Europe’s best-performing listed bank has responded to an analyst downgrade by confirming its intention to continue its rapid growth in the UK. Handelsbanken has quietly grown a network of 160 branches across the country, leaving it as one of the key challenger banks in Britain.

The Swedish bank differentiates itself from rivals by offering a local service where staff decide whether to loan money or even whether to let someone open an account. Its almost organic growth is driven by giving staff the power to decide who the bank does business with. That’s almost the opposite to today’s high street giants which have centrally located decision-making, leaving branch staff just to sell products.

The fund manager Dave Dudding, who runs Threadneedle’s European Equity Fund, is a fan of the bank’s model: “The interesting thing about Handelsbanken is that it is not focused on growth but on profitability, which is the way I believe banks should be run. The key measure for the bank is customer satisfaction. It’s the best-performing bank stock in Europe over the last five to 10 years, and it has a good growth story in the UK.”

But not everyone is convinced. Svenska Handelsbanken shares were downgraded to “sector perform” by RBC Capital last Tuesday. The next day, chief investment officer Ulf Riese hinted at good news ahead by revealing that the bank will set a target for its key capital levels by the end of the year. The move could pave the way for it to return funds to shareholders, increasing the attractiveness of the shares.

Handelsbanken has benefited from the recent increased appetite for Nordic bank shares. Investors are attracted by their stable growth which has seen them climb 18 per cent in the past 12 months. Handelsbanken has the lowest expense ratio of all the key Nordic banks, says Lars-Kenneth Dahlqvist, its investor relations chief.

He says the secret of the bank’s success is “localism”, a return to traditional face-to-face banking with branch managers given the power to make lending decisions. That strategy saw loan growth up 27 per cent in Britain last year. Asked if Handelsbanken could keep up its pace of growth in the UK, Mr Riese said: “There is nothing that has cropped up that makes me less enthusiastic... It looks very promising.”

The UK branch network would double in size to 320 in the next five years if it continues to open branches at the current rate of about one every eight working days.

“Our growth has been somewhat aided by the financial crisis,” Richard Winder, the UK head of communications, admits. “But our success is down to one thing: being focused on relationships.”

The bank, which now employs more than 1,200 in Britain, has had the same strategy and business model for 42 years. “The key was decentralisation, leaving lending to local branch managers so that decisions are made by people close to customers,” Mr Dahlqvist says. It also refuses to have a bonus culture. “We think that bonuses are dangerous in the banking system,” he adds.

The bank’s biggest presence is in its home country, but it has branches in Denmark, Finland, Norway and the Netherlands. Its biggest move outside Sweden has been in the UK, and the scale of its intent can be measured by the purchase last month of Heartwood, a wealth manager based in Tunbridge Wells, Kent, which manages £1.2bn for clients. The UK branch network is growing at 28-30 branches a year, after personal banking was established in the early 1990s. But the bank doesn’t set any specific targets.

Critics say it cherry-picks reasonably well-heeled customers. The bank admits that it turns down potential customers but says it looks to build up relationships with all sort of clients, as long as its staff believe the relationship will benefit both sides. Its approach means that staff can only deal with a limited number of customers while ensuring they still get an individual service. The bank also points out that the customer profile will be different in different areas.

“In Grimsby, for instance, the first customer was a trawlerman,” Mr Winder says. “In Kensington, by comparison, there’s a lot of old money. Each branch has a clear distinct market.”

Opening new branches in the UK can be an expensive business. Indeed, some challenger banks, such as Aldermore and Triodos, have decided against that approach altogether. Metro Bank, which now has 19 branches in the South-east and is opening another in Staines on Friday, has a different view, seeing itself as a retail bank with stores rather than branches.

Anthony Thomson, Metro’s founder and former chairman, predicted last month that there will be between five and 15 new banks created over the next three to five years. Metro spends about £2m to set up each one of its new “stores”, although Handelsbanken says it spends much less on its branches.

But investment managers say its tradition-based model could turn it into a serious player in the UK in the long term. Philip Dicken, head of European equities at Threadneedle, says: “Banking is a difficult sector to find business models that really stand out. But Handelsbanken is one of a handful of banks that we want to hold for the long term. It’s because the bank is not about making quick returns, but about benefiting from long-term compounding.”

Who wants a bank manager who asks to meet you before letting you open an account?

If the idea of discussing your finances with your bank sounds a little uncomfortable, then Handelsbanken probably won’t be right for you. But if you want to have a banker you can call to discuss plans and how they can help you, and who will know immediately who you are, then the Swedish-owned bank could be right up your street.

However, unless it is actually up your street – or at least close by in your area – you won’t be able to open an account. It works on the principle of localism: you need to live close to a branch to be able to open an account. They call it the “church tower principle”, which means only doing business with people you can see from the local church tower.

You also need to be pretty well-heeled or have decent financial prospects. Despite the bank claiming it has no particular criteria when considering customer applications, it will presumably only consider people whom it can make money from. It’s that principle that makes the bank’s business model a success. It only opens branches where it knows there’s a demand and it only accepts customers that it feels will benefit from the bank’s services.

Sure, that does make it a little elitist, but that’s reassuring to customers – and investors, of course – as its prudent nature suggests it will help it to avoid getting into financial trouble through bad debts.

Will that make it a real challenger to established retail banks? Very much so. Maybe not as a mass market bank, but as a niche bank with a key influential customer-base. Loyalty among customers is high and will help it grow. Just maybe not to your neighbourhood.

Handelsbanken branches

Sweden 461

UK 160

Denmark 55

Finland 45

Norway 49

Netherlands 15

The challenger banks and their UK branches

Co-operative 324

Handelsbanken 160

Virgin Money 75

Metro 19

Triodos 1*

Aldermore*

* Aldermore and Triodos offer accounts online