Ladies and gentlemen, welcome to Handelsbanken Third Quarter Report for 2017. For the first part of this call, all participants will be in a listen only mode. And afterwards, there will be a question and answer session. I am now pleased to present Rolf Marcotte. Please begin your meeting.
Good morning, everyone, and welcome to this conference call for the Q3 2017. Joining me today, I have Peter Grabe and Lars Kennett Dahlqvist from Investor Relations and Annika Enger, Head of Group Accounting. The slides used for my presentation are, as usual, available at hammersbanken.com. Let's start with Slide 2. You've all seen this picture many times before, and we just want to show that we again, when adding the 3rd quarter, continued the very stable development of our value creation.
Now turning to Slide number 4 and the income statement for Q3. During Q3, net interest income increased by 4% despite a negative currency impact of almost SEK100 1,000,000. Adjusted for the currency effect, net interest income increased by 5% and was driven mainly by increasing business volumes, but also lower funding costs. Net fee and commission income decreased by 6% due to normal seasonality with the lower activity within the securities brokerage and advisory operations. Net financial transactions also showed a normal seasonal development and dropped somewhat in Q3.
Total income was largely unchanged. Staff costs and other costs were lower and also in line with normal seasonality. Adjusted for Oktogonen, staff costs were more or less unchanged. Credit losses amounted to SEK 217,000,000 and the loan loss ratio was unchanged at 4 basis points. In summary, the operating profit increased by 3%.
Now moving to Slide 25, you can see the quarterly development of the net interest income. The main drivers behind the increase of SEK266 1,000,000 were firstly, increased lending and deposit volumes in our home markets, which together added SEK109 1,000,000 in the quarter. Secondly, the mandatory government fees dropped by SEK 39,000,000 as the bank's previous estimate for the deposit currency fee in 2017 turned out to be a bit too high. The third reason was lower funding costs. This explains the bulk of what is shows up as other in Handelsbanken Sweden and the whole markets outside Sweden in the table.
This reflects that a few bonds issued in a higher credit spread environment have now matured. A part of the impact also reflects that the net interest income that arises in group treasury if the actual funding costs for the group deviates from the internal rates paid by the business units to the group treasury. To achieve a perfect match between the group's actual daily funding costs and the internal rates is difficult with a big balance sheet. If there would have been 100% match, this part would instead have ended up outstanding margins. A big contributor to the lower funding costs this quarter was the benchmark effect, which added SEK 75,000,000.
Finally, one more day in Q3 added SEK 28,000,000, while currency effects contributed negatively by SEK 96 1,000,000. In Sweden, the mortgage margin was unchanged at 106 basis points and the margin development overall in the different countries were generally stable. On Slide number 6, you can see that Handelsbanken's model of combining personal service, local presence and digital services has again generated more satisfied customers for us than our peers. The 2017 annual SKI survey, the Swedish arm of Etsy, showed that Handelsbanken continues to have the most satisfied private as well as corporate customers among the largest Swiss banks. We note that the gap to our peers is increasing and we appreciate SKI's interpretation of the result.
Handelsbanken is the large bank that has succeeded in combining size with a close, local and personal service. It's the major bank that swims against the tide. We see this as a sign of the clients appreciating our model of continuing being local and offering both personal and digital services, not least in these times when the market is characterized by fairly big changes. During the quarter, Handelsbanken was also awarded the Corporate Bank of the Year in Sweden for the 7th year in a row and the SME Bank of the Year for the 6th year in a row in the survey financed by Mirten. For us in Handelsbanken, it is completely imperative to have satisfied customers in order to in the longer term deliver sustainable and good profitability.
Now please turn to Slide 8. The picture is the same outside Sweden. HepSafe's customer satisfaction survey in our home markets confirm that Handelsbank once again has more satisfied customers in both the private and the corporate side. We also keep a good margin to our peers, especially in our newer home markets in the UK and Netherlands. On Slide number 9, our decentralized model and role that the branches have in this model is obviously something that the customers appreciate.
With a cost income ratio of 32% in the Swedish branch operations in Q3, it is fair to say that our model of running a branch operation is sufficient. What is also revealed in the SKI survey is that Handelsbanken is ranked at the top on both private and corporate side when it comes to digital solutions. To have state of the art digital solutions is today something that should be seen as a sanity issue for bank rather than something that gives a differentiating competitive advantage. In Handelsbanken, we use digital tools to further strengthen customer relationships, not to replace relationships with digital solutions. Now to Slide 10.
In Handelsbanken, we always develop alongside our customers and changes in the context. So when the development picks up, we step up our work to facilitate the everyday life for our customers, try to create new business opportunities and develop new combinations of services through digital solutions. That means that we are well ahead in the digital evolution. We group this work into 4 focus areas. Firstly, here are some examples on how we work digitally to improve the customer meeting.
We strive to offer an integrated local and digital experience where the customer can move between our meeting places and communicate with us, identify themselves and close deals and transactions regardless of meeting place. We will shortly launch a so called personal finance manager, which categorizes our private customers' savings and expenditures in the mobile app. There will be an initial launch and after additional services and features will be developed and released during 2018. We also intend to become a TPP and thereby our customers opportunity to gather their personal financial information in one app. We will continue to build in more content in our apps, for instance, newsletters, additional information.
And in Sweden, we also will launch the app in English. Handelsbanken owns Sweden's highest ranked financial TV channel, efm.se. Efm is now being used more and more and creates value added in the bank's different meeting places. EFN will now also start focusing on local news by setting up local editorial teams to reflect on local development. More and more of our branches use social media in order to communicate with their customers.
And in all our home markets except Netherlands, we have digital newsletters that are sent from the local branch. Secondly, our relations is about offering our branches better tools by reducing the administrative tasks. This will free up more time for our employees, which instead can be used to make a bigger difference for our customers. Here, we're working with a project to improve the customers' onboarding process. A new advisory tool as support for our advisers in the branches has been launched and it will be further upgraded.
We launched robots throughout the organization for previously manual and repetitive tasks. Regarding the robots, we have spent plenty of time in creating our own structure and own know how in order to be able to identify suitable processes and to manage robots over time in a systematic and sustainable way. Currently, we have plans for around 100 new robots for such processes in the bank. Likewise, we naturally see opportunities to use artificial intelligence in our operations and pilot products are ongoing. Thirdly, our customers' very high expectations on security and integrity are, of course, central, not least in terms of data handling.
And this is most important in our intensive work in collecting and managing customer data in connection with PUC2. Along with the entrance of new niche players in the market, the customers' trust in its financial counterpart, it becomes even more important than in the past. According to several surveys, banking customers rank security highest on the question about the expectations they have on their banks when it comes to digitalization. Vast majority also wants their existing bank to be the supplier of future digital services, thanks to a built up trust. Finally, sometimes corporations instead of doing everything yourself are important for developing new types of customer benefits and offerings.
We have in cooperation with other banks developed Tambour, which is a digital portal for facilitating the exchange of information between banks and brokers in connection with the transactions involved in the home purchase process. This will be launched in November. Another such example is the cooperation between the software company, Fort Knox and Handelsbanken, which will be launched in Q4. The corporate customers will get access to Fort Knox cloud based solutions through which all the financials and administration will be managed in one place. This means that our corporate customers will be able to handle accounting, salary administration, invoicing, etcetera, directly in Handelsbank as Internet Bank and app.
The cooperation with Fort Knox will not only facilitate the everyday life for our customers, it also leads to a deepened customer relationship and the customer knowledge for us, which in turn will create opportunities for value added services to our customers. On Slide number 12, you see the net interest income development in the past 5 years. We can again see that the net interest income reached its highest level so far despite a doubling of the resolution fund fee in 2017. The key drivers for the development over the period are increased business volumes and lower funding costs. On to Slide 14.
Our well tested growth model continued to deliver in the 1st 9 months of 2017 and not only in terms of net interest income. As expected, our business is growing faster in our newer home markets, the UK and in Netherlands. But lending and deposit volumes are also growing in the other markets. Lending grew by 5% and the volumes increased by 14% with a double digit growth in all markets. Also, the net fee and commission income increased in all home markets with a total of 9%.
Slide number 15 shows the development in our Swedish mutual fund business. You have seen this slide before, and it's very encouraging to see that the positive development continues. Since 2010, the bank has taken 25% of all net inflow into the Swedish fund market and has thereby been the biggest player. Year to date, the market share of net inflows is 24%. The asset management operations in our other markets have also had a strong development.
During the 1st 9 months this year, the net inflow was SEK8.2 billion, representing roughly a third of total net inflows to the group. In all home markets, the funds under management reached an all time high level in Q3. On Slide number 17, you can see that our positive development in the UK continues. Operating profit in local currency increased by 5% compared to the 1st 9 months in 2016. Business volumes continue to grow steadily despite the fact that we have not opened any new branches lately.
We recently announced, however, that we have plans to open branch number 208 on Liverpool potential within our existing branch network. In local currency, net interest income increased by 10%, while the net fee and commission income increased by 25%. In Heartwood, funds under management have increased by £400,000,000 since the beginning of the year, of which £236,000,000 in net inflows. Asset under management now amounts to £3,300,000,000 which is the highest volume so far. Alongside the positive development in our fund management operation, the average household deposit volume increased by 50% compared to last year.
All of this shows that our branches managed to capture larger share of our customers' business apart from the inflow of new customers. As you naturally understand, we continue to see good growth opportunities in the UK regardless of Brexit. The preparations for a transition of the UK branch operations into subsidiary continues. The actions and costs related to that process such as corporate governance, IT, staff costs, etcetera, also mean improved conditions for continued long term favorable business development in the UK. Slide number 18 shows the Netherlands, where the development has also continued to be good.
Operating profit increased by 72% in local currency compared to the 1st 9 months of 2016 and amounted to SEK165 1,000,000. Business volumes grew strongly. Lending was up 27% and deposits 76%. Optimix that we acquired last year contributes highly to the increase in the net fee and commission income. Cost to income ratio fell by 4.3 percentage points and return on equity in 1st 9 months was 13%.
The loan loss ratio was 0. We are obviously happy about the development in the Netherlands and continue to have high expectations on our Dutch business. Finally, on Slide 19, you see the capital and liquidity position. The bank CET1 ratio increased by 0.2 percentage points during the quarter to 23.6 percent, and the total capital ratio was 28.5 percent. The FSA has now completed the 2017 Supervisory Review and Evaluation Process, the SREP.
And we estimate from the SREP that the CET1 requirement at the end of the quarter was 20.1%. The bank is therefore at 0.5 percentage points above the higher points of our target range. If the current situation with the CET1 ratio above the target range remains at the year end, and the capital level will be calibrated into the target range. As you can see on this slide, liquidity continues to be very strong. LCR was at 126% and the NSFR was well above the expected upcoming minimum level.
Finally, in terms of IFRS 9, the total loan loss provisions will increase as a result of the introduction of the new standard from January 1, 2018. As a consequence, equity will decrease, but our assessment is that the capital ratios will not be negatively impacted. The reason for this is that the capital directive allows for loan loss provisions in accounting to be netted against expected loss calculation according to the capital directive. The remaining net expected loss is deducted from capital. The capital adequacy expected loss is downturn adjusted and will normally be higher than the forward looking expected loss calculated according to IFRS 9.
As long as that is the case, IFRS 9 will have no negative impact on the capital ratio. So to summarize on Slide number 20, when adding another quarter, we see that the stable trend continues with an average annual growth in equity pressure, including dividends of 15%. The 3rd quarter was another stable one, where operating profit increased by 3% from Q2, and we reached the highest level so far in net interest income. The common equity Tier 1 ratio was 23.6%, which means that we at present are 0.5 percentage points above the target range. The business activity was high and the bank continues to grow both lending, deposits and net fee and commission income generating business in all home markets.
We see good further growth opportunities in the bank. With that, I
I have two questions. The first one is on the volume side, a question related to volume growth in Sweden going forward on the mortgage side. I was curious to have your view regarding the high amortization for customer with a debt to income ratio above 4 50% as per the proposal from the Swedish FSA. It would be helpful to know what is the current average of the 2 income ratio at Sandoz Bank and what percentage of new customer are in that situation roughly? And finally, if the proposal would be implemented, let's say, tomorrow, would Handelsbank and have to incur additional cost in order to implement it, clearly on
the logistics side? Thanks. Hi, Wallace, and thank you for your questions. So and first of all, I just want to inform you that Lars Hoglund is also here from Investor Relations. So he just joined us.
Well, so regarding if that is going to be decided, we understand that the Swedish FSA is going to propose that to the Swedish government and then they have to say yes or no. So we'll know in December we estimate about this, the outcome. And I think when it comes to means for mortgage loan growth in Sweden, potentially it could have some impact. But I also think that when it comes to I mean, we have over the during the last year seen a slight slowdown in loan demand in that end, but it's still in the range of low 7%, I would say, at the moment. So if that is that proposal is coming through and will materialize, potentially it could impact to some degree, we will think.
But on the other hand, there are an underlying demand anyway because, first of all, when there is a turnover in the stock, when you have new buyers that comes to market, they normally have to pay more than the ones that are selling actually did. So that actually gives an underlying demand and continued increase. And then we also have an increasing stock of homes actually that comes to the market. So that is also something that give reasons to believe that there will be additional demand for loans. So we don't think that the impact will be that big.
And then when it comes to additional cost for us in order to implement this, I think that is I mean, it will carry some cost, but that is something that is it's not really big. So that won't be a problem.
Okay. And still on the volume side, outside of the mortgage growth in Sweden, there is a large part of the volume to corporate, which is to the property management sector. Is there a willingness to become a bit more selective on or slow down those volumes?
So I mean, we have always been very cautious when it's coming, especially during the last years, I would say, on really picking the right customers there, because I mean, we have seen some tendencies starting a few years back, where we saw more aggressive deals coming to market. And so but we have applied our credit policy and stayed very cautious there. So we and we continue to be in that end of course. And then I think I mean the development has been fairly stable also when it comes to loan demand in NASDAQ. We haven't seen any major changes.
Okay. And then the second question was regarding the rate hike next year and how do you think of balancing, maintaining market share and protecting the margins in Sweden going into the hike, if you could share some view on that?
Yes, if there will be a hike, So we don't know that. But of course, we expect that we will start next year, the journey to the 0 point will probably start. So and I mean we approach that in the way we always do it. So we feed the true cost into the system and then it's actually up to the business units to charge customers and try to pass that on. And I think and to what extent it will be able to we will be able to charge customers an increase lending margins or match the change in terms of lending margins, that's really hard to assess actually.
And that's an outcome of the competitive situation at that point. So we don't make any forecasts.
Our next question comes from the line of Adrian Giede from RBC.
This is Adrian from RBC. I have 2, please, one on NII and one on capital. On NII, you maintain a flat margin in Sweden in the increasing cyber rate environment, yet your list prices have changed relatively little in the quarter, at least at the 3 month tenure. Can you
give us more color as to what
the moving parts of the flat margin? Is this a entirely due to the lower funding cost? Or is it potentially some due to the lower discount list prices for customers? And then I'll go on the capital side. You mentioned that you will consider a calibration of your capital if you remain above your target range of 100 to 300 basis points.
Assuming the output floor in Basel IV actually gets introduced in December, will the calibration take into account the pro form a effects of any potential Basel IV impact or is that independent of it? Thank you.
Okay. So about the mortgage margin that has been quite stable and also the different parts that is underlying that. And so we haven't seen any major changes actually. And also when we so when we slice and dice in the portfolio, that has been quite stable during the quarter. So no major changes in that.
And then we don't communicate all the different details as you know, but it is it continues to be very stable, I would say. And that is, by the way, the general impression we have about lending margins in all markets and across sectors, actually. So it has been a very stable environment margin wise during the last quarters actually and especially since Q2. And then when it comes to the capital distribution and what we have communicated around that and in relation to the potential output for, It seems more likely now that there will be an agreement, but we haven't seen that yet materialize. And I would say, no, no, it will not have an impact.
So we the assessment we make about the potential impact of output floors is, 1st of all, it's it is something that will be known to us much later because of many of the ongoing regulatory reviews in the capsule side. And it's a bit hard to assess exactly where that will end. But when we look at where we are and the different account which buffers that is likely not to be required in when applying a standardized approach. We feel that we of course, the capital ratios will be impacted, but we feel that we are in a good range and we have the capacity to manage this. And then we also will have time to manage this because implementation time is expected to be quite long.
Perfect. Very clear. Thank you so much.
Our next question comes from the line of Bruce Hamilton from Morgan Stanley. Please go ahead.
Hi, good morning guys. Maybe just to ask about costs. I mean, I guess, for the U. K. Specifically, can you help us think a little bit more about the further sort of subsidiarization costs you expect to incur?
Has that changed at all in recent months in terms of the look forward? And then we'll generally just remind them how you're thinking about the cost base of the group looking forward from here given some growth but also continued efficiency measures as well?
Okay. Thank you. Yes. So first, about UK and subsidiarization. So I mean, it's early days in a way.
We did start the planning for this a year ago, but we have increased the pace in that process during this year. And you have also seen that through some cost increases during the year. So and I think obviously costs will come with it because we do have to work harder on administrative routines and so on and governance related issues, risk reporting issues and so on, brings some IT development, etcetera. But I also think and that is also important to us, when we do this, we also take the opportunity to improve the administrative support also for business reasons. We try to combine the 2.
And I think that this is something we would have been forced to do at some point anyway. So what it is about actually is to make the investments earlier than we previously would have guessed as a consequence of Brexit. So it will add some costs. We haven't communicated how much over the longer period of time during the coming 2 years when we have to go through this. And that is partly because we don't like to guide us when it comes like to things like that.
But it's also because some of the things that will affect us is not totally known to us because of the political uncertainty as well. So that's the search will add some costs going forward. And then when it comes to the cost base of the group, So I think, 1st of all, the work we addressed a year ago with the restructuring reserve and the estimation that we are going to save €600,000,000 to €700,000,000 per year, all else equal on an annual basis. That work is ongoing. We have used a fairly big part of the reserve and that is progressing according to plan.
So that is something that reduces cost and improve on efficiency. And that is also something that is behind the very positive development we've seen in Sweden during the last year. So that is ongoing work and it contributes in reducing cost. And then at the same time, we do invest more in IT development and also especially this year and the next and to also implement new regulatory requirements and so on. So we spend more in the IT side of the business And we spend more because we recruit new people in the whole markets where we do expand in the UK in particular and also to some degree in the Netherlands.
And I think that is what you could also expect to see going forward. And then of course, we want to improve on efficiency. And one way we do that is to using like rubber techniques and we do other things to try to improve on efficiency in the bank to sort of also counteract some of the investments we want to make and to be really competitive.
Okay? Okay. That's helpful. Could I just check-in terms of the €600,000,000 to €700,000,000 and how much that is already kind of in the cost base in terms of the efficiency gains? Are you prepared to communicate that?
Not in detail, but I would say that a fairly big part of that is already included in the cost base, you could say. And that shows up primarily in the Swedish operations.
Our next question comes from the line of Vivek Gautam from JPMorgan. Please go ahead.
Hi, good morning, everyone. Can I have
3 questions, please? The first one is on margins. I mean, clearly, you've had stable customer margins in the quarter, but there was a massive benefit from wholesale funding repricing, which has been going on for some time. What is the outlook for further wholesale repricing benefit in your view? The second one is on provisions.
Your provisions in the U. K. Ticked up in this quarter, and you mentioned it's due to large exposure. Can you provide more details about that exposure? I mean, what happened and what industry does it relate to?
And the third one is reconciling your octagon and contribution and your messaging on capital. Clearly, Octogonen contribution reduced this quarter. And based on the current rate, you are accruing for roughly 8% of dividend expectations. At the same time, you mentioned that you may want to calibrate capital level into the target interval if your capital remains strong. And if I look at market expectations, they expect market expects you to pay $5.85 per share of dividend, which is a big jump from last year.
How should we reconcile the 2 messages, reducing octagon contribution and talking about potential buybacks?
So both margins and So both margins and the benefit on the funding side. So if you look at the very positive impact we had in Q3, that's related to that's all the benchmark effect related to the fact that we do every 9 months, we would do major covered bond issues and so which funds loans that have been granted before and after that point and that gives an effect that sometimes is positive. And the change was €75,000,000 So that is quite significant this quarter. And then we also had 2 senior unsecured loans bonds that we did issue in 2012 and in a quite different credit spread margin context. So and they have now matured and that gave a positive impact.
If we going forward, we don't have any major of that maturities coming up of the same kind during this year. So we have a few going forward, but that is more limited in terms of impact. And then if you look at the U. K. Credit loss, we don't we haven't communicated which industry it's tied to, but it is one single exposure that explains almost everything or a very significant part of the credit loss in the UK.
And then regarding the decision to reduce the allocations to Oktogonen, that is I mean, when we calculate Oktogonen allocation, that is done as a consequence of how much we are ahead the average of our peers when it comes to return on equity. And we are still ahead, we are, but we sort of have passed a point where we have reason to make a full allocation. So that is why we made a change and adjusted it. So if things are like it seems now, then there will be an allocation in the range we have accounted for, but not a full allocation. And then we have to wait and see how the year ends.
But and that's the sole reason. So that is totally unrelated to the communication about potential capital distribution and how that in turn relates to the target range and where we are in that end. So that is
totally unrelated. And so can I just a follow-up question on the wholesale funding? Clearly, you mentioned that you don't have a lot of unsecured funding maturing this year. But you do have my numbers tell me that you do have some maturities coming up in 'eighteen, 'nineteen, which was issued in 2012, 2013, which was a period when funding markets were in a disarray.
Would you confirm that? Or Yes, that's right. We do have. And so later on, there will be some impact from that. Yes.
Thank you.
Our next question comes from the line of Matti Algaz from Danske Bank. Please go ahead. Your line is open.
Yes. Good morning or afternoon, I guess, at least afternoon in Helsinki. Question on the funding still. Looking at your very good Slide 26, where you kind of break down the NII. Is it still fair to say that all of these other, including allocation from treasury, both in Handelsbank in Sweden and all markets outside Sweden, that would be the impact of the funding cost on a yearly run rate?
Matti, no, not everything. But that actually contains 2 different parts. So one part is the one that is related to the mature bonds that we talked about a few minutes ago. And then there is also the impact of negative interest rates and the covered bond funding we do have. That is also which gives a positive impact and that is allocated.
And then in addition, there are also other sources behind that. That is a very limited part of this, but that is more related to the management of the liquidity portfolio and so on, but that is minor. So I would say that 2 major sources is actually related to the things I mentioned. So and related to the funding costs and should be viewed as margin. Okay, great.
Thanks. And what was the
by the way, the deposit guarantee fees we've been down
quarter on quarter so much.
It's not a big figure,
when we calculate or rather when the authorities calculate the contribution that we need to make to the deposit guarantee scheme and that also goes for resolution fund fee, that is risk based. And the formula they use and the different things that goes into this and how it's being done is quite complicated. So it's impossible for us to actually make a completely correct calculation. So and then we later in the year, we do receive the invoice and then we have the final outcome. So it turned out at this time we had overestimated how much we were supposed to contribute.
Okay, great. And then finally, I saw you mentioned as well that you had opened another branch in the U. K, first one for in a long time. Is this kind of any change that you're becoming more positive and kind of continue opening branches in the UK?
No. And we haven't opened it yet, but we shall do that quite soon. And I know it's I mean, we have a quite stable development in the UK, as you know. And if you look at how we are growing in the different markets and so on, it's a very stable growth. And I would say that this is an outcome of that growth because we have decided to split the branch into 2.
And we will continue to open up new branch offices in the U. K, but not at the same pace as you saw a couple of years back. So this is a quite natural step in the development we have in the UK. But it is it feels good to open up a new branch again, definitely. Great.
Thanks a lot.
Our next question comes from the line of Jan Wolter from Credit Suisse. Please go ahead.
Jan Wolter here, Credit Suisse. Just going back to the cost outlook for the bank, I think you mentioned a number of digitalization projects in the presentation. Would you say that the IT cost and the cost for digitalization of those projects are now in the P and L. So that level has already plateaued at roughly €1,900,000,000 annualized or so. Or is there more to come that you need to up the IT investments in order to complete those projects?
So that's my first question, please. Okay. So as we communicated earlier this year, we decided
to insert another SEK 200,000,000 on this year. And we also expect that, that will be what you can expect in the future in this end. That has a consequence of of increased need to develop both in order to become compliant and to deal with a lot of the regulations that are upcoming. But also because we want to make sure that we really can do the business oriented development that we want to and that we feel a need to and where we also see good business prospects. And that's why we communicated that and that is also what is now coming through in terms of deliveries, you could say.
So that's the reasoning behind that back then. And I think and that is into the cost figures now. So that is what you can see for this year and that explains also the increases you have seen in that end on the cost side. And I think it's fair to assume that it will remain at this level. But we haven't communicated exactly.
And we even don't know for certain, of course, in the long run where things will end up. But what we always try to do when it comes to this is to make sure that we have a good balance between improving on efficiency where we can and to sort of release the capacity to spend more also to invest in development. That's the basic thinking. But I think the level is where you could expect it to be. Okay.
So just to be clear, you wouldn't expect that another €200,000,000 or so comes on top of the current level going into 2018? That's not how you think about it. Well,
we haven't really made any guidance on that. So and we don't.
Okay. That's fair enough. And then the increased resolution fee. Is that when we look at the level going up in 2018 visavis 2017, Is that around €700,000,000 impact on the NII that we should look for? Or if you could give any
clarification around that? Yes, right. That's additional €700,000,000 that we expect. So on an annual basis next year, approximately €2,500,000,000
Okay. And the last question, I think you previously talked a little bit about a shift in terms of lending growth from secured lending to unsecured products. Have you seen that? Or do you still foresee that, say, in the coming year or so to happen?
You mean in terms of funding or
No, rather lending growth that I think in previous quarters, you have highlighted that the lending growth could shift a little bit from secured to unsecured? Sure.
Yes, okay, Jan, I'm with you, sorry, Mr. Nusselvie. Yes, we what we have seen in this quarter, I mean, we have seen a pickup when it comes to lending to other corporate clients and property management companies, which I think has been really encouraging. During Q3 and during the summer months, that was quite flat. We're actually slightly down in Sweden, very limited change.
But and I think that is probably related to the summer months and because that is kind of that is part of the learning book, which is more sort of based on activity, but remains to be seen actually. So I mean, anecdotal evidence we have is that things are still looking good in that end. So it's not a strategy, it's more the outcome actually of the ongoing contacts and negotiations we have with customers.
Okay. Many thanks for all that. Thank you. Thank you.
Our next question comes from the line of Birgish Kumar from Societe Generale.
I'm Brajesh from SocGen Creative Search. Once again, I have a question on your funding plan. So any guidance on your 2018 issuance, especially on sub debt? And what nonpreferred senior? Where are you on that?
Still, you think earliest would be H2 'eighteen or H1 'nineteen? Or has that changed?
Thank you. Hi, Ramesh. So first of all, when it comes to funding and Tier 2 instruments, that is something we wouldn't give guidance about. And when it comes to senior non preferred, we want to wait until we have the clarity on the legal side. So and it seems now that the process is ongoing and that authorities in Sweden are preparing.
So when we have a decision within the EU, we think that it could progress quite rapidly. We could start issuing in 2019, but we want to wait until we have legal clarity before we start that. And we don't feel stressed. So we will wait until we have that and start after that.
Okay, sure. Yes. Thank you.
Our next question comes from the line of Riccardo Robbery from Mediobanca. Please go ahead. Your line is open.
Hi, good morning. Good morning to everybody. Just a couple of questions from my side. Just to avoid any kind of misunderstanding, when you are talking about calibration
of capital
I believe we did lose that person asking the question. So the next question comes from the line of Johan Erik Blom from UBS. Please go ahead. Your line is open.
Thank you very much. Just two things. Can we come back to the Oktogonen allocation quickly? I just want to make sure I understand it correctly that you're saying that you're lowering the allocation because the difference between your ROE and the peer group is presumably smaller than it was at the half year stage. Can you also give us what would the trigger be for a not full allocation?
And is that just a Board or management decision? Or is there a formula sort of driving whether it's a 75% allocation or a 50% allocation, etcetera? And then if you can just confirm that it's still 10% of the ordinary dividend, that's the sort of maximum allocation? And then just a detail on the fee side. What's going on with fees in Denmark?
I mean, 26% quarter on quarter decline is a rather high number. And was it the first half of this year that was the anomaly and we're sort of back to more normal run rate or is there something funny going on in the quarter?
Okay. So let's start with the distance we have to our peers. So we that has declined somewhat. And then we haven't communicated exactly where that point is actually. When we calculate the allocation, we do that based on it's not just looking at the peer group return on equity, the average peer group return on equity.
We also do weighting considering where we are and the number of employees we have in the different countries and so on. So there is a weighting behind it. And that's to get a fair comparison between ourselves and our peers. And then there is a maximum. And I don't know if we have communicated that, Lars, okay.
And then regarding the fees in Denmark, I will pass that question over to Lars Hoglund. Yes.
Hi, Johan. So I mean in Denmark, of course, you have the normal seasonal impact on activity based commissions. But also worth mentioning that they had a very strong start of the year, also including Q2 in terms of fees. So starting off from a quite high level in Q2, I would say. So nothing specific going on except from the strong quarter comparison and seasonality.
Our final question is from the line of Riccardo Rovere from Mediobanca. Please go ahead again.
Can you hear me now? Yes, Riccardo, I can. Okay. No problem.
No, I just wanted to be 100% sure of no misunderstanding when you talk about recalibration of capital ratio. I would say the way I interpret it is that if nothing changes, everything else being equal, at year end, you want to bring your capital ratio back to the top of your management buffer in respect of the Swedish FSA's preparation? Just want to be 100% sure that there is no misunderstanding on that. This is my first question. The second question I have is, you clearly stated that at year end, the output for output for output for will have no impact on your decisions.
In that respect, do you expect any potential negative surprises coming from RWA between here and let's say February, March when you will have to approve the year end report. And finally, on risk cost, there is a one off in U. K, but there are some few other countries where the risk cost is extremely low, close to 0 or in some cases even positive. Aside from U. K, do we expect what is coming as a very, very low risk cost in those countries to be well above normal, let's say, or much better than what should be?
Thanks.
Okay. So regarding the calibration, so first of all, yes, if we if the situation remains at year end, we will a calibration will be carried out, which in order to take us into the range. And then we haven't specified exactly to which point. And that is something that we will make a decision about in relation to Q4. So that is the point where you will have further clarity about that.
And regarding expected potential expected surprises when it comes to RWAs, No, we have no expectations regarding any changes. We have been through 2 modeling exercises and approval of those. And then the first one was the corporate PD model exercise and then also the government modeling exercise. And that is those were the major ones. So nothing that is major in that end.
And risk of cost in the U. K, so could you please explain more?
No, it was not in the UK, it was not few other countries like Finland, for example, or maybe Norway, where in this quarter it came very low, but then you see this as much better than it what should be? Or do you think there is no reason why that situation should change?
Okay. No, we have I mean, credit quality is stable, I would say. So no change is expected as we know about now, at least.
Thank you very much. Just one final thing, if I may. You stated that IFRS 9 is not going to have any impact on your common equity TMR ratio. Is there going to be any impact on the shareholders' equity on
the 1st January 2018 at first time application? Yes, I will. So that's true because we expect that the provisional level will increase, but not to the point where it would actually exceed the expected loss calculated in the capital adequacy calculation.
I will now return
the conference back to the speaker for any closing comments.