.

Holborn branch of Handelsbanken is quite a bit different to Lincoln branch, to Kendall branch, to Aberdeen branch. We don't dictate product volumes. It's the branches that have got the customer relationship. That's about it. And they present to the customers, their customers, in their geographic territory, the kind of products that those customers want.

And they are different from Horban to Kendall. So the, the focus is absolutely on customers. Customers really appreciate talking to decision makers. But because the decision makers in Handelsbanken, at the front of the arrow, the branches, are profit centres, And because they pay for all of the services that they demand from the back of the arrow, they're running a small business.

The branch managers are effectively running an SME. Five staff, fifteen staff, a few hundred customers, a few thousand customers, they're running both sides of the P& L and both sides of the balance sheet. The customers really appreciate the decisions, even though sometimes the decisions are no, Because in banking, that's, we're in the industry, which is quite unusual, where sometimes a customer wants to buy a product that you think they may be unwise to buy.

And the customers really have very, very detailed customer knowledge. So the structure of Handelsbanken is all driven by the customer. And the branches are responsible for the customer. We have an expression, the branch is the bank. Without a branch, in Handelsbanken, there is no bank.

I've touched on the fact that each branch has got its defined geographical area. We call it the church spire principle. So when I opened my branch in 2001 in Leeds, it was a very tall church spire because it was only branch number five and I covered the whole of Yorkshire in the northeast. But with 201 branches now in the UK, this is now a very, very local business.

So one branch has its own geographical area. It can't go outside of that and the branch manager, she's responsible for all of the customers in her area. Costs, income, everything. Nobody from head office is telling her how many products to sell and at what price. Even pricing, especially pricing, is decentralised to the front line, to the branches.

And as I say, it's all there. Our task is simply to make sure they've got the tools and the infrastructure to do the job. So for a branch manager, when we come to add up, as we will at the end of the financial year, the UK profit, it's quite simple really. It's all of the branch's profits added together.

Because the branches have paid for every service that they've had. They pay for the personnel support, the IT support, everything. And because they pay for it, they're really careful about how they use it. And they're very careful about what they demand in terms of new systems and new developments.

So in the UK, since 2002, this is a line that shows our branch openings. As I mentioned, we're at 201 branches now. And on that journey we have become ever more local. So I mentioned we opened a regional bank in the north in 2008 and effectively split the country in two. And then we've opened further local regional hubs and the regional head office for Handelsbanken is where the specialists say that the branches need to be physically close to them to go and deal with maybe more complex customers.

So as we've grown, we've become evermore decentralised and evermore local.

And we've never had any difficulty in finding staff that embrace our way of working. In fact, there's a very long list. And every day we get CVs coming in with people who want to do banking our way. So, just a few more statistics. We're a bank, so we lend money, we take deposits. The growth of the lending book has been evident.

The deposit book we opened 19 new branches last year. The beauty of our model that's not dependent on head office is that we can find people in all of these places in Newcastle, in Morpeth, in Carlisle, in Penrith, there are people there who want to do banking the way that we do it and are really excited about the opportunity to run something that feels like a bit of a franchise, but they don't have to put their own money in.

And in that period before their new branch breaks even, they're running a small business that somebody else is funding. And over time, we've built quite a substantial business in the UK. I mentioned before that the branch is the bank. So the branch manager, they decide who to recruit, how much to pay them, all of the costs.

They negotiate with the landlord. They negotiate with local suppliers. Everything. The marketing is done in the branch. It's local marketing, so if they choose to sponsor their local football team, that's what they'll do. If they choose not to do, that's up to them. These are all value decisions that are made in the branch.

In banking, credit is a hugely important area, so they decide which customers to choose, which ones that they do choose that they would like to lend money to. And on what terms the computer doesn't say no or yes in Handelsbanken , it's a human being. And as I mentioned before, there's certainly no sales or activity targets.

We recruit people that are self motivated, that want to do a good job. And as I say, as Valender expected and suspected in the early seventies, there are people out there who want to do that and lots of them. So this is just an example. It could be any branch. It's a typical branch. It started in 2008, just as the global recession started to bite.

It opened with four staff, frugal organisation, start small, build gradually. I mentioned this local thing, I keep saying it, so you won't be surprised to hear that the Huddersfield branch staff come from Huddersfield. This is a big market for us, 150, 000 people. But it's a market where other banks have kind of decamped from.

They can do Huddersfield from Leeds and Manchester, so they don't believe that you need people of this calibre in Huddersfield. Thankfully for us, people in Huddersfield disagree, and want to bank with Handelsbanken, and that branch, just like It happens to be the average. Typically, these branches start with no income and clearly a cost base, and it broke even after 18 months.

So this organic growth model can work really effectively if you couple it with this devolved leadership, and you pick your staff very carefully, and you make sure that they understand and are really passionate about your culture. Of course, As I mentioned at the outset, higher return on equity through cost effectiveness and customer satisfaction.

This is Handelsbanken, the data that is Blue is satisfaction, the light blue is loyalty. Epsy, which is the cus, the company that run these independent surveys across Europe, across many different sectors, have never seen scores as high as this. We're head and shoulders above the UK banks. And that is typical of Handelsbanken in its other home markets in Scandinavia and Holland.

So customers really like dealing with staff that have been empowered by their organisation to serve them with a local flavour.

Of course, we are a listed company, as I mentioned, and shareholder value is very important. What Volander perhaps didn't anticipate to quite the extent that we've seen was how commercially successful a devolved leadership model could be. So since 2007, this tracks, the shareholder value and clearly, you know, Handelsbanken is the best of the UK, er, the European banking market.

And the red in the middle is effectively the average. So the customers like it, and the shareholders like it. You just need to implement it. And just like with Volander in the early 70s, there will be people, of course, that say it can't work. The good news now is that there's a case study that says it can.

So during the period of growth we've seen a crisis but you wouldn't Spot there'd been a crisis when you see the Handelsbanken Charts, whether they be profitability, customer satisfaction, branch growth. We're staunchly independent. We don't want or need any support from governments. So we didn't need a bailout.

We didn't, neither from our shareholders nor any governments. We're ranked as one of the world's strongest banks. So devolving leadership to your staff doesn't create risk. They really respond, they really respect the fact that you've given them autonomy to run the business. In banking, the risk of a bank is reflected by its credit default swaps rate, which is a bit like the, if you were going to insure a bank against default, that's what that indicates.

To insure Handelsbanken is considerably cheaper than any other bank. So, customers like it. Shareholders like it. And if you like, the wider community like the idea that they're dealing with a bank that they haven't had to bail out. So another question, okay, so given our focus on our single corporate wide goal, which we mentioned before, this higher return on equity, how do you think that might affect how we recompense our staff, our remuneration policy?

So maybe you wanna spend a few minutes thinking about that as well.

Host: So it's great to hear lively discussions around the tables

so could please come back So.

Does anyone want to share the, some of the discussions at your tables with the rest of us? What are we talking about?

Coming back to the question, I mean, what does this do? What should this do to your compensation method? Please. Ready?

Audience Member 2: I'll start you off. We were thinking it may not be driven by actual financial returns. That's, that's a consequence. So we were thinking that the outcome actually, I'm trying to think of a branch manager, but it, customer service, lots of other indicators, but not bonus driven, because it's all got to be very long term. So we were thinking it probably wasn't any of the things that we would sort of almost take for granted. And it was something that just said, you get a salary, you work together. We were very intrigued whether a branch manager could adjust his own branches, remuneration in terms of I think everyone should get 10 percent in Huddersfield, but of course he's got to live with the consequences. But we were thinking actually it wasn't any of the stuff we'd sort of take for granted. Naturally it would be about, you get a salary, you're in for the longterm, you know where you are and you will do better out of that because the whole business does better, but you don't know how or when.

Andy: Just kind of have faith basically. It'll all be all right in the end. Great.

Host: Thanks for that contribution. Any other thoughts? Anyone who doesn't know what the model looks like that would like to take a shot at it?

Otherwise I'll leave it to you Andy to review it. Okay.

Andy: I'll just pick up on a few of those points because I think they're really useful. Remuneration. So inevitably, you might be drawn into thinking about financial and we'll absolutely talk about financial reward, but it does go beyond that. So, having the pride of running your own business, your own franchise unless you're called, I don't know, maybe Rothschild, you're probably not going to set up your own bank.

But in Huddersfield they have, because the seed capital came from Handelsbanken. But it feels like their bank. Because it's local people just serving the local community. There's a tremendous pride in being able to do that well, and support local businesses when they're wanting to build an extension on the factory, or increase turnover, or take on some new contracts.

So there's huge non financial rewards that, in our world, none of our competitors can match. Because, of course, our staff, to run a devolved leadership model, your staff need to be better, actually, because you're expecting them to do more. So you recruit really good people, and you need to invest a lot in training and development.

And then, of course, your competition might think, I think we'll take one of those, because it saves us 15, 20 years of training, which perhaps that organization no longer does. But the rewards, of course, are financial. And they are long term. And you use the word collective.

So in Handelsbanken, since Volander introduced this devolved leadership model, Volander said, if we're going to achieve our corporate goal, it won't be because this year we've got the best product, or we're selling it cheaper than anybody else. We've stolen a match on the competition. That's This was in the early 70s.

Even, of course, and especially now, if you've got six month lead on a new product with your competition, you're doing really, really well. So Volander said the only difference, the only way we're going to achieve our corporate goal, is to have the best staff working more effectively. And therefore, if we achieve our corporate goal, the staff should share in the profit.

If you like, the surplus profit, the profit that can only be ascribed to the fact that the staff have done better, worked harder, were more, worked more effectively. And he introduced the Octagonal scheme. So if the bank, if we achieve our corporate goal, all staff receive an equal share Allocation into the octagon and fund the CEO or the graduate who joined Huddersfield branch a few months ago.

That's not actually on that picture yet. They both get the same allocation. Providing this financial year, we collectively hit our corporate goal.

The Octagon Foundation invests that money predominantly into Handelsbanken and shares.

So the staff are absolutely focused on The success of the bank, which would, you would expect, be reflected in its share price. And since it's been around for a long time, the, the, the Octagon Foundation is now roughly 10 percent shareholder of Handelsbanken.

You mentioned long term, and this has been a real hot debate in the banking world over recent times because of the misconduct that's been seen. How long should you tie somebody in for? For how long should their bonuses be recoverable, if it transpires that they did something they didn't ought to have done?

We think pushing it to 60 is probably about as far as you... so when the graduate in Huddersfield sat down and I'm sure his branch manager explained that when she reaches 60 she's gonna ... but I think that's an important point because it's I'm sure she's not thinking about that every day. But equally, in the back of everybody's mind in the bank is, you won't get any prizes for smashing a target, for landing a large customer, or doing a big sale this month, this year, or next year.

You get your prize if all of those collective decisions that we've made together over decades result in the share price having appreciated. Between this point and when you individually reach 60.

And of course, it's been in place a long time now. So there's 22, 000 unit holders.

So yes, it's long term. Yes, it's collective and it works. What it means culturally is that anybody can challenge anybody if they're doing something that looks like It's going to destroy shareholder value. And again, there's been lots of debate about behaviour, about whistleblowing, about misbehaviour.

In Handelsbanken, we all know what's right, we all know what's not right, and we do occasionally have to say to colleagues, I'm not sure you should be doing that. Is that the right thing for the long term?

And very occasionally, very, very occasionally. Somebody doesn't get it, and this is important in any organization. You need people that have bought into the culture of your organization.

So outside of that, but this is the glue that holds it all together really, this is the final piece of the jigsaw. But financially, because some of the words I heard just when I was walking around was sharing, as in kind of fair sharing. Bonuses, I mentioned before, we don't do bonuses, pensions. I heard staff get a pension.

This is not a pension because this is dependent on the commercial success, success of the organization. I heard somebody mentioned minimum wage. You know, I suppose I'm sure we weren't necessarily talking about minimum wage, but just salary levels. Generally, we need good staff and we need to pay them. Of course, what's commercially sensible to recruit and retain good staff.

And we do retain, retain staff. And I genuinely believe it's not because they think when I turn 60 if I stay here between now and then, oops, I'm going to get more allocations. It's because they're genuinely engaged in running the bank, in making a difference, especially, to be honest, here in the UK.

This is just looking at Octagon and in a different way, probably just really putting some more meat on the bone from what I've just said. But it does link in to this long term, the everyday focus on long term customer satisfaction. As I said, nobody's going to thank you for doing anything today that looks like a good idea when it's not.

From a risk perspective, or customer satisfaction. So there's a genuine sense of ownership. I mean, individually, we own, obviously, a tiny percent of Handelsbank and share capital. Handelsbank. com But that collective, to use the word from this table here, that collective ownership and collective vision, where you, you know that you can actually influence.

You're expected to take responsibility, and you're expected to step forward and say what needs to be said in a constructive way. So you can influence the bank's success. Extremely important.

And in our little book of guiding principles, which Volander wrote in the early 70s, And the subsequent small handful of CEOs that we've had since have kind of updated. We're reminded about this long term perspective and the importance of the customer. Crucially, if you think back to the arrow, of the focus for Handelsbanken or for Handelsbankers in their day to day life.

So. Q and a if we've got time. Okay.

Audience Member 3: Thank you. If I understood you correctly, the head office supports the branches in developing new products and services when they see the need. Do we have a specific method for inquiry for having insights into these customer needs?

Andy: Yeah, it's a good question. It's quite simple. Every month. The branches have the opportunity to write a free flow report to head office where they talk about what the personal customer market looks like in their local town, the business customer, market environment, the competition, what products are seen coming up, Apple Pay and new internet banking products, for instance.

So they bring that to the attention of those of us that sit at the back of the arrow. And 201 branches are very vocal and we get them and we go through the notes every month. And we pick out trends and we double check things if they say, you know, is it, we've obviously got to be very careful, this isn't just a very, very localized issue, whether it's just a flash in the pan, is this a, a genuine need for a new product or system.

And then if we feel that there is a broad, broadly based demand, then we will work out a cost benefit analysis, we work out how much it would cost to deliver it. And then we present that back to, to the branches or the branches representatives. Say, you said you wanted this new card product.

We've worked out it's going to cost a million pounds to deliver. We've worked out, based on branch feedback, that, you know, there might be ten customers at a branch want this product. We think the profitability is going to look like this. So we give them the full cost benefit analysis, and then they decide whether they really want it.

That's it. Because they're gonna pay for all that product development. So it really focuses on develop spending your scarce I. T. Resources and intellectual capital on what will really make a difference to the branches.

Audience Member 4: I'm just interested. Obviously, it's all devolved down quite a low level. Do you have? Where does the long term strategy come? Do you have a board that?

Andy: Yeah. Yeah. Well, it's a really good question. The organic growth model that we have almost exclusively implemented over the last 40 years. We have made the odd acquisition.

We bought a 12 branch bank in Denmark in 2008. So is that a laugh? That's okay. Yes. In Denmark, you do have banks with 12 branches. So, the strategy we have this expression that every day we try to become more Handelsbanken. You know, we're not the finished article. I think it's really important to state that the natural way of the world is centralization and maybe budgeting as well.

That's why everybody does both. So the long term strategy of Handelsbanken is to become more Handelsbanken, is to be ever more local, ever more empowered, and to perfect the model. But in effect, what's happening is the branches are running their own strategy, if you like. So when I open my branch, there were four of us in a huge geographic territory.

Our strategy was not to go, you know, 20 miles that way or 50 miles that way, but to build a business as close as possible to the branch. Because the risk is lower when you're fishing locally in clearer ponds. The further you go, the higher the risk, and the more diluted the relationship is. So the branch, especially in the UK actually, where we're such a growth market, the branches are kind of maturing in, within their own patch, and working out their own strategy.

But, but crucially, and something that I've not really touched upon, because of course it's important that this doesn't become anarchy. You can't just do whatever you want. There are absolutely centralised principles that branches are steered by. We're all steered by. So that's how we treat customers.

I've mentioned about customer satisfaction. How we treat staff. How we account. How we count the beans. How we account for income and expenses. Because there's lots of things you can do if you account for them in different ways. Thank you. So very conservative in that respect and risk generally, we are a risk averse bank.

So within those centralised core principles, the branches have got enough reference points to know when they're heading in the right direction. And of course, they will be guided by colleagues around them that are more experienced because of course the staff. If you think about the age profile of the Huddersfield branch as it has been fairly typical at the starting point of the branch at least, they've all worked somewhere else for between 10 and 30 years and none of where, none of the places where they used to work were decentralised and they all absolutely had bonuses, targets and budgets.

Audience Member 5: Given you're effectively the delivery operation. For the different branches. How do you do you allow them to go to other, the power for them to go to other suppliers and yourselves if you're too expensive?

Andy: Good question.

Audience Member 5: And the other one is as, as their customers evolve because they're influenced also by external factors.

Yeah. If a case where you've actually said, look this cost this customer segment. It's wrong. I'm just saying the wrong thing. I'm not seeing elsewhere around the country. No other inputs coming from the country for the branches. How do you cope with that sort of situation?

Andy: Okay. Really good questions.

Thank you. So, I mentioned that we have the centralized principles. One of the key elements in Handelsbanken, if you think back to the arrow, is the branches pay for the support that they receive. So, for instance A really good example is the legal area, because you can get legal advice externally, no problem.

So our legal department in Handelsbank and UK have an internal price tariff for the different services they provide, and of course being lawyers, a good part of that is by the hour. So, if it was more cost effective in the round to go externally, So, if it was a 150 an hour externally, but 200 an hour internally, then the branches would absolutely have every right to go externally.

Now, the responsibility really falls on those of us in head office to make sure that our production costs mean that we are competitive, and of course, we in head office, we only need to break even. And this is a really important point from a budgeting and financial control perspective. So every, every service that head office sells to the branches, such as legal advice, there's what we call the planning committee, which is effectively an internal pricing committee, where the internal price for that service is agreed between the buyers, the branches, and the sellers, those of us in head office.

And there's a really good tension there. As you could expect, but it's really important that the true price is passed on. So we're not going to subsidize the legal department. If the legal department is badly run and expensive, such that an external party can provide the as good a service more cost effectively then that's clearly a bad outcome for the bank.

Audience Member 6: Can I ask you a subsequent question to that? Because we've got a similar situation in our organization. In a case where the delivery operation just has to break even. How do you invest and innovate in that delivery organization to keep it up to date? Because in those sort of models, the lack of modernization of that service because you don't have the profit to reinvest back into maybe modernizing your IT or improving your skill set. How do you do that?

Andy: Yeah, that's a good question. I wouldn't say we don't have profit to invest in it. What we would say to the branches, so let, let me think of a, so we're, we're developing a new loans module, you know, loans are an important product that every bank needs. How you establish and administer a loan, which is a long term, you know, some of these loans run for 25 years, and that is a product line.

We've recognized that we need to streamline our loan process, our loans module, we've gone to the branches and said we think it's going to cost X million pounds. We've worked out the payback, it's going to be more efficient, the unit cost is going to go down. Do you want us to invest that money this year and next year in order for the unit cost to come down in future years?

And they've said yes. So the branches pay for the unit cost for the variable ongoing service, but they also pay for development. And when it comes to product and systems, you're absolutely right. The upfront cost is substantial. So when we, in the UK, were a small business with 20 branches, not making the kind of profits that we're making now, then the answer to some of those questions when asked of the branches was, not yet.

We're not quite there yet. We don't think we could actually take that cost at this stage of our evolution. But, one of the crucial things about Handlespan, because we've had the same management model for 40 years, the staff know that it's okay to make your role redundant.

Because if the answer to getting the unit cost down. Is that actually you don't need me. Because I've automated this process. And we've done this in one of our areas. We've automated a process and got the unit cost so, so low. Because the, the department head, it never, he never thought that he was making himself redundant.

Because of course he didn't. He's held up as the shining example of how to produce a product cost effectively. So the branches can, can then go sell it with a margin on. Because if you don't produce it cost effectively, you can't sell it and then you've got a problem. And he is now going around other operational teams and saying, you know, these are some of the ideas that worked for us over here.

So that constant evolution in Handelsbanken, just every day becoming more Handelsbanken, is a lot better than the kind of big bang restructure that happens in other organizations.

Audience Member 7: One question. Do you expose the net PNL of each branch to all the other branches? Because if you have branches of similar maturity in a similar market, one performing better than another, you use peer pressure to exert encouragement to the weak and performing better.

Andy: Great question. So Handelsbanken is a benchmarking organization, so.

We want to have the best ROE at a group level. And at a branch level, every branch aspires to have the best cost income. Okay, so it's their responsibility to use the resources that they utilize as effectively as possible to generate as much income relative to the cost as possible. And absolutely, those statistics, I presented to the branches and the first thing they look at is where's my branch, our branch in the cost income league.

Now where we are in the UK, you can be a really old branch that's eight years old or you could be a really new branch that's literally just opening the doors at the moment, but you will always know who your peer group is. So for me, when we opened our peer group in 2001 was a Newcastle branch.

Bristol branch because they owned similar kind of size cities round about the same time. So we were always competing, but we had our church spire. We couldn't go to Newcastle and take some really good customers and they couldn't come to Leeds either. So we'd all put our flag in the sand and said, this is our patch.

This is where we're going to do the business and we're going to beat Newcastle. I'm going to beat Bristol, but you can't, if you like, detract from their ability. to achieve their goals.

Host: We have time for one more question. Anyone down in this part of the room?

Audience Member 8: I'm curious to know how you transfer knowledge between region geographies when you, for example, I know it.

Andy: Okay. That's a good question. So and it's especially pertinent in the UK because not that many years ago, our only head office. So it's in the head office environment is that you're referring to the branches as well.

Audience Member 8: Well, I'm thinking about, you know, now you're talking about UK very much. And the regional offices of the UK, you know, supporting branches in the UK. Yeah. But if you get a really good idea for a product here in the UK, it might be suitable for Sweden.

Andy: All right. Okay. Yeah, good. So we have Global product owners. We have global system owners.

We have people that are responsible for the kind of architecture from an IT perspective. So the demands come from the branches. So, for instance, we introduced a corporate product last year, invoice discounting. The UK is the biggest banking market for invoice discounting in the world. But it's hardly it hardly appears in Scandinavia.

But it's starting to do. So when we develop that local product, we brought it to the attention of the global corporate product owner that we were developing this. And at some point in the future, they might find it interesting. They did a bit of research in their local market and discovered that one of their big competitors was absolutely about to sign up to the same supplier as we are using in the UK to, to launch this product.

I think it was in Sweden. So that flow of information is really, really important, both to spread best practice and also what you don't want, of course, is that we decide to launch that product in Sweden and they start from scratch with the due diligence and development process rather than just picking the phone up to the UK and saying, I know you've developed this product.

Can you tell us all about it?

Thank you.