Good morning, everyone, and welcome to this conference call for the third quarter of 2018. Joining me today, I have Lars Höglund, Head of Investor Relations, and Annika Engler, Head of Group Accounting. The slides used for my presentation are, as usual, available at handelsbanken.com. I'll start with slide number two, the usual starting slide, where you can see that our stable value creation continued also in the third quarter. First of all, as you saw last night, our CEO, Anders Bouvin, has told the board that he wants to resign August 31st, 2019. This means that recruitment process for a new CEO starts now. Obviously, with Anders on board for another 10 months, this is a very undramatic announcement. He will have been CEO for three years and will be 61 when he retires.
On to slide number five and the income statement for Q3 compared to Q2. Net interest income dropped somewhat. This is primarily due to the fact that we have chosen to extend our funding duration and to be more active in the funding market. I'll come back to that. If we look at the Swedish mortgage markets, we continued to have a good market position in Q3. Our mortgage margins remain stable, but when rounding the number, it dropped one basis point to 105 basis points. Net fee and commission income increased by 3%, mainly driven by savings, but also payment commissions. Income dropped by 8%, but adjusted for the sale of the credit bureau UC AB in Q2, the decline was 1%. Costs were down by 1% and it was the second quarter in a row with declining costs in local currency.
Loan losses were four basis points in the quarter, and the credit quality remained stable. Operating profit decreased by 14%, but adjusted for the sale of UC AB in Q2, the drop was less than 1%. Return on equity in Q3 was 12.1%. Please go to slide six. This slide describes our net interest income development in a 20-year perspective. Average lending volumes continued to grow in all home markets in Q3, though at a slower pace than earlier this year. This is a common seasonal pattern, especially in the corporate area, but the tendency was stronger than last year. It is too early to say whether this is a sign of a weaker business cycle or just a slightly stronger seasonal pattern than usual. Lending to large corporate customers can fluctuate short-term, and this had a negative impact on quarter-end lending volumes.
Our household deposits also continue to grow, up 9% compared to last year. When we look at our different home markets, we see that there is a growth in all of them. Net interest income contribution from the U.K. and Netherlands also continued to increase, adding close to 300 million SEK in the third quarter since Q3 last year. To slide number seven, please. Fees and commissions had a strong development in the third quarter. This is often a seasonally weaker quarter, but this year we reached an all-time high level. Just as before, this is to a large extent driven by the savings business. The card business made a positive jump in this quarter. We pay fees to the card companies, and once a year, a repayment based on, for example, currency movements is made to us.
This year we got that repayment in the third quarter, while in 2017 it came in the second quarter. Adjusted for this, the net income on the card business was up by around SEK 10 million compared to the second quarter. On to slide number eight, please. The increase in reported costs earlier this year is explained by the same factors as we showed in Q2, that is our growth markets in the U.K. and Netherlands, investments in business development and IT, the subsidiarization of the operations in the U.K., and by currency effects. We have also continued to strengthen our control functions, which explains the increase in underlying costs. We are continuously investing in our growth markets, particularly in the U.K., where we are closing in on finalization of the subsidiarization.
The cost for the project is SEK 200 million higher so far this year compared to last year, our previous guidance of a total cost of SEK 300 million is unchanged. In 2019, these costs will remain largely at the same level, possibly somewhat lower. In terms of the development costs, our best assessment is that these will be in a range of SEK 2.1 billion-SEK 2.2 billion for 2019. A few words about the development investments on slide 29. So far this year, we have spent slightly more than SEK 1.8 billion on development and out of these SEK 1.5 billion in the cost line of the P&L. As you can see, we have increased investments in business development and in our growth markets, which is in line with previous communication. What could also be noted is a slightly lower level of investments relating to regulatory compliance.
We also expect 2018 to be the peak year for these types of investments. Back to slide nine and a few words on our U.K. operation, which we remain very enthusiastic about. This graph shows the underlying development of income and costs over the past decade. Here we have adjusted for the one-off effect in Q1 regarding the changed pension plan, as well as for costs relating to the subsidiarization, which is SEK 200 million so far this year. As you can see, the underlying jaws continuously increase as our branches mature and customer relations deepen. This development has continued despite significant development costs on top of the subsidiarization costs. We saw loan growth slowing down somewhat in the quarter. This was related to the London region where increased uncertainty around Brexit explains the slower growth.
At the same time, it's worth highlighting that we have around 150 branches outside of the London area. We'll continue to make investments as we grow our business. At the same time, we continue with further development in the U.K. to ensure continued efficient growth as well as compliance with an adaption to tightening regulatory demands, not least in the area of anti-money laundering. Consequently, costs in the U.K. will remain at an elevated level also in 2019. A key reason for the outcome is our way of working with the customers and the focus on relationships. Obviously, our service and business model is very appreciated by our customers. Now to slide 10 and the encouraging development in the Netherlands. We have 29 branches today and continue to roll out our presence as well as developing our product range.
We're offering renters great appreciation by our customers with the great marks in the nationwide customer satisfaction review also this year. The return on equity is already above 14%, despite our relatively short history in the country. Operating profit increased by 31% to more than SEK 200 million in the first nine months. To slide 11 and some words about our capital and liquidity positions, which remains very strong. The CET1 ratio increased by 0.3 percentage points compared to Q2 and reached 21.7% in Q3. As you see, we are in the middle of our target range. The Swedish FSA has decided to move the risk weight floor for Swedish mortgages from Pillar 2 to Pillar 1 as of year end 2018.
The nominal capital requirement by the FSA will only be marginally adjusted for the change, the subsequent increase of risk exposure amount will of course lower both the requirement and the reported CET1 ratio expressed in percentage terms. Applying the forthcoming change to the Q3 numbers would have resulted in the CET1 ratio dropping to 16.7% and the FSA requirement to 15.1%. Our liquidity ratios are strong as you can see. The funding markets have started to become a bit more nervous gradually this year. We have therefore actively worked to further reduce our risks. We have made sure to be very active in a broad range of markets with our funding, which also has been extended maturity-wise. Aiming the issuance we have done are two EUR 750 million Tier 2 trades during the year.
On to slide 13 and a few words about our strategic initiatives for business development and efficiency. What you see here is our digital product portfolio as it looks now. The portfolio will give measures that increase efficiency corresponding to at least 1,600 FTEs up until 2022. This will be quite evenly split between the years. What the portfolio will also generate is an extensive business development. You can see some of the areas we are targeting here. The business model will remain unchanged, we will use digitalization to further strengthen and deepen our customer relationships and to improve our service. Let's go to slide number 14 and talk a bit more about the digital product portfolio as it looks now. As you know, we aim at capitalizing on our strong customer position by further integrating digital solutions with our local and personal service.
In addition, we see a material scope for efficiency improvements as administration is being digitalized. I'd like to mention a few things that we do prioritize development-wise. First of all, we look at many different features that will allow a comprehensive digitalization of the administrative work. One obvious example is the parts of processes that are still paper-based and manual. This will be addressed. Processes will be streamlined and digitalized. Artificial intelligence already plays an important role here and will become even more important going forward. Improvements are also being made in the development process itself to speed up testing and time to market. We also prioritize products with a clear business angle, enabling holistic advice to private and corporate customers. This is about new customer meeting places, allowing distance advice, also user-friendly client dashboards that can be used in several home markets.
We have just released an advisory tool to also include support for pension advice. This tool is used in Sweden and Finland and will be rolled out in Norway shortly. Securing and developing first-class handling of big data is instrumental from a business but also regulatory point of view. This requires investments in infrastructure. Finally, we have ongoing discussions with potential and existing partners that provide interesting services for our customers. Through one of these partnerships, we just released a new app for children in Sweden and Denmark. On to slide 15. We have come really far in terms of digital support when it comes to savings advice. As you can see here, the number of advisory meetings in Sweden has increased by 70% this year, and the increase has been accelerating.
This proves that providing really good tools for the branches, making the job more efficient, and adding value to customers gave a good leverage. On to slide 16. Handelsbanken's combination of personal service, local presence, and good digital services has again been highly awarded in several customer surveys. SKI, the Swedish arm of EPSI, recently published its annual industry survey, which show that Handelsbanken continues to have the most satisfied private and corporate customers among the large Swedish banks. We can also note that the distance to our main competitors has continued to widen materially in the last year. Customers are clear they want to meet the bank, also in connection with a mortgage. Seven out of 10 customers want a meeting, according to SKI. Here, I think we have an explanation to Handelsbanken's sustained strong position in the Swedish mortgage market despite an increased and tough competitive environment.
Having satisfied customers is, for us, essential in order to, in the long run, reach a high and sustainable profitability. Please go to slide 20. We know and see clearly on this slide that advisory meetings are not only appreciated by customers, they also create business for the bank. This slide shows the savings pattern by customers before and after an advisory meeting has taken place. Every advisory meeting generated on average per year an increased mutual fund volume around SEK 140,000. It occurs both through single mutual fund purchases as well as in the form of standing transfers. Six out of 10 customers increase their mutual fund savings within 30 days from the advisory meetings.
The next step we take regarding the advisory meeting tool is to integrate the pension area, which naturally will form an even more valuable meeting for the customer and the potential for further volume growth for the banks. Now to slide 21. The increase in number of advisory meetings has been achieved with an unchanged number of staff when we compare Q3 this year to last year. At the same time, the number of licensed investment advisors in our branches has gone up. We do see a clear link between the sharp pickup in customer satisfaction in Sweden and the increased activity with our customers. Now to slide 26. Undoubtedly, our corporate customers, to a very large extent, expect a continued local and personal service. They also have expectations and demands regarding the digital tools.
We therefore invest in tools and features to be able to offer holistic advice also to our corporate customers, just like in the private side. We develop new customer dashboards, which give the customer a better overview of their total financial position. This enables us to provide better advice in various areas for the customer. Our cooperation with the software company Fortnox, where accounting and other services are integrated with our banking services, was the first step and more services are to be added. The heading in the box to the left in the picture, which says business services, relates to corporations with different suppliers of interesting services for corporates Which we will integrate in our own services. This could, for example, relate to handling of different types of risks in the company, such as FX risks.
We see good opportunities to achieve similar effects from our investments in the corporate business as we have already seen in our savings business. Now finally to slide 27. To conclude, Q3 showed a continued good business growth, particularly within the savings area. We have continued to invest in our growth markets as well as in development. Total costs in the bank were, however, down by 1% compared to Q2. We also spend a considerable amount of IT resources on our business development in order to increase efficiency. The measures ongoing will increase efficiency corresponding to at least 1,600 FTEs by the end of 2022, quite evenly spread between the years. With that, I thank you for listening in and open up for questions.
Thank you. Ladies and gentlemen, if you would like to ask an audio question, please press 01 on your telephone keypad and you will enter a queue. If you would like to withdraw your question, that is 02 on your telephone keypad. Once again, if you would like to register for a question, please press 01 on your telephone keypad. Our first question comes from the line of Magnus Andersson from ABG. Please go ahead. Your line is now open for your question.
Yes, hi. A couple of questions on the efficiency enhancing measures. As I read it, the 1,600 employees would correspond to roughly SEK 1.6 billion. First, just to be clear, I read this as a gross number, and then in the next sentence you say that at the same time, the bank's ambition is to increase business volumes in home markets, which may require increased resources. Is this the correct way of reading it?
Hi, Magnus. Yes, that's the correct way to read it.
Okay, good. If I continue then. Headcount, can you say anything about what you expect on headcount, for example, in 2022 in your base case versus your 12,600 you have employed on average today?
No, we haven't made any forecast about that. Even though it might take a minute, I'd like to take you through how we approach this. I think that the starting point for us is actually to just to give the context where we're coming from. Where we are as a bank today, we have a really strong starting point. We have an increasing business. We gain new customers in the newer home markets, but also the older home markets. We have a very high level of customer satisfaction and so on. That's specifically really have a strong starting point for entering this journey. Then we have announced the strategic initiatives. The first one is about business development as you know, and then the strategic initiative to improve on operating efficiency.
Then we have assessed that considering the portfolio we have today and the plans we have today, the efficiency impact from that is the 1,600 we have communicated, 1,600 FTEs. That is expected to be quite evenly spread over the four years we have made plans for. Meaning that you can split that in four more or less. That is the gross amount. Then we are developing the bank. We want to grow business and invest. That also means that more resources will also be needed in some places. What this means, which is very obvious, is that a number of tasks that are being done and carried out today in the branch offices and also at central head office in Sweden and also in all the other countries, none of those tasks will be reduced and much quicker to carry out.
That is something that will improve efficiency. We have clearly the intention to make sure that we take this out in the form of reduced cost. When it comes to making forecasts about the other side of the coin, which is that we intend to continue to grow, to actually grow income, that is something we haven't provided any forecast about how much that is. What is clear here is that the cost impact from this will certainly counteract the cost increases we might have from adding on more resources.
At the group level, will total costs still grow in the midterm, 2019-2020 about?
We haven't made a forecast.
Can we have a more specific over view this year?
I understand that you want that forecast, we haven't made a forecast about that. I think you can get an idea when you look at the numbers and the way we expect that to feed through the system over the four coming years. You also can see the growth rate we have and the cost development we have in different parts of the bank. I think you can make an assessment. I think a picture which is really good to look at to understand better what we actually mean is the slide where you see the running costs we have in the presentation, where we make a split between the running cost and then split out the investments we make and the cost we have in the U.K. regarding business development and so on.
Where you should expect to see the impact from the measures we take is actually on the running cost part of the bar.
Okay. You mentioned development cost, that it should be 2.1 to 2.2 in 2019. I guess that's the number that is SEK 1,832 year to date. Where will that end up for the full year, roughly? It's been around now SEK 500 million-SEK 650 million last couple of quarters. Is that the run rate we should expect also in the last quarter?
The figure for this for 2018 is SEK 1.5 billion.
1.5 after the capitalization.
That is development cost. That figure is what we expect to be between SEK 2.1 billion and SEK 2.2 billion in 2019.
That is development cost after capitalization.
We haven't made any forecast about the full year of 2018.
Okay. The level of capitalized costs of the total investments in development, have you said anything about that or can you say anything about that? Because I see it's been quite volatile. I look in the fact book at page 12, the last two tables there.
Yeah, it has been quite volatile, and that depends on what kind of development we do and different parts of the year and have been doing in the past. What you could expect in the future is that we are going to continue to make investments. On average, I think the approximate figure is approximately 30%, and that has been the number, but that vary over time considering what we are actually doing. That will continue to some extent to be volatile.
Okay. Just since you didn't take a restructuring charge here, I guess the headcount reduction in the areas will go down, will be through natural turnover then.
Yeah, that's correct.
Okay.
We have made that conscious decision and gone through this and the level of staff turnover that we normally have and where this would feed through, and so on. We have come to conclusion that we don't need to do that, and then also that we can handle this in a smooth way.
Okay, good. Just finally on capital, will you come back in connection with Q4 with the new target range based on the mortgage risk weight floor move to Pillar 1?
Yes, we will. You have the numbers if you just make the calculation now, and we'll come back in Q4. I also think that what we can say is that we haven't changed our mind about the level or the amount of capital we feel that we need for the business. It's not a change in mind for us. It's more a technical exercise.
Okay.
We will come back in Q4.
Excellent. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Matti Ahokas from Danske Bank. Please go ahead, your line is now open.
Yes. Good morning or afternoon. Going back to slide number eight again, you mentioned that the development cost would be between SEK 2.1 billion and SEK 2.2 billion in 2019. What about after that? How does that look like? Also a question regarding your mortgage margins. They were slightly down but basically intact. Was this due to higher funding cost or lower rates? Thanks.
About the development cost for the following years, we are not giving any guidance about that. We do it only for 2019. What I can say is that when we look at what we have in mind, the plans we have, the initiatives we have taken, I think it's fair to expect that we will remain at the level where we are, and we'll need to continue to develop obviously. When it comes to the mortgage margin, the change is a really small change. This time it meant that when we rounded it decreased by one basis point. What we have seen also is, of course, that there is competition in the market, and we have peers that are obviously competing with price. Of course, we're affected, but we have been able to hold out quite well.
Both protecting our market shares and also keeping margins at a good level. Competition is part of the picture, but it's a very small change.
Yeah, I totally agree. What is the reason that you've been able to keep the margins at these levels if price is not an issue for your customers?
Price is one part of the puzzle, obviously. That's for sure. I think there are several reasons why we can keep that margin at a decent level. First of all, one sign is something that was also shown in the SKI investigation that we also did show you today, where we asked the question about whether people want to see the bank or not when they get the mortgage, and seven out of 10 want to do that. It means something to have the customer relationship and to get the chance to integrate with customers. That's important. Then you can also discuss the whole economic condition for the customer and so on. That helps.
The geographical coverage also helps because price competition is different in different parts of the country, I would say, and also the volumes that people borrow in different parts of the country do differ and so on. There are a number of explanations to it. I think also often what you look at primarily is normally the three-month reset margin, and there we do stick out. When you look at the other resets, one year, two year, three and five and so on, we are not that far away from our peers. Often customers do have a blend of different loans. I think those are the main reasons, but certainly to be able to meet with the customer and talk means something here.
Great. Thanks.
Thank you. Our next question comes from the line of Andreas Håkansson from Exane. Please go ahead, Andreas. Your line is now open for your question.
Thanks very much. Just to follow up from Stockholm, I had to rush out since the record started, I think Anders was saying that the 1,600 FTEs that we talk about is just really the equivalent in time that's going to be freed up. He could see scenarios where there's not going to be any reduction in FTEs at all. Could you just elaborate what he was meaning with that statement?
I'll try to. The 1,600, that is freed up time. We have, of course, also gone through the bank. We have worked really hard to go through these initiatives and to make all the plans and to see and estimate the impact in all the different parts of the bank. We really have done the maths here. What we then see, this is a reduced time, and in many cases, this will actually lead to a reduced number of staff. That's something that you could expect to see going forward. Considering the fact we are talking about four years. You will be able to see it. It will take some time, but you will be able to see that in some parts of the bank where that is obvious. That is also where the part that will show up in the running cost.
That will happen, and we will make sure that we take account of this and that it will have a cost impact. That's quite clear. On the other hand, we will increase business and continue to develop business and to grow business, and that will require resources. That is what he meant. The net of that is a different number than the 1,600.
Okay.
I think it's simple as that.
Yeah. We see one of the other Swedish banks hiring quite aggressively within the IT space and digital banking and all of that. Could you see a scenario where you're actually going to reduce branch staff and some back office people and hiring, in many cases, perhaps more expensive digital type employees instead?
I think you really have a trace of that already. If you look at the development we've had in the Swedish operations and the Swedish branch network over the last two years you can see that the number of employees has gone down. It has been reduced. To some degree you could expect that to happen going forward as well as a consequence of the improvement in operating efficiency and the reduction of number of tasks that are being performed. The same thing would actually happen also in a country for instance like the U.K. In that case when you really have a growth market, that will actually mean that instead of firing a person and then recruiting a new one, you will keep the old one, but that one will do more business and since we have freed up time and improved the efficiency.
That's the way it's going to show up in the number of employees, I would say.
Okay. Thank you.
That, sorry, just to answer your question about development. The fact that we increase efficiency and reduce number of staff in some positions in some parts of the bank does not mean that we will not recruit people that have a different profile and that is needed. I think you could also expect that to some degree at least we need to recruit new people in IT development parts and so on. I don't foresee that kind of massive recruitment.
Okay. Thanks.
Thank you. Our next question comes from the line of Rhys Hacche from Morgan Stanley. Please go ahead. Your line is now open for your question.
Hi. Yes. Good morning, and thanks for taking my questions. Firstly, you mentioned some comments around competition and margins. Can you give us a little bit more color around margins in the different markets and products you're operating in? Secondly, linked to that, how you're thinking about your ability to reprice should the Riksbank move rates. Finally, when you mentioned your geographical coverage helps in terms of margins, was that a comment around competition being fiercer in Stockholm and in the cities, or was there something else behind that? Secondly, on costs in the U.K. specifically, just to make sure I've understood. I think you said SEK 200 million has been incurred so far of the SEK 300 million planned for this year, i.e., we should expect SEK 100 million in Q4.
Is there any other Brexit-related or other that could lead to some cost pressure in 2019 above and beyond that? Thank you.
Hi, Rhys, and thank you. Let's start with the competition and margin development. When it comes to lending margins, I think there are two quite clear tendencies. First of all, we see slightly declining retail margins more or less across the board, so in every country. It differs to some degree, but it is slightly declining margins in the private side. When you go to the corporate space, the margins are stable or actually trending slightly upwards. That's quite general. The only country where we have declining margins also on the corporate side is in Denmark. Apart from that, it's the picture I gave.
When it comes to the ability to reprice interest rate hikes from the central bank when that happens, we expect to be able to do it to some degree, it will be beneficial for us when that happens. It's also really hard to assess to what extent, that is dependent on the competitive situation to what extent we will be able to do that. To some degree, we expect to be able to do that. Regarding the geographical coverage we have. Yes, what we see is that margin pressure is particularly obvious in the Stockholm area and the major cities in Sweden. That is what I referred to. Especially also lending for apartments, when you purchase apartments. There is a structural impact of that.
Structure helps us in that respect because we do have a coverage across the country. Regarding U.K. and the Brexit cost. Yes, SEK 200 so far this year in the U.K. SEK 218 for the group as a whole because SEK 18 was related to preparations we have to make here in Sweden at head office as well because it impacts us a lot as well. The assessment for the full year is still SEK 300 million. For the next year, we expect it to be at the same level, maybe slightly lower. That is the very clean Brexit preparation costs. We are also making other investments in the U.K., for instance, related to AML and other compliance-related improvements we are making and also other development investments.
That is also something that elevates costs to some degree this year and will continue to do so next year.
Thank you.
Thank you. Our next question comes from the line of Johan Ekblom from UBS. Please go ahead. Your line is now open for your question.
Thank you. If I could just come back on two things. Firstly, on the cost, just to get us a sense for the kind of ongoing efficiency improvements we've seen in the past. Can you give us some idea as to what's the normal efficiency takeout that you've managed over the last couple of years? You showed the slide of the increased advisory meetings, et cetera. How do we translate that into FTE equivalent to gauge the scale of the incremental program now? Secondly, just on fee income, if we can come back and just maybe clarify. When I look at the trend quarter-on-quarter, how much of that was related to this timing of the fee reimbursement, and how much is underlying, just to get a sense for what kind of seasonality we should expect going forward?
Okay. Hi, Johan. When it comes to cost development in the past and the pace we've had in improving on cost efficiency, we did provide slides about the productivity improvements we have made in the Swedish branch network, and that, I think, gives you that information. I don't have that at hand now, but we can provide you with those slides again that will show you that. What you can see from that is a trend where we have an increasing amount of profit per employee. That is quite stable development and has been since 2016. We had a turning point, and since then, productivity has been improving, particularly in Sweden. That is actually underpinned by the same kind of efficiency improvements that we will also carry on with going forward.
When it comes to fee and commission income and the card fee and the reimbursement we got from the card companies, if you correct for that, the improvement in net card fees was SEK 10 million for Q3 compared to Q2.
Okay, thank you.
Thank you.
Thank you. Once again, if you would like to ask a question, it is zero one on your telephone keypad to register. Our next question comes from the line of Riccardo Rovere from Mediobanca. Please go ahead. Your line is open for your question.
Good morning to everybody. Three questions, if I may. The first one is on NII. Right at the beginning of the call, if I remember correctly, you mentioned that NII this quarter was somehow impacted by prefunding, if I understood it correctly, your statement. Did I get it right? If that is the case, should we expect NII to benefit from defunding you have collected this quarter? Second question, sorry. On cost, just to be 100% sure I understand it correctly. At the end of the day, you expect the number of staff to go down after reducing by 1,600 gross. Is it also fair to assume that the weighted average cost per employee should go down in the next few years, assuming that the brand-new hirings will cost less than the people that will leave the group?
The third question I have is on asset quality in the U.K. Do you see the level of credit impairment and asset quality in general in the first nine months in U.K. is a sustainable one? Thanks.
Hi, Riccardo. Net interest income impact and prefunding. What we have done during the year, we are really conservative when it comes to both capital and liquidity, as you know. We felt when we entered into 2018 that it was really time to, good reason to issue more senior unsecured bonds and also to issue Tier 2 bonds. The market conditions were good, but we also expected market conditions to potentially deteriorate during the year because we saw several signs as other market participants of potential increasing risks. We started to do that, we have issued SEK 55 billion in senior unsecured during the year. In addition to that, two Tier 2 issues. We have done that for conservative reasons, that comes with a cost. That has a cost impact that explains the change compared to Q2.
You might have noticed that the NSFR has not been impacted by that, but that is because we have a maturing covered bond benchmark that will actually mature in December. When that is being rolled, it will impact the figures. When it comes to a number of staff, with the number of staff gross, it will be reduced. Yes, that's for sure. Net, what happens? We haven't made any forecast about that. Obviously, the measures we do take when it comes to the efficiency measure is something that will counteract cost increases that we naturally have in other parts of the business. We haven't communicated where we expect the figures to end at next year and going forward.
The average cost of employees, will that be reduced as a consequence of us hiring less costly employees than we have done in the past as a consequence of this? Once again, we haven't made any forecast about that. Regarding asset quality in the U.K., that continues to be stable, and we haven't seen any changes in that respect. We, of course, might be impacted by a hard Brexit, not maybe in terms of credit quality, but business-wise, it could impact the demand for credit. That is something that we have seen a tendency to, especially in the London area, as I mentioned before. We have seen no, and do not expect any credit deterioration.
Thank you, Mr. Macrov. There, you can leave. Thanks.
Thank you. Our next question comes from the line of Paulina Sokolova from Barclays. Please go ahead. Your line is open for your question.
Hi. Thank you for taking my questions. I have two. The first is the pace of lending growth in Sweden looks like it slowed in the third quarter, both on the household and the corporate side. Please, could you maybe elaborate on the drivers here and comment on whether Handelsbanken's relatively high pricing has any impact at all? The second question is just coming back to costs, but for the rest of this year. The run rate for setting up the U.K. subsidiary, the costs for that are going to be higher in 4Q. On top of this, do you expect to see the usual seasonal increase, maybe similar to the SEK 200 million you saw last year? Thank you.
Thank you. When it comes to the pace of lending growth, yeah, it's correct. The average lending volumes did increase in all home markets during Q3, but at a lower pace than we have seen earlier this year. It did slow down. It did so both in the households side and in the corporate sector. We think it's too early to tell whether it's a cycle-related issue, or if it's just an unusually strong seasonal effect, because that's something we often see, as you know, during the summer months. It's a bit too early to tell, but the slightly lower pace, that's for sure. If that has to do with the pricing that we have, I wouldn't say that that is the impact. It's something that is rather, we would assess, related to the activity during the summer.
We don't expect it to be related to margins, I would say. Regarding costs for the rest of the year when it comes to U.K. and Brexit. The assessment is that the Brexit preparation cost will be SEK 300 million, and that is still the assessment we make. The number SEK 200 million, that is for U.K. alone. If you then include the Swedish operations, that is SEK 218. We still assess SEK 300 million to be the figure for the full year.
Okay.
I don't know if that answered all your questions.
Just to clarify the second point, on top of the U.K. costs, will you see the usual other seasonality impacting costs and driving them higher in full year?
Normally we have the trend that you refer to. We don't make any forecasts about that, I don't want to go deeper into what we exactly expect.
Okay.
What I can tell is that behind the figures you saw last year in Q4, that increase was higher than we have seen in previous years in Handelsbanken, and that was related to the fact that we did, during that period, increase the development capacity and actually recruited people and brought on more consultants than we had before. We did increase it in a way that we haven't seen so far this year, and the intention is to stick with the level of capacity we have for the remainder of the year. I think from the communication we have done in the past, you can piece that together.
Okay. That's very clear. Thank you.
Thank you. Our next question comes from the line of Jacob Kruse from Autonomous. Please go ahead, Jacob. Your line is open.
Thank you. Hi. I just wanted to ask a couple of more questions on the cost side. When you talk about your normal cost growth, I know you do not make a budget or a forecast, but would you say normal is inflation or normal is low growth, or what is the kind of baseline that you are offsetting with these savings? In terms of the efficiency gains, I guess where I struggle to see really is how much of this is a sort of additional project in addition to what you would always normally do. You are saying you do 30 projects over the space of four years. That is about eight projects a year. Would you normally do zero projects or normally do two or three of those kind of 30 in a sort of typical year? Lastly, the development cost.
You have done SEK 1.5 billion roughly this year. Is that setting you on a track for about SEK 2 billion, so you have a step up over SEK 100 million-SEK 200 million? Or is this one of those things where you normally have a bit more being booked in Q4, and actually you are not really increasing development costs very much in 2019 versus 2018? Thank you.
Thank you, Jacob. Okay, let's start with the first one then. What is the normal cost development? I think, is it inflation rate? What should you look at? When you look at our cost development, I think you actually have to split that into a few different pieces. I think the best way to understand that is to look at slide number six in the presentation. There you can see. I think it is twofold in our case. First of all, we make the investments in the U.K. and we increase development cost. That is basically the main drivers. In addition, we have also the Brexit costs. That is the area where you have seen the cost increases. Apart from that, we have been very stable over the years in the cost development.
Meaning that then we have had inflationary elements. We have had increases in spending on developing control functions and AML investments and so on, and AML-related costs and so on, and regulatory compliance. We have been able to offset those cost increases by efficiency improvements and then to keep the cost level stable in that area. That is where you should expect to see the impacts from the efforts we are making now. What I think is a really good question, I like that one. What comes in addition here? Of course, we have been developing a lot also in the past years, so that does not change. What I think the way to express what we are doing here is that, first of all, we have increased the development pace since last year.
That's also the reason behind the cost increase we've seen. It's not only about that. It's also about how you fit together your way of developing your business. What we have done is to also get the development side of the business and the business side and the IT departments closer together and to plan and to prioritize in a slightly different way where we really target areas where we have major efficiency gains. What is interesting when you look at the bank and how we spend and the cost allocations we have to make. The picture you get is that often you have to pay a lot for investments in infrastructure that has a quite small impact on efficiency gains.
You have a number of initiatives you could take that are not always that expensive, but that really give you a strong and good outcome in terms of efficiency gains. What we have done is to focus primarily, especially on those, and to make sure that we can carry out, go through them and really to gain efficiency through that. That is to speed up development and also to take out and reduce the number of administrative routines. That is what we have done, and that is the major change here.
Okay. Great.
When it comes to the development cost for 2018, we haven't made a forecast, but I think from the numbers we have so far, I think it's easy for you to at least get an idea.
Yeah. It was just that in 2017, there was a step up of development cost in Q4. If I look at that chart where you give development cost first nine months versus full year. If I'm not just annualizing, if I'm assuming a similar step up in Q4, I will get to, I guess, SEK 2.1 or so for this year, which would mean that your guidance for 2019 is broadly unchanged development costs rather than an increase.
A slight increase. I think considering the fact that we have guided between SEK 2.1 and SEK 2.2, and if you would come to that conclusion. I think the way to get an idea and not just to annualize it is to go back to my comment about the development we saw last year. We normally have higher cost increases in Q4 than in previous quarters. That's the normal tendency. Last year it was more pronounced than it has been in the past.
Okay.
If you fit that together with the communication we've had on the development capacity we keep within the bank, which has been stable during the year, I think you can get some guidance. That is as far as I can go.
Okay, great. Thank you very much.
Thank you.
Thank you.