Com. And I'll start with Slide number 2, the usual starting slide, where you can see that our stable value creation continued also in the Q2. Today, I will focus on 4 different areas: the result for the Q2, dive into costs, our growth and strategic initiatives for further business development and efficiency. On Slide number 5 and the income statement for the Q2 compared to Q1. The positive development in net interest income continues with a growth rate of 3% between the quarters.
SEK 103,000,000 of the growth came from increased lending volumes. In our Swedish mortgage business, we have maintained our strong position in the market and kept an unchanged mortgage margin of 106 basis points. Fee and commissions increased by 4%, mainly driven by savings and payment commissions. In total, income increased by 13%, but adjusted for the sale of the credit bureau UC, the increase was 5%. Costs increased by 4%, but adjusted for the one off effects from the changed pension plan in the UK in Q1 and currency effects, costs declined by 1%.
Staff costs were down by 2% in local currency. Loan losses were 5 basis points in the quarter and the credit quality remained stable. Operating profit increased by 21%, but adjusted for the one off in Q1 and the sale of UC, the increase was 7%. Return on equity in Q2 was 16% and 13.8% when adjusted for UC compared to 11.7% in Q1. Now on to some comments about costs.
Please go to Slide 6. Here you can see the cost development since 2015. In the picture, we have adjusted for the positive impacts in Q1 this year and in Q1 2017 from changed pension plans in the U. K. And Norway to better illustrate the underlying cost developments.
What you see is a total group cost split in cost development for our growth markets, U. K. And Netherlands, development costs, costs related to the subsidiarization in the U. K. And currency effects.
What you can see is that the increased costs since 2015 are related to our growth in U. K. And Netherlands and investments made in developing the bank. The other running costs were stable between 2015 2017 during a period of strong growth. Increasing costs related to regulations and control functions has been offset by increased productivity in Sweden.
During 2018, there is a slight increase due to regulations and internal control functions. In Q2, the cost development has been flat compared to Q1. Moving to Slide 36. You can see the exact numbers and how our development investments impacts the P and L. The total investments in development, what part that is being capitalized for and what amortizations our development in total incurs.
The total development investments have increased by 20% in the 1st 6 months 2018 compared to last year. Due to the nature of our projects, the rate of capitalization can of course vary from quarter to quarter. Costs increased in U. K. And Netherlands as a consequence of continued business growth.
Process to subsidiarize the UK business continues according to plan and the total cost for 2018 is assessed to be SEK 300,000,000. So now on to the purpose of these investments. Please go back to Slide 7. Here we have split our total development investments into 4 main categories. We spend a significant amount on business development for 2 major reasons.
We are making investments in order to integrate digital solutions with our personal and local service in our branches. We are also making investments in order to over time significantly reduce the administrative work in the branch offices. We have increased these investments during 2018. We also have our organic growth strategy, which means that we currently have increased the level of investment in the UK. Technological development is life cycle management, system upgrades, development of infrastructure and so on.
On. Finally, adapting to changing regulatory requirements means substantial development. As we have communicated in past quarters, we expect that this part of the development investments most likely will peak this year and potentially be somewhat lower next year. Please go to Slide 8 for some comments on capital. The CET1 ratio was 21.4%, which was down 0.2 percentage points from Q1.
The decline was mainly explained by increased business volumes, which reduced the ratio by 0.3 percentage points. What should be noted is that the level of accumulation of the quarterly profit in core equity is low since a large part has to be deducted during the year. This is because of the regulatory requirements, which states that the dividend to be deducted is the higher of last year's total payout ratio and the average of the last 3 years' total payout ratios. This means that we are now deducting more than 90% of the profit that we generate. Having said this, we want to underscore that this is not a forecast for future dividends.
It is purely a mechanical calculation based on regulatory requirements. We estimate the FSA requirement at the end of Q2 to be 19.6%. This means that we are within our target range, which is to be 1 to 3 percentage points above the SREP requirement. Now I will spend a few minutes on our business growth. Please go to Slide 10.
This slide describes our growth in regards to net interest income and clearly shows the broad based growth in the business. Lending at the end of Q2 was 9% higher compared to the end of Q2 last year, and net interest income reached an all time high level. The chart also shows the strong development in our growth markets in U. K. And Netherlands over the past years and increasing contribution also to net interest income.
In U. K, net interest income grew by 18% in the first half year compared to last year. In the Netherlands, the growth was 25%. Slide number 11 shows that the increase in net interest income is driven by volume growth. You can always have views about margin development, but over time, margins sometimes increase and sometimes decline and often with divergent trends in different countries.
Over the last 3 years, margins all in all have had no impact on the net interest income growth. Net interest income growth is explained by volume growth. As a consequence, our business model and focus on growth, adding customer by customer and increasing business with existing customers has been incremental to income development. Next year, the resolution fund fee will drop to 9 basis points again from this year's peak level of 12.5 basis points. On to Slide 12.
Another positive development is seen in net fee and commission income, which continues to grow steadily. Also here, we see that the growth markets now are generating an increasing contribution to group profits. Looking at Slide number 14, it's very clear how important the savings business has been to our fee growth during the last 2 years. Also lending and deposit fees have been growing, which is also a reflection of increased business volumes. Now to Slide 15.
The positive development of our Swedish fund business continues and is explained by the strong net inflows into mutual funds. Since 2010, the bank has taken 23% of all net inflows. And in the first half of twenty eighteen, the figure was 35%. News in this quarter was that we surpassed SEK 1,000,000,000 per month in standing transfers into Swedish mutual funds. On Slide 16, you can see that we have a similar development in all home markets.
The stable development in assets under management in Sweden continues, but even though we have been doing well, we only have a market share of around 11 percent. In the other home markets, the development is even stronger with a growth rate of 26% since Q2 last year. In the markets outside Sweden, our journey is still at an early stage. On Slide 17, a few words about the U. K.
During the last 10 years, this business has developed from a very small operation into where we are today. 208 branches, a broad based product range, ranked number 1 both as a private bank and for SMEs. And at the same time, the market share is only 1%. As you know, we take big investments now in the U. K.
And we plan to transfer the operation into the newly created subsidiary at the latest in Q1 next year. Cost for this will be somewhat lower next year and then drop more meaningfully in 2020. Fitch assessed an expected rating of AA Flat with stable outlook for our U. K. Subsidiary.
At the same time, U. K. Sovereign rating is AA, but with a negative outlook. Our rating is, of course, a real sign of strength. The infrastructural investments we make now in the U.
K. To become a local British bank will further improve our business opportunities and our growth. This will improve our efficiency too. This will over time reduce the manual administration and give more time for business and to add new customers. This makes us convinced that sometime in the future, we can be a bank not with a 1% market share in the U.
K, but rather around 5%. Our customer segment has the strongest and most interesting financials and this is the segment where we intend to continue to focus when we grow for the next many years. Now to Slide 18. The Netherlands is another exciting growth market for us, but still early days, of course. We have operated here as a whole market for 5 years and a half now.
The U. K. Growth provided us with a lot of experience that facilitates our growth in the Dutch market. During the 1st 5 years in the U. K, we didn't have a profitability that was even close to the Dutch one.
Building a new home market takes time, but the development so far in the Netherlands continues to make us very optimistic. Now on to Slide number 20, please. I will now talk about our strategic initiatives for business development and efficiency. As you know, we have a very consistent business model. The business model and its fundamental principle remains.
We will continue to have a strong branch network where the branch owns the customer relationship and have a strong decision making power paired with a strict credit policy. Digitalization does, however, provide us with major opportunities to both improve our operating efficiency and our service offering, building on our key strengths and present value creation. Our aim is to integrate a complete digital offering with our approach of being local and focused on personal service when the customer is so vicious. Now to Slide number 21, please. Sometimes we face questions about role of branches in the digital world.
What we hear loud and clear from our customers and what we see in business outcome is that customers appreciate our local presence and personal service. But digitalization also means that the branches are changing quite a bit. In the past, they used to be transaction centers. The new branches more and more moving up from street level to more suitable and efficient premises have a different focus. They are the meeting points for customers looking for qualified holistic advice, but also for customers who need assistance to resolve the situation.
A new branch can also meet the customer digitally through distance advice, for example. The number of branches in Sweden has gone down, often due to changed local demography, but we will keep a nationwide branch network and sometimes we also open new branches in Sweden. This is something we have also done in recent years. Moving to Slide 22. I will go back to the savings there to describe how integrate digital solutions into our personal service.
We have already done a lot, but more will come. We have developed a digital advisory tool used by our Swedish branches today. This tool enables the adviser to be well prepared and informed before a customer facing meeting takes place. The tool will, of course, produce the savings advice to the customer. But more importantly, the customer meets a human being personally or through a business meeting, where other questions that are important to people can be covered.
That could be questions about customers' personal preferences, factors that a machine cannot capture. This includes questions about where people are in life, future plans, preferences, uncertainties, potential choices, etcetera. We have also launched a digital savings guide where the customer can easily choose the savings option and this will be further developed. Slide number 24, please. The developed approach, the tool and the way it has been adopted by our branches has, as you can see, led to sharp increase in the number of advisory meetings in our branches.
It has made it possible to carry out a significantly increased number of personal customer meetings. This has happened despite reduced number of staff in the Swedish branch operations during the last three quarters. The business impact of this, you have seen in the numbers in the first section of this presentation. Slide number 25, please. We now take the next step in our strategic initiative for business development, the mortgage business.
We already told you in Q1 that we will digitalize that process during the next few years. In many cases, the mortgage situation is quite uncomplicated. For example, an existing customer or a customer where all the metrics without any doubt match our strict criteria for lending. In these uncomplicated cases, the customer will be able to handle the process digitally. We will gradually digitalize the various steps.
Still, all customers will belong to branch. We also see in many cases that customers want a personal advice in mortgage lending cases. The need has actually increased due to the new quite complicated amortization regulations. For these customers' personal contacts and advice will be handled by the local branch just as today. The bank's process and administration will also here be digitalized as far as possible.
Now to Slide number 26, please, where I'll describe the strategic for efficiency. Digitalization means that our branches will be able to spend significantly less time on administration and more time with customers. We have always handled the administration locally in our branches and not in a central bank office. This means that a significant share of the time in the branches is spent on administration. Thanks to digitalization, we now see that most of this administration over time can be automated.
This work is ongoing and will gradually deliver improvements during coming years. By doing this, we skipped the step of outsourcing back office to countries with lower cost levels. Instead, we digitalize our routines directly in the branches. A large share of these measures will render cost savings. The situation does, to some degree vary, of course, between markets.
In the U. K, for example, it means that more time will be left for growth. We have a number of ongoing initiatives in this area. And in October, when we present Q3, we will come back and quantify the impact that we expect over the coming years. On to Slide 27.
We show a number of examples of what we are doing and we'll be doing. Since a few months back, we are using artificial intelligence for our review of advisory documentation, which has been a very time consuming task for branches. This has really got off to a good start and there are more areas where we will use similar tools, for example, in reviewing credit documentation. We have also continued to launch a number of algorithms and macros to handle the various processes, and we are currently using these tools in about 100 processes in the bank. Example of this is the mortgage process reviews of collateral valuation in Stadsepatek, KYC tools and customer onboarding.
Now to Slide number 28, please. So to summarize our strategic initiatives for business development and efficiency. The administration that has always been handled in the branch will be digitalized and thus most of it will be removed over the coming years. In Henness Banken, the branch is the bank. The branches will, however, going forward, be able to spend much more time with our customers.
Digitalization means that we have major opportunities to integrate new technology into the local and personal customer meeting. This has already been partly done in the savings business and that experience teach us about the potential of personal services also in times of digitalization. And now to summarize on Slide 29. Q2 showed a continued good growth in our business and income. Our underlying costs are stable, and we continue to invest in our growth markets and into development at a higher level than in early years.
Quarter on quarter, total costs were unchanged. Loan losses were at 5 basis points in the quarter. We have also initiated initiatives for business development using digital tools and also for efficiency. As much administration as possible will be digitalized and this will give cost savings. The expected impact from these initiatives will be quantified in the Q3 report.
Thank you very much. I now open up for questions.
Thank you. And we go to the first line in the queue, which is over to Magnus Andersson of ABG. Please go ahead, sir.
Yes. Hi. A few questions on your strategic and efficiency enhancing initiatives here and costs. First of all, you mentioned that the mortgage process should be fully digitalized during 2020. Is that the time frame we should look at also for the other digitalization initiatives of administration, etcetera?
Magnus, no, it's not. So the 2020 date is regarding the mortgage process. And then we'll come back next quarter to quantify the impacts from the efficiency measures we are planning to implement. So but the 2020 date is regarding the mortgage process and digitalization of that one.
Okay. So you will also come back on the time frame of the efficiency enhancing measures?
Yes, that's correct. But I also think it's important to underline that, I mean, efficiency measures is something that is always ongoing. And although we might frame it in time wise, it is something we, of course, continuously are working on. And also regarding the efficiency measures, we now have in mind and we'll communicate more about next quarter. That is something that has been ongoing already and but more will come next quarter.
Okay. And although you are not prepared at this stage to quantify any impact. Could you say just obviously 2018 is the year where costs go up a lot and expectations have been lagging for the last three quarters in consensus. Just can you say will it be you're talking about cost savings. Are we supposed to see clearly visible net impact on the cost base in 2019 2020 from this relative to 2018?
Can you
say something there? Yes. So first of all, and I'd like to start where we did communicate in Q1. So the way I think you should think about our cost development is that we in the later part of 2017, we did increase cost. And we did that consciously because we wanted to invest more in development.
So we for good reasons, and that is what we have communicated. So what we did at that time was to increase our capacity when it comes to develop. And we did build up that capacity, and we reached a level where we wanted to be early this year. And we have no intentions to change that capacity. And that capacity is represented by the plans we have for the rest of the year is to keep the same level of capacity.
And then as we have communicated before, of course, we continue to develop the business in the UK and Netherlands, and that's also important. And also, we are investing in the subsidiarization. But that's the way we are thinking about development and the level of development and also the cost that accompanies that. What we also told, and that is still the case, is that we when it comes to the cost that has been added for building up control functions and adapting to new regulations, That is something we have been building up over time. We are nearly there.
So
not
much more to expect, but some more to be done. So that is, I think, sort of the baseline. And when you then move forward, we don't make any forecast about 2019 2020 and so on, as you know. And we haven't changed that strategy. But I also think that what we have been communicated about the efficiency measures we would take, that is something that will be implemented over time.
So that is the impact from that is something that will be seen over the coming years. But when it comes to quantification of the effects and the impact of those efficiency measures, it's something we'll communicate about in Q3.
Okay. But the cost outlook for the rest of the year, if I start with the Q2 level, should we expect kind of a normal seasonality Q3 and Q4 from here?
Well, we don't make forecasts like that. But I think you can based on what I told about the level we have when it comes to development capacity and development in other parts of the business will make it possible for you to have an idea about potential development.
Okay. And finally, due to these efficiency enhancing measures, will there be any restructuring charge or transformation costs or something like this associated with the new initiatives?
That is something we will come back and deal with in Q3.
Okay. Yes, okay. Thanks. That's all for me.
Yes, thank you.
We are now over to the line of Matti Hochas of Danske Bank. Please go ahead. Your line is open.
Yes. Hi. It's Matti here from Danske. Two questions, please. Firstly, at least in the press conference, it seems that you'd said that there is fierce competition in the Swedish mortgage margin, but at the same time you report stable margins.
What's the reason for this? There's some kind of structural reason that your margins are stable, especially when we hear your competitors talking about more downward pressure on that side? And also if you could elaborate a bit when you're saying the lending margins in the branch operations outside Sweden were down, where was this and where there some specific reason for this? And if I still may ask about the efficiency program, what was the reason that you decided to kind of disclose it now given that you're not disclosing a lot of details about it? In my experience, it's quite untypical of Handelsbanken to come out with a special program like this, especially when other banks it's more like business as usual.
Thanks a lot.
Hi, Martin. Thank you. Well, yes, the first question number 1 about the mortgage margin. And yes, it's stable in Sweden so far. We feel competition, so we know that we have a lot of questions about pricing in that end in the branch offices and so on.
But we keep a stable level of margin. So and that's where we are. So we haven't seen any impact so far. And we also have been able to get and protect our market share so far. So it's still stable still so far.
And the reason why that is, this is something that we is actually an outcome of the day to day work that is ongoing in all the branches on an everyday basis. And what is one part of that is, of course, also the service we do provide and also the quite wide geographical coverage that we do have. So that impacts. That's a good starting point. But of course, we also are part of the competition and feel that.
But margins are still stable and have been very stable over the last year. When we then move over to the question of margin development outside Sweden, I think there are 2 tendencies that goes across all the markets. And the first one is that we do see margins in the private side declining in most markets. It has been generally stable in Sweden, slightly down in total. Mortgage margin is stable, but total margin in the retail space, slightly down in Sweden and more so in some other countries.
And we see that, in particular, in UK and Denmark. So we have seen an impact there. And the second trend we have seen is very stable or even, to some degree, upwards moving margins in the corporate space. So that is there, we have do have a stable development. And business wise, which also impacts net interest income is, of course, that we do have a solid and good development, not automatic, but improvements in the corporate area where we have been increasing lending volumes.
And then why do we communicate about these strategic initiatives now. Well, it has been important for us to be clear about these initiatives and communicate these because we think this is an important message, and it is work that has been ongoing for some time, of course. But we now want to pronounce it more, and we are taking further steps internally to make this happen and to change the bank. So we think that it is an important message to the market. And then we'll come back later on to quantify the impact from this.
But we think that the steps we are making, so first of all, to improve business development and to further integrate the digital offering with the local presence and local services we have is important and is an important strategic development. And the same goes for efficiency measures we are making and especially that we see that now see that we can actually dramatically reduce the administrative work that is being carried out in the branch offices. So we find it to be an important message to give to the market. But we will come back in Q3, as we're told, when it comes to the quantification of the impact.
We now go to Sophie Petterson at JPMorgan. Sorry, I do apologize. We're actually going to Andreas Hakansson of Exane. Please go ahead, sir.
Good morning. Thanks. We covered most areas. So a reflection and if I can ask on that mortgage process that you're going to have fully digitized by 2020? Some of your very close peers seem to be finalizing that a couple of years before you.
Do you feel that you have been underinvesting for some time in IT and you now need to catch up? And if that's the case in mortgages, are there other areas where you also need to invest more?
No. We have not underinvested. Investment in development is something that is continuously ongoing. We have been early when it comes to investment in the savings area. So there, we have come quite far and also with a known positive business impact.
When it comes to the mortgage business and digitalization of that process, it's something, yes, I've seen that many peers are also talking about that and maybe have been doing so for a longer time than we have. I think so that process is actually quite complicated, and it does contain many different steps. And it is easy to state that you digitalize the full process. We will do it step by step, and that's also what I expect that our peers are doing. And some steps are more important when it comes to customer facing part of it, and that is to be able to have a digital offering, which makes it easy for customers to sign up or to apply for a loan and so on.
So that's one important part. And then you have a lot of administrative work that is going on within the banks and in our case than in the branch offices. And that is also something that could be digitalized. It doesn't impact the customers so much, but it means a lot to our operating efficiency. So I don't know exactly what others have in mind when they state this.
But in our case, it is a process that will we have started and it will be ongoing, and we will deliver during this period of time. And it will mean a lot both to the offering we have and also to operating efficiency. And I think so back to yes, I think I covered because I covered the Yes.
That's fine. And just one follow-up on the mortgage side. We listened to SEB that's been cutting margins in the first half and they're losing market share and then we listened to Swedbank that has had flat margins and are guiding to relatively flat margins as well.
Could you tell us what do you
think is and you sound like you think margins are relatively stable as well. What do you think is the difference between you and an SEB? And also, could you tell us your outlook on volumes? We saw things have slowed a little bit from the beginning of the year. Could you tell us what you expect for the rest of the year?
Okay. So I don't know exactly why the banks diverge in their But I know what we see. And what we see is that we have a lot of I mean, there is competition in this area, no question about it. We have a lot of discussions with our customers. So they want a good price.
So we have the negotiations. It is also a total offering we have. So we have we keep a higher level on 3 month lending. But when it comes to other fixings, we are more in line with the other banks. So any the total mix really do matter.
And I can just conclude that even though competition is fierce, it's we can conclude that so far, we haven't seen any changes in the mortgage margin. So that's where we are. Potentially, what we expect is that, that competition will continue like the way it is now. And when it comes to volume outlook, well, that's really hard to assess. What we know, yes, we've seen some signs of slight decline, but it's still at a fairly stable level.
And many things come into play here. So first of all, okay, the turnover in the mortgage market means something. Price development also impacts, but also the fact that new apartments come to the market. And even though it might take some time to for the market to digest the increased supply, it is something that also adds lending volumes and there are also underlying demographic reasons why that sort of supports growth. So we don't expect any major changes, but we don't make any exact forecasts about that.
Okay. Thank you.
Now we're over to the line of Sophie Peterson at JPMorgan. Please go ahead. Your line is open.
Yes. Hi. Here is Sophie from JPMorgan. So my question was on the mortgage moving from Pillar 2 to Pillar 1 on your mortgages, how should we see the core Equity Tier 1 impact on Handelsbanken from this? And second question would be on the elections that you have in Sweden in September.
We have seen quite big election surprises in many European and also on the other side of the Atlantic.
Do you
expect any material impact on the Swedish economy from the elections that we have?
Okay. So Sophie, so about the mortgage the move of the mortgage risk rate for from Pillar 2 to Pillar 1. So the status at this point is that the Swedish FSA has proposed a change, as you know. And we but it hasn't been finally decided. It is also being processed in European Commission.
So we don't have the final answer to where it will end. So and we hope we'll know soon. What we did communicate in Q1, and that is still the best assessment, is that the impact would be that the risk exposure amount in Pillar 1 would increase by SEK 160,000,000,000. So it's a significant change in terms of risk exposure amount. On the other hand and that would also mean, of course, that the ratio would go down.
And if you make a clean calculation, that would represent 16.6%. And that's simple math. So but what it also means is that the underlying absolute capital requirements in terms of pure money from the Swedish FSA will remain basically the same, so no impact in that end. So So we won't need more capital as a consequence. There is also something in the writing from the Swedish FSA, which I think is really important here and to bear in mind.
And that is that you know that today, we have a 25% risk oil for our mortgages. 15% of that is something that was and that was the first part that was introduced. It's something that should it's supposed to reflect that we have been through a number of really strong years. So the calculated risk weights were perceived as being too low. So the 15% is something that represents the worst outcome we would ever imagine in a crisis situation.
The additional 10% is there to cover systemic risk. And this is also a buffer that the Swedish FSA wants to be a pure buffer, meaning that they should be able to remove that and use that buffer in a really critical situation. That's the purpose. When these requirements move from Pillar 2 to Pillar 1 and the FSA has used that particular article in CDR. It would mean also that they could still and that is something they also underscore in their writing about this, that they could move back from that right and also use that requirement as a buffer.
And I think that's important for the minimum distribution amount and the thinking of the distance in a crisis situation for us. And then on to the election. And well, yes, it's really uncertain what the outcome will be, and I wish I knew. But I must say we did face a fairly similar situation 4 years back. And I it's really hard to assess the impact.
But what normally happens in Sweden is not that it has any major impacts on the economic development, but it's really hard for me to guess. And we don't expect, as a consequence of that, any major impacts for the bank or economic development.
Thank you. That's very clear.
Okay. We're now over to the line of Paulina Sokolova of Barclays. Please go ahead.
Hi. Thank you for taking my questions. I have 2. The first is just going back to the efficiency gains you're highlighting. It sounds like you're not centralizing administrative functions at branches, but digitalizing only.
First, could you please confirm that that's the case? And secondly, could you be able to make more savings without compromising the customer experience by centralizing some of these processes in the future? And then the second question is just on the number of advisory meetings and branches that you're highlighting. Can you maybe give us a better idea of how the increase links to the numbers that you report? So are you seeing a higher number of meetings translating into more sales and higher fee income?
Or is this just a strengthening of existing relationships?
Paulina, thank you. So question number 1 about if whether this would lead to centralization or if it will stay administration will stay in the branch offices but being digitalized. And then I can confirm that what will happen is that we will digitalize the processes as far as we ever can over the coming years. And it also means that the branch offices will have the customer responsibility and also to support customers when it comes to administrative tasks. It's just that it's being digitalized.
And then in some cases, we, of course, when it's value will create value, we might consider to centralize some parts, but that's minor. So the basic underlying strategy is to keep that in branch offices. When it comes to the efficiency measures we are making and how that might impact the customer experience, I think that's a really good question. And I think it's a really important one because we to us, it's really the core of the business model we have. And that is something we are pronouncing now that we are sticking to this business model, and we want to be able to continue to support customers and give them a chance to meet us in person when they want to and to have a local presence.
So to build on relationship and to have the distribution capacity, that is something we really feel is the value creation of the bank and our key strength. So we sincerely want to keep that. And the experience we have from what we have done so far because we have done a lot already, even though much more is to be done, is that what happens is that we develop tools that improve the customer meeting, make it more efficient, less time spent also with customers on administrative tasks. So this is something that will both be good for operating efficiency and for servicing customers because it frees up time and makes it possible for us to talk to customers instead of doing administration. And then when it comes to the increased number of advisory meetings, we are carrying out in the Swedish branch operations as a consequence of the introduced tools and the new processes we have in place and have had in place during the last year in this form.
It is something that supports we haven't calculated or communicated any exact numbers how much that in itself isolated impacts income development. But it is certainly something that really supports the development we have seen in the with the net inflows into the Swedish fund market. And so and we also see that it has a positive impact through where we do grow because the funds that are part of this advisory service are also growing a lot. So we know that the impact from these investments and is really good.
Okay. That's very clear. Thank you very much.
We're now over to the line of Riccardo Rovere of Mediobanca. Please go ahead. Riccardo, your line is now open.
Good morning. Good morning to everyone.
A couple of questions, if I may. The first one is just
a clarification. I wanted to
be 100% sure I got it correctly.
When at the beginning of the
call, you stated that the as in and you also stated that this should adding and you also stated that this should not be representative for any decision that should be taken at year end? Did I get it correctly? This is the first question. The second question I have is on risk credit assets. Aside from the Pillar 1 movement of mortgages, do you expect risk credit assets to mirror more or less the loan growth in the future?
And do you see the economic situation in Sweden strong enough in the second part of twenty eighteen to, let's say, replicate the long growth that we have seen in the first half?
Okay. Hi, Riccardo. So yes, you got the message right when it comes to the dividend that is being deducted of more than 90%. And it doesn't represent the forecast for the future payout ratio. When it comes to risk exposure amount, if it will mirror future loan growth, and I would say basically, yes, it will.
And then when it comes to the economic situation in Sweden and whether it will support further loan growth, That's really hard to forecast in but we have seen no signs of change, and we see that loan growth is good, and we have seen no changes in the trends in that respect.
Very clear. Thanks.
We're now at the line of David Benson at Morgan Stanley. Please go ahead. Your line is open.
Hi. This is David at Morgan Stanley. I just had a quick question on loan losses. In Finland and Norway, they went up both quarter on quarter and year over year. What drove this development?
Anything in particular? Any color you can share, please?
David, no, it is not. That is a few, 2 or 3 cases that are not very big either, but we don't communicate any specifics around those cases.
All right. Fair. Thanks.
We're now over to Kim Boga at Deutsche Bank. Please go ahead, Kim. Your line is now open.
Thank you. Just I think most of my questions have been addressed. But just one, when you talk about these efficiency gains, it seems that your peers are doing something similar and it's maybe it's more of a minimum requirement in Sweden to do this efficiency than it is getting ahead. But my question is, there is obviously a cost benefit, but what are the risks that
some of that is going to
have to sort of be paid away in terms of what's distribution likely to be between you and the clients in terms of when you become more efficient?
Thank you, Kim. Yes, we that is probably the communication from many banks. I think what is important in that respect for us is that we what we want to do here, and I think that's something that might maybe are different in our case, we have 2 messages here. The number one thing is that we want to improve operating efficiency. So we want to streamline our processes and to really reduce the administrative work.
And that is something that will give cost benefits, that's for sure. But secondly, and I think that's really important, we are really trying to combine opportunities we see in digitalization and where we are when it comes to the strategy in relation to customers and to be local and to offer personal meetings because that is something that supports long term relationship and that is something that supports value creation. So for us, it's really important to use the opportunities offered by digitalization in that way. And that is also a way to avoid a situation where it will be just about pure price competition. Okay.
Thank you.
Okay. We're now over to the line of Jacob Kruse at Autonomous. Please go ahead, Jacob. Your line is now open.
Thank you. Just one quick question. When it comes to your efficiency gains, given your, I guess, unwilliness or your kind of traditional not really having budgets, are you do you think you will be able to communicate efficiency gains as seen on a sort of net basis? Or will this just be kind of gross impacts with the overall cost growth elsewhere still being very much of an unknown? Thank you.
Jacob, how we are going to communicate about this is something we'll come back to in Q3. So yes, unfortunately, we have to wait for that.
Okay. Thank you.
Okay. We're now over to the line of Nick Davy at Redburn. Please go ahead, Nick. Your line is now
open. Two questions please. The first one on costs. And I can see there's a pickup in capitalized costs in the quarter. And I wondered if you could just talk generally about the difference between or your preference between booking these costs and efficiency investments through the P and L versus capitalizing them?
And I know you're not going to tell us anything more about Q3 until Q3, but perhaps if you can just give us a general philosophy so we can know where we should look in future quarters between the P and L and the balance sheet? And then the second question, please, on capital. I know you've addressed it in a few different ways so far, but my question would be, if you're now about 80 basis points above the sort of bottom end of your targeted range, I understand the comment about the dividend and perhaps you have 30 bps up your fee from that, but also the kind of cyclical buffer in Sweden might also go up by the same amount. So if I just think about that 80 basis points above the top end the bottom end of your range, The question is, is that enough? I suppose at a time where Swedish corporate demand seems to be picking up quite markedly, do you think you have the raw materials to support all the demand?
At what level of capital do you start to feel a bit uncomfortable in terms of just servicing the demand of your customers?
Hi, Nick, and thank you. So first of all, when it comes to the extent that we do conservative approach to this. So we don't want to capitalize too much. But it's also I mean, we follow rules. So what decides actually how much we do capitalize is more a question of about what kind of development we are carrying out and what we need to and should and have to capitalize and rather than what we want to.
But if we can choose, we want to take the costs upfront. That's the main approach we have. And then when it comes to capital and the capital level and the 80 basis points, yes. And then as you correctly stated, we have sort of a hidden buffer, you could say, there potentially. So what we feel is that level of growth we have now and the capital generation we create is well balanced.
So we will not see any restrictions where we are at this point.
Okay. Thank you.
We're now over to the line of Adrian Cighi at RBC. Please go ahead. Your line is now open.
Hi, there.
Thank you very much. Two questions and follow-up on NII, please. In trying to assess the potential impact from a rate increase in Sweden, can you disclose from your Swedish corporate exposures how much of those have a floor, a styro floor? And then on the various moving parts of Swedish mortgage margins, thank you for the explanation. Just maybe one follow-up on that as well.
Does the change in mix explain in any way the stability in margin? In other way, have you moved up the risk curve at all on switched mortgages? Thank you.
Hi, Eirijn. So the corporate loans with the floors, that is something we have not communicated. So and I won't this time either. And when it comes to mortgages and whether we have moved up the risk curve or not, no, no, we have not. And I that's really important to us.
It's the credit we when we go into deal, we always start with the number one question, and that is whether we want to do business with a particular customer and if they have the right repayment capacity. So we and that is not a price decision. So and if that stage is passed, then we go into price discussions. So we have definitely not moved up the risk curve.
Super. Thank you very much.
We are now over to Nicholas McBeath at DNB Markets. Please go ahead. Your line is now open.
Thank you. A few follow-up questions on previous questions. First of all, on mortgages, it seems like you're keeping your market share overall in the market and growing basically in line with the market. But I was wondering if there are any trends regarding subsegments like geographies in markets where you noticed that you're losing market share, which is then offset by gains on market share in other segments? If you could comment on that, please.
Nikolas, no trends in that respect. Due to geography.
Okay. And then a question also on the capitalized costs, which have increased. And should we expect a further increase in capitalization
of cost as
you add development capacity? Or do you think that the run rate, I think it was around SEK 230,000,000 in Q2, we start what you also think is the run rate in the coming quarters when it comes to capitalized cost?
That will depend on what kind of development we are going to carry out in different periods. So that is the deciding factor, and that's something that we don't give any forecast about.
Okay. And then final question on the digitalization of the mortgage process. I think your CEO has previously mentioned the potential for gross savings of around SEK 500,000,000 from a fully digitized and automated mortgage process. So yes, first, if you could comment if you still think that is the case. And second, how much investment you expect to go into this project until it's completed by 2020?
Okay. So about the SEK 500,000,000, that when he mentioned that, that's more related to the total costs in the branches for handling the mortgage process. So that is not the expected cost saving. And the potential for that is something we are going to communicate. And when it comes to the impact of the efficiency measures we are taking, that is something we're going to communicate about in Q3.
And also the investment side of things related to that.
Okay. Thank you.
Final sorry, our next question for today is from Bruce Hamilton at Morgan Stanley. Please go ahead. Your line is open.
Thanks. Yes, just 2 sort of follow-up questions. On the increase in advisory meetings that you flagged earlier and thinking through the importance of sort of client satisfaction, what are the key metrics do you guys track then? Is it Net Promoter Score? And if so, has that shown any kind of signs of improvement yet?
Or is it too early? And then secondly, on the sort of mutual fund business or as I mentioned, obviously, momentum has been very, very healthy, market share has been good. Through the course of Q2, sort of geopolitical risk sort of rose. Did you see any reduction in client risk appetite? So as we look forward, should we be sort of thinking about moderation?
Or has it been fairly resilient throughout?
So I will start with the second question about mutual funds and the composition. And well, yes, over time, we have seen some changes in the composition, and it has some impact on the development on net fee and commission income. But it's not really significant. Conscious about potential risks. But could you please repeat the first question because I didn't completely understand it.
Yes. Sorry, yes. So I guess given the Slide 24 where you talk about the increase in advisory meetings supported by this move to more sort of digital processes, etcetera, etcetera, and the importance of this whole process. Obviously, it sounds like it will take time to feed into the P and L, but are you looking at sort of client satisfaction via Net Promoter Score? Or what metric is it you track to see whether this increase in meetings will actually have any impact on your financials?
Well, we see the impact in business, added business and also in growth in the funds that are being advised and recommended. So that's one way to track it. But this is also what we have done is to invest in the process and how we approach customers in general when we give them a holistic advice. So this is something we do with all customers that want to have that kind of advice. And then we have seen a really positive impact, both from the number of advisory meetings and also the response from customers about that kind of advisory meeting.
So and it's been highly appreciated. So and then it should impact over time also customer satisfaction levels. But statistical measures about that, we haven't seen so far.
Sorry. So but you've already seen a pickup in levels of sales linked to increase in meetings, so you're saying financial impact already being felt?
I would say that, yes, the development, the positive development you have seen is partly related to that. Got it.
Okay. Thanks.
Okay. That was the final question we have time for today. So gentlemen, may I please pass it back to you for any closing comments at this stage.
Okay. Thank you very much.