Good morning everyone, welcome to this conference call for the first quarter 2018. Joining me today, I have Lars Höglund, Head of Investor Relations, and Annika Engler, Head of Group Accounting. The slides used for my presentation are as usual available at handelsbanken.com. I will start off by making some comments to an article in the Swedish paper, Dagens Industri today. Dagens Industri 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, that work is continuing.
We take this matter very seriously, we have ongoing dialogue with FCA, 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. The 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 number two. During the first quarter, 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 could continue to see good growth in our business operations across the bank.
This momentum we used to invest in creating an improved offering to our customers, increased operating efficiency in preparing for the next step in the U.K. and further adopting to regulatory requirements. Now please turn to slide five and the income statement for the first quarter compared with the fourth quarter of 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 a dividend from Visa Sweden of 576 million SEK, 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 U.K. 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, 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 U.K. and to continue adapting to new regulations.
These various investments are reflected in our cost level this year. Loan losses amounted to SEK 153 million, corresponding to a loan loss level of 0.03% 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 non-recurring items related to the Visa dividend in the previous quarter and revised pension plan in the U.K., the increase was 14%. Adjusted also for the increased resolution fund fee and the increased Oktogonen allocation, the increase was 20% between the quarters. Moving to slide 24 and net interest income developments. During the quarter, net interest income decreased by SEK 129 million or 2%. The main drivers were the fee to the Swedish resolution fund that increased this year to 12.5 basis points from nine basis points in 2017.
This led to an increase in government fees of SEK 191 million. Increased lending and deposit volumes in our home markets, which together added SEK 77 million. Increased margins that added SEK 49 million, mainly driven by higher deposit margins in the U.K. Currency effects which added SEK 46 million. Two days less in the quarter reduced net interest income by SEK 69 million. Finally, other impacts amounted to minus SEK 47 million, including a negative benchmark effect of SEK 28 million. 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 seven.
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 million. We have seen a very positive trend the last two years. Compared to Q1 2016, the reported net interest income has increased by SEK 853 million, or 13%. Adjusted for government fees, the increase was SEK 1.2 billion, 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, home 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. To slide nine. 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-ends, which has a positive impact on the margin, as well as few days in the first quarter, 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 five basis points, and that the level is the highest for a first quarter 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. 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 two years, and new players have announced their presence in recent months. This 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 first two 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 billion, and this is managed by 80 employees. 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 million. 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 the mortgage distribution. This is a development that is ongoing and that involves both an increased level of digitalization and 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.
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 first quarter, 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 billion, which accounts for around a third of the total increase in the group. In Heartwood in the U.K., 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 U.K. 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 reach 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 first 14 weeks 2018, the number of advisory meetings increased by 45% compared to last year.
Now to Slide 16. Two years ago, we initiated a change in the Swedish operations and made a provision of SEK 700 million to enable structural changes. Significant changes have been made during this process. Many branches have moved from street-level premises to the second 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 higher level, we get more business and revenues per employee today compared to two years ago.
The investments we make now are expected to generate continued productivity developments throughout the bank. Please go to Slide 17. In the U.K., 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 Heartwood, capital under management increased by GBP 300 million since the first quarter 2017, of which GBP 350 million were net inflows. The funds under management now amount to GBP 3.4 billion. 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 U.K. subsidiary.
The U.K. 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 U.K. business and means that we are improving local U.K. 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, et cetera. The current efforts and investments in the U.K. comes with increased cost. As we have previously communicated, it improves the foundation for continued growth and value creation. Now to slide 18. When we look at our largest home market, Netherlands, we also see a very satisfactory development. Operating profit rose by 35% in local currency compared with the first quarter 2017, and business volumes developed strongly. Lending increased by 21% and deposits by 41%.
Also in the Netherlands, the bank has the most satisfied customers, and the distance to competitors is high among both private and corporate customers. Optimix, our asset management arm, which we acquired in 2016, greatly 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 FSA requirement at the end of the first quarter 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 one to three percentage points above the SREP requirement. The decline from 22.7% in Q4 to 21.6% in Q1 2018 calls for some explanations. During 2017, the bank has had a risk weight floor on certain property management lending in the U.K.
In 2017, this was applied in Pillar II. This floor has now been moved to Pillar I and thus increase the risk exposure amount and reduce the capital requirement in Pillar II. 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 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 three 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 Easter, the Swedish FSA published a proposal that risk weight floor for mortgage loans in Pillar II shall be transferred to Pillar I starting December 31st 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 billion, 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 SREP ratios will also drop. The capital impact is neutral. 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 first quarter showed a strong business development, and we continue to see good growth opportunities. The project of establishing a U.K. 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 21.6%, and the bank is within its target range. With that, I'll conclude my presentation and open up for questions. Thank you.
Thank you. Ladies and gentlemen, if you wish to ask a question, please can you press zero and then one on your phone keypad now in order to enter the queue, then after I announce you, just ask that question. If you find the question has been answered before it's your turn to speak, just press zero and then two to cancel. There'll be a brief pause while the questions are being registered. Our first question is from the line of Jan Wolter at Credit Suisse. Please go ahead. Your line is open.
Yes. Hi, Jan Walter, Credit Suisse. Just a couple of questions, follow up from the press conference in Stockholm. 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? Excluding those three, 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. That's the first question. Then a detail there, whether or not the cost for the subsidiarization of the U.K., is that now in full in the P&L in Q1? The delta there of around SEK 80 million, it means that the incremental cost in the coming quarters will be zero. We will stay at this level.
Those are my two first questions. Thank you.
Hi, and thank you. First of all, you mentioned the major projects, PSD2 and GDPR. That's of course important to us, and will be that also this year and to some extent also next year. We have projects ongoing to improve data quality, and that's something that I guess that most banks are involved in doing. That's related to BCBS 239. We also have some remaining parts that are related to MiFID II that is being sharply reduced and will be finished this year. That is at least what we anticipate now. We have a project where we are changing a securities 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.
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 U.K. previously is that we are building a loan ledger, and we also are improving the customer onboarding services we have and support for that. 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 U.K. today, and it's also good from a regulatory point of view, of course. Those are the major ones that comes to mind. Regarding Brexit cost. The SEK 300 million we communicated as an estimated cost for 2018 in Q4, that is the pace we are running at now. We don't expect that to change. You can expect a quite even development regarding that cost going forward during 2018.
Next year, that is expected to go down slightly. In addition, we do other things in the U.K. as well. For instance, the customer onboarding project that I just mentioned. The Brexit cost we have communicated is the cost that are tied to the preparations for creating a subsidiary.
Okay. Many thanks for those clarifications. Just another question, if I may, different subject. In the quarter we did have in the U.S. market a widening of the LIBOR-OIS spread and some changes there perhaps in the short-term funding market, the CP/CD market. Did you see any impact in the P&L on the NII from either extra cost or extra gain from this volatility? 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.
The impact, we have had some impact, but we estimate that the impact is approximately SEK 10 million, and that is what shows up in the net interest income. It's not a major impact, but we have had some impact. When it comes to the funding strategy, we have not changed that. We have seen margins being changed to some extent, but 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 to the line of Kim Bergoe at Deutsche Bank. Please go ahead.
Hi, it's Kim Bergo. I think most of my questions have been answered, but just one question about you previously, you've been linking the strength of the bank 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. That's really our key focus. I think it's good that you did bring this up because when we look at the value creation that we are able to make and what we see going forward and the strategy we have, we stick 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. 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 as many banks become more purely digitalized. The customer meeting, in many cases, will be really important. We expect that this could very well be a differentiating factor in our case in the future.
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 second floor and so on. 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. What is the differentiating factor in our case is that if you're a Handelsbanken customer, you should be able to go to a 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.
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. Just maybe a follow-up to that. 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. First of all, the most satisfied customers we have is the ones that use both. I think it's really key to us to keep the closeness that we do to customers when we offer both. I don't see that contradiction. It's something that is working in our favor. I think when we look at the way we are giving advice now and the direction we are moving, I think one interesting example is what happens now in the Swedish mortgage market when we see new players entering the market. Because when they do, 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.
In addition, we also have the 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. That's really, really complicated. That will increase the need for advice, and we see that in our branch operations. We certainly think that this moves in our favor, and that we, even in a more digitalized world, through offering this will benefit in terms of customer satisfaction.
Okay. That's very clear. Thank you.
We're now over to the line of Geoff Dawes at Societe Generale . Please go ahead. Your line is open.
Yeah. Hi, good morning, everyone. It's Geoff Dawes here from Societe Generale. Just a couple of questions on the U.K. operations. We've spoken about the operational costs, but obviously a few things are changing as well, both subsidiarization for yourselves, but also a change in the government lend 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? How are you going to manage that situation? That's the first question. A follow-on from that, do you see any similar processes required outside of Sweden and outside of the U.K., so setting up subsidiaries in any of the other operations? Thank you very much.
Thank you, Geoff. Regarding operating cost in the U.K. and what we can see going forward, obviously that is impacted by the Brexit preparations and the subsidiarization and also some other costs we do take in order to improve that business and to prepare. That is something you have seen coming through the P&L now, and that will continue during this year as we have communicated before. This year in general, when it comes to development needs in the bank in total but also in the U.K. 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. First of all, the funding strategy we have to run a really centralized funding operation, that will continue.
The responsibility for long-term funding and so on will still be by the head office and coordinated here. Short-term funding to some extent is being done in the U.K. already apart from the stable deposits in the U.K. then, and that won't change. We will continue the same, but we will then start issuing short-term in the sub. We don't expect that to have any impact on funding costs. The final question about subsidiarization in other countries. No, we have no plans at this point to make any changes. Running the operations through branches is something that is efficient, and it has been working well also in the U.K. Now, Brexit means that It meant and sort of decided the point when we needed to make a change in the U.K.
There are two things that makes U.K. different compared to our other home markets outside Sweden. The first one is that we would have been forced to do this at some point anyway because of the rules in the U.K. about ring-fenced banking, so for retail activities. At some point we would have come to that point anyway. More importantly, and the way we see our business in the U.K. long term is that it is a business that has been growing at a very steady and a fairly high pace for a long time. We have become quite big actually, and we have no reason to think that the development will change in a significant way. We have the potential to become bigger in the U.K. 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. There are many regulatory things that comes to play when it comes to forming a subsidiary. It will also be beneficial to have greater capacity locally in the U.K., and that's why we have taken the step there. No plans to make any changes in other home markets.
Okay. That's all really clear and helpful. Thank you.
Sorry, I forgot to mention the Funding for Lending Scheme-
Yeah
which is ending in the U.K. and the impact we could expect that that might have on margins and so on. I can say that at this point, we haven't seen any impact from that. If you look at the margin development in the U.K., it's a slightly positive trend when it comes to corporate lending, but still a slightly negative trend when it comes to retail lending.
Great. Thank you.
Okay. Our next question is over to the line of Willis Pomeroy 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, Willis.
Hi.
About volume growth in the mortgage market. We saw actually, if you look at the numbers, and I'm sure we've seen it, that we had an increase that was slightly higher than we normally have each quarter this quarter. I would say that the development we have seen during this quarter has been slightly higher than we often see. That also happened when the amortization requirement was introduced in 2016. What happens is that sometimes people try to get that loan before the new system enters into force. I think that is part of the development. I think what we conclude is that has been a stable development, and then in addition, some additional volumes coming in. I think that's what you should have in mind when you move forward.
Thank you. Outside of the mortgage market in Sweden, have you seen any stronger activity among the SME outside of the property management sector?
I think we can say, this is more anecdotally and what we see in terms of business inflow. It is looking good, I think. The business momentum is good and what we hear anecdotally and also see is that we get more and more business. Times are good in that respect. It's not a dramatic change, but positive signs still. It's like it has been during the last quarter or two, I would say.
Okay, thank you. 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? What are they doing in order to maintain the market share?
What we see is that first of all, we are seeing that the Swedish mortgage margin has been stable during the quarters. Very small change in that end. We also see when we look at the published margins, average margins that each bank publish and have to publish, we see that we have on three-month rates, we have the highest margin. That is still the case. Quite small changes. 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. It has been generally stable. I also think that when you have a customer relationship, you want to defend that, and we are competitive.
Even though we have new players and we do not neglect that kind of competition, definitely not. 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 also want to defend our customer relationships.
Thank you very much.
Our next question.
Sorry.
I'm sorry. Please go ahead.
I just want to add one thing there. I think the development that we see in the Swedish mortgage market is interesting, and some players are alluding or using other funding sources. 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 covered bond system is a really efficient funding system. 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. 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. Your line is open.
Hi. Thank you. Just two questions, I guess. First, you may have commented on it earlier, but the discussion in the press today about the Swedish Financial Supervisory Authority, sorry, the U.K. FCA, and putting parts of the banks virtually, as they call it, under administration. Could you just give me an update on what is real there and what is the current state of that? Secondly, on the cost side, 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. 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? How should I think about that for 2019? Yeah, I guess those were my two questions. Thank you.
Okay. Thank you, Jacob. First of all, about the FCA investigation, I want to firmly deny that we are under any kind of administration. Just to underscore that and get that right. That is completely wrong.
Okay.
FCA approached us and made an investigation in mid-2017. They found some weaknesses in our financial crime prevention routines. We have taken significant action to correct those deficiencies and to improve our handling of that. We take this very seriously, and we also spend a lot of resources in this area. Also when it comes to cost development, then slightly moving away from the FCA issue, but a more general comment on cost development and regulations and so on. When it comes to the development capacity we have developed now, as we communicated in Q4, we have increased our capacity in that end. In addition, we have Brexit. That's why we communicated it in Q4, and that is also what you have seen now materializing in our cost numbers.
We have now reached the level of development capacity that we think we need going forward. When you look at what we use that development capacity to do is, of course, to improve the offering to customers and to improve operating efficiency. It is also to make the preparations for subsidiarization in the U.K. It is also to a very significant degree, a question of continuing to adapt to regulations. 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. Also routines across the bank. This is something that we have in common with all banks.
What this has meant in our case is also that we have increased our resources in the control functions. That goes across the bank, actually. That is also one part of the cost development we've seen and the increased number of employees in support units in the bank. 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. When it comes to control functions, we are nearly there. Not so much more to expect in that end. For everything we can know at this point. 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. When we 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 a peak year when it comes to the 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. 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. Just in terms of, does that mean the declining cost on development cost, from a group cost point of view, does that mean you can stay more in line with peers keeping costs flat, or is that too much like a guidance or budget?
I think we don't give that kind of guidance, as you know. I think the way you can think about that is that, if we have slightly less pressure to carry out regulatory-related development, then we can choose. Then we can choose to use that for business development, and we can also choose to use that partly to reduce cost. What also comes into the cost calculation is that we are doing things now to become more efficient, to increase operating efficiency. We are taking steps to improve efficiency in our mortgage process in Sweden in particular. That is a very time-consuming exercise in our branch offices in Sweden. That's an important point. We are using our robot techniques and so on to improve efficiency. We are taking many measures also to reduce cost, becoming more efficient.
That is also something that takes time for that to feed through, but that's also part of the expectations for the future.
Yeah. 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. They've hit a low, if I look at the last two 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 this is an item which is always quite small in our case, compared to our peers, because we have such a conservative view on market risks and related risks. That also means that when we have some negative changes or positive ones, they become really obvious. This time we had some impact related to derivatives that we use to manage our risks when it comes to our funding, where we do not apply hedge accounting. That's the answer, and it is actually as simple as that. That's a one-time effect or impact. 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's now open.
Good morning, everyone. Two questions, please. The first one on capital. If 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 basis points off. You're running at around a 30 basis points negative organic capital generation. If it carries on for the rest of the year, it'll obviously leave you slightly tight by the end of the year relative to your range. Could you just address that and with your centralized business model, what can you do to prevent that being your capital trajectory? Then on the second question, please, just coming back to this discussion around cost.
Difficult from the outside in, a 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. 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. Do you think that is a steady run rate or over time that might need to drift up? Thanks.
Thank you, Nick. First of all, the capital generation capacity. In Q1, we fortunately, I'd say that we had strong lending growth. It looks really positive. Then you have the question of capital generation and to what extent that can balance the growth rate. 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. We are within our target range, so we are not at that point. In addition, we also have, that was announced yesterday, that we have or intend to sell our share in what is called the UC, what's the-
Credit information.
Credit Information Bureau that we co-own with other banks, that will have a slightly positive impact on core equity tier 1 when that happens. Expecting it to happen in Q1. What it could also do, of course, is the board could always announce a payout ratio strategy, and that would also change things. I think what is the most important part of this is the capital generation we have. We have to follow the rules. If the board has not made any formally decided payout ratio strategy, we have to apply the rules, and those are the ones we are applying now. We are within the target range, and we have the capacity to deal with the situation.
When it comes to the cost ratio and the spending we make on IT, I can't really answer about the levels because then I would need to see the comparison, I can't reply to those numbers exactly. What I can tell is that as you have seen, we are spending more on development. That is, of course, beneficial and necessary to improve our IT infrastructures. That is something we do step by step all the time. In addition, when we need to, we take bigger steps. Some of those steps are the steps we have been communicating about. For instance, loan ledger in the U.K. is one of them, also the security system we have been investing in for a number of years in our capital markets division is another example as well.
We do what we have to. I would say that we have the same needs as other banks when it comes to keeping a good infrastructure. 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 JP Morgan. Please go ahead. Your line is open.
Hello. Hi. Two questions from me, please. Very small ones. Firstly, you mentioned earlier on the call about your three-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 below 50% LTV or below 60% LTV? That's the first one. The second one is, what percentage of your mortgage lending is getting impacted by the new amortization requirements in March? If you do some backward-looking data crunching, what was it in January and February when the amortization requirements were not in place? Thank you.
Hi. Yeah. Okay. About the low LTV and the margins we charge, that is not something we have disclosed. I can't really answer that, I'm afraid. When it comes to the number of customers or part of the customers that are impacted by the new amortization requirements, I will pass the question on to Lars Höglund, see if he knows.
Hi. The number that the Swedish FSA talked about earlier was around 14% of the borrowers that were affected. Our share is roughly the same ballpark.
That 14% was for 2016 as I believe. Is there any updated number that you can provide us, or is that the right ballpark number?
No, this doesn't change dramatically between quarters.
Yeah. Okay. Got it.
You can assume it's in that ballpark.
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