Good morning, everyone, and welcome to this conference call for the Q1 2018. Joining me today, I have Lars Hoglund, Head of Investor Relations and Annika Engler, Head of Group Accounting. The slides used for my presentation are as usual available at hanersbanken.com. I will start off by making some comments to an article in the Swedish paper, Dagens Industrie, today. Dargan's Industry is quoting a letter sent to Handelsbanken UK from UK FCA in August last year regarding our UK anti money laundering prevention procedures, where they point to areas where we need to improve.
Already before this letter was sent to us, the bank intensified further our work in improving systems and routines in this respect, and that work is continuing. We take this matter very seriously, and we have ongoing dialogue with FCA, and we have committed substantial resources to further improve our processes to prevent financial crime. The requirements from regulators in general in this area have increased a lot over the last years, as you know. As this matter is subject to confidentiality, this is all I can say about this process for now. Increased efforts in this area is also a part of the additional resources we commit to control functions, which we also comment in the report.
Let's start with Slide 2. During the Q1, the stable value creation continued with an average growth rate of 15% in equity per share and dividends. Much of the Q1 report is about growth. We continue to see good growth in our business operations across the bank. This momentum we use to invest in creating an improved offering to our customers, increased operating efficiency in preparing for the next step in the UK and further adopting to regulatory requirements.
So now please turn to Slide 5 and the income statement for the Q1 compared with the Q4 2017. Net interest income decreased by 2%, but adjusted for the increased resolution fund fee, it increased by 1%. This is mainly explained by increased business volumes and increased deposit margins outside Sweden. Net fee and commission income decreased by 2%, mainly due to seasonally lower payment commissions. The net result of financial transactions is, as you know, a relatively small revenue item for the bank compared to our peers.
This quarter, the result was partly affected by negative effects in the valuation of derivatives used for hedging the bank's funding. Other income during Q4 included the dividend from VIFA Sweden of SEK 576,000,000, which explains the difference. In total, revenues fell by 7%, but adjusted for the dividend from Visa Sweden and the increased resolution fund fee, the decrease was 1%. Staff cost increased by 3% when adjusted for the quarter's higher allocation to Oktogonen and the changed pension plan in the UK. The explanation is found in an increased number of employees in our growth markets and within our IT operations as well as exchange rate effects but also annual salary review.
Other expenses, including amortizations and depreciations, followed a relatively normal seasonal pattern and decreased by 5%. As we have explained before, we have increased our IT development capacity in order to support our growing business and to improve efficiency, to make preparations for the subsidiarization in the UK and to continue adapting to new regulations. These various investments are reflected in our cost level this year. Loan losses amounted to SEK 153 3,000,000 corresponding to a loan loss level of 0.03 percent according to the new IFRS 9 standard. The underlying credit quality remains stable.
In total, operating profit increased by 3% between the quarters. Adjusted for nonrecurring items related to the Visa dividend in the previous quarter and revised pension plan in the UK, the increase was 14%. Adjusted also for the increased resolution fund fee and the increased Oktogonen allocation, the increase was 20% between the quarters. Now moving to Slide 24 and net interest income developments. During the quarter, net interest income decreased by SEK 129,000,000 or 2%.
The main drivers were the fee to the Swedish Resolution Fund that increased this year to 12.5 basis points from 9 basis points in 2017. This led to an increase in government fees of EUR 191,000,000 increased lending and deposit volumes in our home markets, which together added EUR 77,000,000 increased margins that added EUR 49,000,000 mainly driven by higher deposit margins in the UK. Currency effects, which added EUR 46,000,000, 2 days less in the quarter reduced net interest income by EUR 69,000,000. And finally, other impacts amounted to minus EUR 47,000,000, including a negative benchmark effect of EUR 28,000,000. In Sweden, the mortgage margin was unchanged at 106 basis points.
The overall lending margin development was slightly positive for corporate customers and slightly negative for retail customers in most countries outside Sweden. Moving to Slide 7. When we take a closer look at the net interest income development over the last years, we can once again conclude that when adjusting for the increase in government fees that the bank reports the highest level so far. The resolution fund fee in Q1 amounted to SEK 617,000,000. We have seen a very positive trend the last 2 years.
Compared to Q1 2016, the reported net interest income has increased by SEK 853,000,000 or 13%. Adjusted for government fees, the increase was SEK 1,200,000,000 or 17%. The growth in our home markets outside Sweden has been very strong when we look back, and the contribution to the group's net interest income has been increasing steadily. Today, whole markets outside Sweden account for 40% of the group's net interest income compared to only a very marginal share a few years back. After a few years of weaker development in Sweden, the trend changed in early 2016.
Now to Slide 9. When we look at an aggregate net interest margin in the group, expressed as net interest income in relation to total assets, we see a significant recovery since Q2 2016. The seasonal pattern that started to occur in 2015 is explained by the shrinking balance sheet at year end, which has a positive impact on the margin as well as few days in the Q1, which adversely affects the margin. Nevertheless, the net interest margin trend has been positive since Q1 2015. When we compare the net interest margin in Q1 2018 to Q1 2017, we see an increasing by 5 basis points.
And that level is the highest for a Q1 since 2013. The positive trend is mainly a result of the continued good volume development in our growth markets, where margins are generally higher as well as lower funding costs. Please turn to Slide 10. The improvement in net interest income in Sweden is largely driven by increasing lending volumes, for example, in the mortgage market. As you can see in this slide, the smaller institutions have taken a larger share of new lending over the past 2 years, and new players have announced their presence in recent months.
There has been a further tightening of competition, but this has been going on for quite a while already. Looking at the market shares of new lending, we can conclude that Handelsbanken's share in recent quarters has been more or less in line with our share of total outstanding volume, around 23%. In the 1st 2 months in 2018, the share of new lending was slightly higher at 24%. We are obviously a leading player in the Swedish mortgage market, and we intend to keep it that way. We have a high degree of efficiency in mortgage administration.
The Swedish mortgage book is over SEK 750,000,000,000 and this is managed in Stadse protect by 80 employees. Then we also have more than 400 branches in Sweden that takes care of mortgage advice and distribution to a cost of more than SEK 500,000,000. In the distribution of mortgages, we have a potential to become more efficient through digitalization and other process related improvements, which will reduce costs over time. Slide number 11. Our development in the Swedish mortgage market shows that our business model is appreciated by our customers.
This is particularly obvious today when the number of alternatives in the market increase, both in the form of new players and new types of mortgage offerings. At the same time, new regulations regarding amortization requirements and debt to income ratios are really complicated and often difficult for customers to understand. This increased the need for advice. It is still clear though that there is a need to improve and streamline mortgage services, the mortgage process and mortgage distribution. This is a development that is ongoing and that involves both an increased level of digitalization other process improvements.
Over time, the mortgage process will most likely become fully digitalized, not only in Handelsbanken, but also for the market as a whole. But a differentiating factor in our case is that we will continue to offer a personal meeting and personal advice. Much of the investments that we are currently making in the mortgage loan process will release significant time and capacity in the branches, time that instead can be devoted to customer meetings and advice as well as reducing cost. This is what we have done in the savings business and what we aim to do also in the mortgage business. Please go to Slide 12.
Our solid development in the Swedish fund market continues. During the Q1, the bank got 54% of net inflows in the market, which should be compared with the 11% market share we have of the total outstanding fund volume. This suggests that there is good potential for continued growth. Since 2010, the bank has taken 23% of total net inflows in the Swedish market and has been the largest player. It should be noted that this has been done in a market that has undergone major changes over the past 20 years.
Many new players have entered and the level of competition has increased. Slide 13. It is not only Sweden that is growing in this area. The asset management business in our other markets has also had a strong development. Since Q1 2017, net inflows in mutual funds outside Sweden were almost SEK 10,000,000,000 which accounts for around onethree of the total increase in the group.
In Hartwood in UK, we have seen a further increase in net inflows, which is a consequence of us reaching out to an increasing number of customers around the UK with our wealth management offering. Net inflows in Q1 increased by 38% compared to Q1 last year. We are working to achieve the same in Netherlands, where we are increasing the level of integration between Optimix and the branch operations. In all markets, fund volumes reached an all time high level in the quarter. Now to Slide 14.
The strong development in the savings area is an outcome of a few improvements over the last years. In particular, the advisory service process has undergone major improvements with the aim to offer a holistic advisory service. Our own funds have also had a strong performance and strong ratings. The focus in the branches on asset management advice has also increased. This is also why the number of advisory meetings has been growing rapidly during the last year.
In the 1st 14 weeks 2018, the number of advisory meetings increased by 4% to 5% compared to last year. Now to Slide 16. 2 years ago, we initiated a change in the Swedish operations and made a provision of SEK 700,000,000 to enable structural changes. Significant changes have been made during this process. Many branches have moved from street level premises to the 2nd floor.
Some have left high street location and changed office space to better support advisory business. A number of branch offices, in particular in the major cities, have been merged and the number of staff has been reduced. This has improved productivity. Going back to 2013, we can see a sharply improved trend in Sweden since 2016. Revenues per employee has increased strongly as well as profit per employee.
At the same time, we have increased our level of investments in the bank. And with this high level, we get more business and revenues per employee today compared to 2 years ago. The investments we make now are expected to generate continued productivity developments throughout the bank. Please go to Slide 17. In the UK, our good development continues.
Business volumes are growing steadily, although we only opened a few new branches in the past years. All branches still have small market shares and therefore have good growth potential. In local currency, net interest income increased by 16% during the year, while fees and commissions increased by 17%. In Hartwood, capital under management increased by GBP 300,000,000 since the Q1 2017, of which GBP 350,000,000 were net inflows. The funds under management now amounts to GBP 3,400,000,000.
The average volume of household deposits has also increased by 32% compared to a year ago. We now run at full speed in the creation of a UK subsidiary. The UK business has been growing significantly over the years and has the potential to become bigger. Creating a subsidiary represents the next step in the evolution of our UK business and means that we are improving local UK capabilities. We are investing in new systems and processes that will streamline the branch's work and enable handling of more customers, improve customer onboarding processes, etcetera.
The current efforts and investments in the UK comes with increased cost, as we have previously communicated, but it improves the foundation for continued growth and value creation. Now to Slide 18. When we look at our youngest home market, Netherlands, we also see a very satisfactory development. Operating profit rose by 35% in local currency compared with the Q1 2017. And business volumes developed strongly.
Lending increased by 21% and deposits by 4% to 1%. Also in the Netherlands, the bank has the most satisfied customers, and the distance to competitors is high among both private and contributes to the sharp increase in net fee and commission income. The return on equity in Netherlands was almost 14%. Now please turn to Slide 19 and the capital requirements. The CET1 ratio was 21.6%, and we estimate the Swedish FCA requirement at the end of the Q1 to 19.5%.
This means that we are just over 2% above the SREP requirement and that we are within our target range of being 1 to 3 percentage points above the S requirements. The decline from 22.7% in Q4 to 21 point 6% in Q1 2018 calls for some explanations. During 2017, the bank has had a risk weight floor on certain property management lending in the UK. In 2017, this was applied in Pillar 2. This floor has now been moved to Pillar 1 and thus increased the risk exposure amount and reduced the capital requirement in Pillar 2.
This reduces the CET1 ratio but has no impact on the amount of required capital. This change explains 0.4 percentage points of the change since Q4 2017. Growing lending volumes reduced the ratio by another 0.4 percentage points, and net pension assets reduced the ratio by 0.3 percentage points. Exchange rates improved the ratio by 0.2 percentage points. What should also be noted is that the level of accumulation of the quarterly profits 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 profits that we generate during the year. 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. Right before Eastern, Swedish FSA published a proposal that risk weight for mortgage loans in Pillar 2 shall be transferred to Pillar 1 starting December 31 this year.
This is intended to create a level playing field as Nordea moves its headquarters to Helsinki. The capital requirement in absolute terms is today SEK 106,000,000,000 and this will not change. What it does mean, however, is that our CET1 ratio, all else equal, would drop to 16.6% based on Q1 numbers from the current 21.6%. As a consequence, the required asset ratios will also drop. So the capital impact is neutral.
So to summarize on Slide 20. When adding another quarter, we see that the stable value creation continues with an average annual growth in equity per share, including dividends of 15%. The Q1 showed a strong business development, and we continue to see good growth opportunities. The project of establishing a UK subsidiary continues according to plan as well as the work with IT Development. Loan losses were very low and asset quality is stable.
The common equity Tier 1 ratio was 21 point 6 percent and the bank is within its target range. With that, I'll conclude my presentation and open up for questions. Thank you.
Thank Our first question is from the line of Jan Wolter of Credit Suisse. Please go ahead. Your line is open.
Yes. Hi, Jan Wolter of Credit Suisse. Just a couple of questions, follow-up from the press conference in Stockholm. So first on the cost side there, could you just tell us what are the major regulatory and IT projects which are still running in the bank apart from the U. K.
Subsidiarization PSD2 and GDPR. So excluding those 3, which you've highlighted previously, will continue to run this year. Just curious about what the major projects are still to be implemented in this year and perhaps next year? So that's the first question. And then a detail there whether or not the cost for the subsidiarization of the U.
K. Is that now in fully in the P and L in Q1. So the delta there of around €80,000,000 it means that the incremental cost in the coming quarters will be 0. We will stay at this level. So those are my 2 first questions.
Thank you.
Hi, Jan. Thank you. So first of all, you mentioned the major projects, PSD2 and GDPR. That's, of course, important to us and we'll see that also this year and to some extent also next year. And then we have projects ongoing to improve data quality, and that's something that I guess that most banks are involved in doing.
So that's related to ECB S239. Then we also have some remaining parts that are related to MiFID II that is being reduced, sharply reduced and will be finished this year. That is at least what we anticipate now. And then we have a project where we are changing our security system, and that is something we have been running for many years. And that still goes on, but that will continue this year at a lower pace, though.
And I think those are the major ones and a part, of course, of the Brexit related things. What we have also mentioned in regard of UK is that previously is that we are building a loan ledger, and we also are improving the customer onboarding services we have and support for that. So that's also important development that will have both a business impact because it will improve operating efficiency. It's really time consuming to onboard customers in the UK, I'd say. And it's also good from a regulatory point of view, of course.
But those are the major ones that comes to mind. And then regarding Brexit cost, yes, so the EUR 300,000,000 we communicated as an estimate estimated cost for 2018 in Q4. That is the pace we are running at now. So and we don't expect that to change. So you can expect a quite even development regarding that cost going forward during 2018.
And then next year, that is expected to slightly go down slightly. But then in addition, we do other things in the UK as well. So for instance, the customer onboarding project that I just mentioned. So the Brexit cost we have communicated is the cost that we that are tied to the preparations for creating a subsidiary.
Okay. Many thanks for those clarifications. And then just another question, if I may, different subject. The in the quarter, we did have in the U. S.
Market a widening of the LIBOR spread, LIBOR OES spread and some changes there perhaps in the short term funding market, the CPCD market. Did you see any impact in the P and L on the NII from either extra cost or extra gain from this volatility? And number 2, related to that, have you changed your behavior in any way in terms of how you issue CPs and CDs in the U. S. Market, I.
E, you're going shorter or longer, so focusing more on Yankee CDs or moving out of the U. S. Market and issuing short term debt in other currencies? Thank you.
So the impact, we have had some impact, but we estimate that the impact is approximately EUR 10,000,000 and that is what shows up in the treasury line in the net interest income. So it's not the major impact, but we have had some impact. And I when it comes to the funding strategy, we have not changed that. We have seen margins being changed to some extent, but I mean, we have very low risks in that portfolio, and we haven't changed behavior and strategy in that respect.
Okay. Many thanks for that.
Our next question is from the line of Kim Berger with Deutsche Bank. Please go ahead.
Hi, it's Kim Berger. Just I think most of it most of my questions have been answered. But just one question about you previously you've been linking sort of the more the strength of the bank to being to having high customer satisfaction, both absolute and relative to your peers. Can you tell us a little bit about where that's moving? Or if there is any indications of that moving?
Or is that still the case? Are you keeping that level? Thanks.
Thank you, Kim. Yes, definitely. I mean, that's really our key focus. And I think it's good that you did bring this up because I think when we look at the value creation that we are able to make and what we see going forward and the strategy we have, it is really to I mean, we stick to be to run branch offices and to see that as the focal point of the bank. We are digitalizing, and we have a good digital offering, and we continue to develop that, obviously.
But we will keep our branch offices. And that is because we think that customer satisfaction, being close to customers and building relationship will become even more important in the future when as many banks become more purely digitalized. And so the customer meeting, in many cases, will be really important. And so we expect that this could very well be a differentiating factor in our case in the future. So the ambition we have and some of the changes we have been making recently in the Swedish branch operations is certainly moving in that direction where we, in some cases, have left the street level and moved to 2nd floor and so on.
So we want to transform the business in the direction of a more complete advisory service where we take account of the full economic picture of our customers, both corporate customers and private individuals. And what is the different trading factory in our case is that we will if you're a Handelsbanker customer, you should be able to go to your branch when you want to, when you feel a need to. And then you will meet a person in Flesh and Blood, and that will be fully responsible for all the business you have with the bank. So satisfied customers and keeping costs low and being efficient is really still core of our business model, and that will not change. Okay.
Thank you very much.
So just maybe a follow-up to that. Do you see that so do you see a risk to I guess it's really the differential between you and the peers in terms of satisfaction. Do you see a risk of that differential reducing as more and more of the interaction with the customers goes online, goes mobile and less is physical? Or do you expect that you can keep the differential to your peers? Can you keep that?
Will you be able to keep that in a more digital banking world?
No. On the contrary, actually, because so first of all, the most satisfied customers we have is the ones that use both. And I think it's really key to us to keep the closeness that we do to customers when we offer both. So I don't see that contradiction. It's something that is working in our favor.
And I think when we look at the way we are giving advice now and the direction we are moving, And I think one interesting example is what happens now in the Swedish mortgage market when we see new players entering the market. And because when they do, they in some cases at least, they offer a slightly different mortgage product that differs from the normal standard mortgage products we have in Sweden and that have been offered historically by banks. And then newly introduced amortization requirement, and we need to calculate debt to income ratios, which we haven't done before and our customers haven't done it before. And that's really, really complicated. So that will increase the need for advice, and we see that in our branch operations.
So we certainly think that this moves in our favor and that we even in the more digitalized world, through offering this will benefit when in terms of customer satisfaction. Okay. That's very clear. Thank you.
We're now over to the line of Jeff Dorsey at Societe Generale. Please go ahead. Your line is open.
Hi, good morning, everyone. It's Jeff Dorsey from SocGen. Just a couple of questions on the U. K. Operations.
We're expecting about the operational costs, but obviously a few things are changing as well, both subsidiarization for yourselves but also change in the government funding schemes, changes in the base rate and so on. Can you talk about your funding cost going forward with all that taken into account? Is it going to go up? Is it going to reduce the competitiveness of the bank? And how are you going to manage that situation?
So that's the first question. And then a follow on from that. Do you see any similar processes required outside of Sweden and outside of the UK, so setting up subsidiaries and any of the other operations? Thank you very
much. Thank you, Jeff. So regarding operating cost in the UK and what we can see going forward, obviously, that is impacted by the Brexit preparations and the improve that business and to prepare. So and that is something you have seen coming through the P and L now, and that will continue during this year as we have communicated before. And this year, in general, when it comes to development needs in the bank in total but also in the UK, will be a peak year, I would say, especially when it comes to preparations for creating a subsidiary.
Regarding funding costs, we don't expect that to be impacted actually by us forming a subsidiary. So first of all, there is the funding strategy we have to have a really strong and really centralized funding operation, that will continue. So the responsibility for long term funding and so on will still be by the head office and coordinator here. So and then short term funding is, to some extent, is being done in the UK already apart from the deposit stable deposits in the UK then. And that won't change.
So we'll continue the same, but we will then start issuing short term in the sub. But we don't expect that to have any impact on funding costs. And then the final question about subsidiarization in other countries. No, we have no plans at this point to make any changes. I mean running the operations through branches is something that is efficient, and it has been working well also in the UK.
Now Brexit means that we it meant and sort of decided the point when we needed to make a change in the UK. But I there are 2 things that makes UK different compared to our other home markets outside Sweden. And the first one is that we would have been forced to do this at some point anyway because of the rules in the UK about ring some spanking, so for retail activities. So at some point, we would have come to that point anyway. But more importantly and the way we see our business in the UK long term is that, I mean, it is a business that has been growing at a very steady and a fairly high pace for a long time.
So we see so we have become quite big actually. And we have no reason to think that the development will change in a significant way. So we have the potential to become bigger in the UK. And then it means something to have more capacity locally to deal with things. It also comes with a cost, obviously, because we do have to put more emphasis on local governance and so on.
So many regulatory things that comes to play when it comes to forming a subsidiary. But it will also be beneficial to have greater capacity locally in the UK. And that's why we have taken the step there. But it's no plans to make any changes in other home markets.
Okay. That's all really clear and helpful. Thank you.
Worries, I just mentioned I forgot to mention the funding for lending scheme and which is ending in the UK and the impact we could expect that, that might have on margins and so on. And I can say that at this point, we haven't seen any impacts from that. If you look at the margin development in the UK, it's a positive slightly positive trend when it comes to corporate lending, but still slightly negative trend when it comes to retail lending.
Great. Thank you.
Okay. Our next question is over to the line of Willes Pomerra at Goldman Sachs. Please go ahead. Your line is open.
Hi, good morning. Thanks for the presentation. I have two questions. The first one is on the volume growth in the quarter, especially on the mortgage side in Sweden. Should we expect the same pace over the coming months and year?
Or have you seen any change in momentum between the different months in the quarter perhaps related to the new regulation introduced in March?
Okay. Hi, So about volume growth in the mortgage market, we saw actually if you look at the numbers, and I'm sure you've seen it, that we had an increase that was slightly higher than we normally have each quarter this quarter. And so I would say that the development we have seen during this quarter has been slightly higher than we often see. And that also happened when the amortization requirement was introduced in 2016. So what happens is that sometimes people try to get that loan before the new system enters into force.
And so I think that is part of the development. I think what we can conclude is that it has been a stable development. And then in addition, some additional volumes coming in. So and I think that's what you should have in mind when you move forward.
Thank you. And outside of the mortgage market in Sweden, have you seen any stronger activity among SMEs outside of the property management sector?
I think we can see and this is more anecdotally on what we see in terms of business inflow. It is looking good, I think. So the business momentum is good. And what we hear anecdotally and also see is that we get more and more business. So times are good in that respect.
So it's not a dramatic change, but positive sign still. So it's like it has been during the last quarters or 2, I would say. Okay.
And second question, just to come back on your comment about competition in the Swedish mortgage market. How do you see the branch managers reacting to the other players reducing their prices? How are they what are they doing in order to maintain the market share?
So what we see is that, first of all, we have seen that the Swedish mortgage margin has been stable during the quarters. So very small change in that end. And we also see when we look the published margins average margins that each bank publish and have to publish, we see that we are still we have on 3 month rates, we have the highest margin. So and that is still the case. So quite small changes.
And also, if you look at the market share we have been getting, that also tells you that we are getting our market share, and they are able to do business and to defend customers. So it has been generally stable. I also think that when you have a customer relationship, it's and we do not neglect that kind of competition, definitely not. But we are competitive, and we can offer terms that are good, and especially to the customers that also have offerings from other new players that are mainly targeting more wealthy customers and so on. Then we are competitive and we can we also want to defend our customer relationships.
Thank you very much.
Our next question is from the line of I'm sorry, please
go ahead. Yes. I just want to add one thing there, I think. So because I think the development that we see in the Swedish mortgage market is interesting. And I and some players are alluding or using other funding sources.
But I think what you should keep in mind when you look at this is that we have a really strong foundation for meeting that kind of competition because the Swedish Fund Covered Bond System is a really efficient funding system. And we also have efficient operations in administering the mortgage loans we have. What some of these players have in their favor is that they are not facing the same kind of regulations, obviously, and that's fair. But I think the total sum so far has been good for us.
Thank you.
Okay. We're now over to Jacob Kruse at Autonomous. Please go ahead.
Just two questions, I guess. First,
you may have commented on it earlier, but the discussion in the press today about the Swedish FCA sorry, the UK FCA and putting parts of the banks virtually, as they call it, under administration. Could you just give me an update on what is really there? What is the current state of that? And then secondly, on the cost side, your as I understand it, your IT cost was what mostly drove the increase in cost in this quarter, especially on a clean basis ex that pension issue. If I did I understand you correctly that you say you expect these development costs to peak in 2018?
Or did you just mean that development costs, including the Brexit expenses, peak? And so how should I think about that for 2019? Yes, I guess those were my 2 questions. Thank you.
Okay. Thank you, Jakob. So first of all, about the FCA investigation. And I want to firmly deny that we are under any kind of administration, just to underscore that and get that right. So that is completely wrong.
And then I think so FCA approached us and made an investigation in mid-twenty 17. And they found some weaknesses in our financial crime prevention routines. And we have taken significant action to correct those efficiencies and to improve our handling of that. We take this very seriously, and we also spend a lot of resources in this area. And I also when it comes to cost development and I and then slightly moving away from the FCA issue, but a more general comment on cost development and regulations and so on.
So when it comes to the development capacity we have developed now, we as we communicated in Q4, and we have increased our capacity in that end. And then in addition, we have Brexit. That's the way we communicated it in Q4. And that is also what you have seen now materializing in our cost numbers. And we have now reached the level of development capacity that we think we need going forward.
And I and when you look at what we use that development capacity to do is to, of course, to improve the offering to customers and to improve operating efficiency. It is also to make the preparations for subsidiarization in the UK. But it is also the very significant degree a question of continuing to adapt to regulations. And when it comes to regulations, that is something that it doesn't only create costs in terms of development and IT development. It also means that further development and buildup of control functions and all different control functions.
That's both internal audit, it's risk control, it's compliance and so on. And also routines in across the bank. And this is something that is we have in common with all banks. But what this has meant in our case is also that we have increased our resources in the control functions, and that goes across the bank actually. So that is also one part of the cost development we've seen and the increased number of employees in more in support units in the bank.
And when it comes to the level of capacity we have built now, both when it comes to development and also the control functions. I would say when it comes to control we have reached the level where we want to be when it comes to development. And when it comes to control functions, we are nearly there. So not so much more to expect in that end for everything we can know at this point. And I think and then when we look at about Brexit and what we can expect going forward, We expect to stay at this level when it comes to capacity and also when it comes to Brexit costs as we have seen in Q1, also the other quarters during 2018.
And then when you will look at the expectations for 2019 when it comes to development needs and that are tied to regulations, we see that for everything we know now that this is the peak year when it comes to regulatory related development. That will go down next year. We will have to develop a lot related to regulations next year as well, but not at the level we are today. So that gives us some room next year. When it comes to Brexit cost next year, that is also supposed to be slightly reduced and even more so in 2020.
Okay. And just in terms of does that mean the declining cost on development cost, is that from a group cost point of view, does that mean you can stay more in line with your peers keeping costs flat? Or is that too much like guidance or budget?
I think we don't give that kind of guidance, as you know. But I think the way you can think about that is that, I mean, if we have less slightly less pressure to carry out regulatory related development, then we can choose. And then we can then we can choose. And then we can choose to use that for business development, and we can also choose to use that partly because to reduce cost. But what also comes into the cost calculation is that we are doing things now efficient, to increase operating efficiency.
So we are taking steps to improve efficiency in our mortgage process, in Sweden in particular. And that is a very time consuming exercise in our branch offices, so in Sweden. So that's an important point. And we are using our efficient. So that is also something that takes time for that to feed through, but that's also part of the expectations for the future.
Yes. Thank you.
We're now over to Barclays and Paulina Sokolova. Please go ahead. Your line is now open.
Hi. Most of my questions have been answered actually, but maybe just one small question on net gains and losses this quarter. So they've hit a low if I look at the last 2 years. Could you maybe give us some more color on what's behind this and if you would expect this revenue line to move back up in the coming quarters? Thank you.
Hi, Paulina. I think well, this is an item where which is always quite small in our case compared to our peers. And that's because we have such a conservative view on market risks and related risks. So and this and that also means that when we have some negative changes or positive ones, they become really obvious. And this time, we had some impact related to derivatives that we use to manage our risks when it comes to our funding.
And that's where we do not apply hedge accounting. So it's that's the answer. And it is actually as simple as that. And I and that's sort of a onetime effect or impact. So that's the way it is.
And I think no reason to expect us to move away from the average we've had in the past.
Okay. Thank you. Very clear.
We're now over to Nick Davey at Redburn. Please go ahead. Your line is now open.
Yes. Good morning, everyone. Two questions, please. The first one on capital. I work from Slide 30.
It looks like in the quarter, retained profits were worth about 10 basis points to capital lending growth, took about 40 bps off. So you're running it around a 30 bps negative organic capital generation. If it carries on for the rest of the year, it will be slightly tight by the end of the year relative to your range. So could you just address that? And with your centralized business model, what can you do to prevent that being your capital trajectory?
And then on the second question, please, just coming back to this discussion around cost.
Difficult from
the outside in, but rough estimate would be that you spend about 15% or 16% of your total costs on IT, both in maintenance and development and personnel, which just looks slightly at the low end of the range relative to European peers. So could you just talk to that? I don't know if you recognize that 15%, 16% number. I understand you're more branch led than some peers, but it does seem quite a big gap relative to some of your Swedish competitors. So do you think that is a sort of steady run rate?
Or over time, that might need to drift up? Thanks.
Thank you, Nick. So first of all, the capital generation capacity. And so in Q1, we fortunately, I'd say that we had strong lending growth. So it looks really positive. And then you have the question of capitalism generation and to what extent that can balance the growth rate.
And yes, of course, that could be the case. If we continue to grow at a very high pace and we don't have capital generation during the year to meet that, it could mean something. But we are within our target range, so we are not at that point. In addition, we also have and that was announced yesterday that we have or intend to sell our share in what is called the UC, what's the Credit Information Bureau. Yes, Credit Information Bureau that we co owns with the other banks.
And that will have a positive slightly positive impact on Core Equity Tier 1 when that happens. I expect it to happen in Q1. What we could also do, of course, is to the Board could always announce a payout ratio strategy, and that would also change things. And I think what is the most important part of this is the capital generation we have. And we have to follow the rules.
So if the board has not made any formal formally decided payout ratio strategy, then we have to apply the rules. And those are the ones we are applying now. But we are within the target range, and we have the capacity to deal with the situation. And then when it comes to the cost ratio and the spending we make on IT, And I can't really answer about the levels because I then I would need to see the comparison. And so I can't reply to those numbers exactly.
But what I can tell is that we are as you have seen, we are spending more on development, and that is, of course, beneficial and necessary to improve our IT infrastructures. And that is something we do step by step all the time. And then in addition, when we need to, we take bigger steps. And some of those steps are the steps we have been communicating about. So for instance, loan ledger in the UK is one of them.
And also the security system we have been investing in for a number of years in our Capital Markets division is another example of Solana. So we do what we have to. And I would say that we have the same needs as other banks when it comes to having a keeping a good infrastructure. So just the fact that we have branch offices and so on doesn't really change that picture. That is something that helps us to create value and to build strong relationships, but we still need to and make sure that we have a good infrastructure.
Okay. Thank you.
We now go to Vivek Gautam at JPMorgan. Please go ahead. Your line is open.
Hello. Hi. Two questions from me, please. Firstly, very small ones. Firstly, you mentioned earlier on the call about your 3 month rates being higher than the rest of the market.
In March, it was 1.62%. Can you tell us what is the average rate for the low LTV customers? Anything like below 50% LTV or below 60% LTV? That's the first one. And the second one is, what percentage of your lending is mortgage lending is getting impacted by the new amortization requirements in March?
And if you do some backward looking data crunching, what was it in January February when the amortization requirements were not in place? Thank you.
Hi. Yes, okay. So about the low LTV and the margins we charge, that is not something we have disclosed. So I can't really answer that, I'm afraid. And when it comes to the number of customers or part of the customers that do are impacted by the new amortization requirements, I will pass the question on to Lars Hoglund, if he knows.
So hi. I mean the number that the Swedish FSA talked about earlier was around 14% of 1 4 percent of the borrowers that were affected. And our share is roughly in the same ballpark.
That 14% was for 20 16 as I believe. Is there any updated number that you can provide us? Or is that the right ballpark number?
No, but it's I mean, this doesn't change dramatically between quarters. So you can assume it's in that ballpark.
Got it. Got it. Thank you.
Okay. That was the final question we have time for today. May I please pass it back to you for any closing comments?
No, thank you everybody. Bye bye.