Ladies and gentlemen, welcome to Handelsbanken Q1 2017 External Conference Call. Today, I'm pleased to present Rolf Marcotte. 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. Rolf, please go ahead.
Good morning, everyone, and welcome to this conference call for the Q1 2017. Joining me today, I have Michael Hallacher, Head of Investor Relations Lars Hoglund, Head of Debt Investor Relations and Annika Engler, Head of Group Accounting. The slides used for my presentation are as always available at hanersbanken.com. So let's start with Slide number 2. The The bank has continued to generate capital and annual average growth rate in equity per share, including dividends, was again a steady 15% when adding the Q1.
The common equity Tier 1 capital at the end of the quarter was estimated to be 50 basis points above the target range. As we said already after Q4, we see a good potential for growth for the bank, at least in the home markets outside Sweden. If the capital level remains above the target range, the board intends to distribute the excess to shareholders, either through using share buybacks, extra dividend or a combination of the 2. On Slide number 5, you can see the P and L for the Q1 compared with the Q1 2016. Operating profit increased by 8%.
Net interest income grew by 4%. Business volumes continued to increase in the quarter, and this more than compensated for the doubled fee to the resolution fund. Net fee and commission income increased by 8%, driven primarily by fund management and payment fees. There is an increase in all home markets, which is a result of a high activity in our branch network. Staff costs fell by 20%.
However, there are some elements that need to be adjusted for. In Q1 2016, the bank did set up a reserve of SEK 700,000,000 as you know. This quarter, in Norway, the pension plan has been changed into a defined contribution plan, which means a one off positive impact of SEK 139,000,000. And finally, as communicated earlier, the bank has resumed allocation to Oktogonen. During Q1, this amount was $243,000,000 Adjusting for these items, the staff costs decreased by 2%.
Other expenses increased by 11%, mainly driven by higher IT development costs. We see a lot of opportunities on the back of the digitalization, and therefore, we intend to increase the ambition further. And we estimate that IT development costs will increase by approximately SEK 200,000,000 this year. Loan losses were virtually unchanged at 4 basis points. As you know from this year, interest expense from subordinated debt are no longer tax deductible.
As a consequence, we assess the full year impact of this to be SEK 280,000,000 in increased tax expense. On Page 21, you can see the quarterly development of net interest income. From this year, lending and deposit margins are defined as the difference between the customer rate and the internal rate charged from or given to branches. The main reason behind the CHF 218,000,000 drop in net interest income in the quarter is the doubling of the resolution fund fee applicable from this year for Swedish banks. Safeties in total increased by SEK207 1,000,000.
There has been some decline on lending margins, primarily in the household segment in some home markets again in Q1, but nothing dramatic. The exception is Norway, where margins have improved during the quarter. Negative currency effects and fewer days in the quarter, all in all, reduced NII by another 100,000,000 The benchmark effect, which over time is 0 and which gave a positive contribution in Q4, was SEK 45,000,000 low this quarter. Looking at the business, there has been good activity in the quarter, where higher lending volumes added SEK 75,000,000 in our home markets. Lending margins dropped somewhat, which reduced NII by SEK 29,000,000.
Mortgage margins in Sweden was 106 basis points rounded, which means a decline by slightly less than 1 basis points quarter on quarter. Now back to Slide number 6, where we show the net interest income for the group since 2,009. Here on the green bar, you can see the impact of state fees on net interest income and that the underlying trend in NII is increasing. We have adjusted NII for currency effects here and highlighted state fees over time. As you can see, during the Q1, considering these adjustments, the underlying NII was the highest ever.
On Slide number 7, you can see net interest income for the last five quarters. We have adjusted the numbers for currency effects and again highlighted state fees. As you can see, in fixed currencies, the underlying net interest income has increased by 7% or close to SEK 500,000,000 compared to the Q1 last year. In the same period, state fees have increased almost SEK 200,000,000 on a quarterly basis. The underlying improvement in net interest income is a reflection of the bank's organic growth strategy.
And the activity in our branches is high, and we have seen new customers and higher business volumes also in the corporate segment in Sweden during the Q1. Slide number 8 shows the lending growth in local currencies since 2012 in our various home markets. Sweden has shown a very stable growth, even though it has been slightly higher lately. In the U. K, growth has also been very stable, but naturally much higher.
During these years, our branch opening pace has varied quite a lot. During the last year, we only opened a small number of branches in the new home markets. The growth in business volumes have been unaffected though. The branches in the UK have continued to grow their business and the customer base in a stable way. In Finland, growth has slowed during the last couple of years, but we, Martin, keep in mind that the economy in Finland has been very weak.
But despite this, we have been able to grow the business. Norway made a jump in 2016. Our branches always have a list of prospect customers that they want to do business with. And towards the end of 2015, several of these opportunities did materialize. And finally, Netherlands, where growth has been very strong and this continues.
As we have said already after the Q4, we see good growth potential for the bank, not least in the home markets outside of Sweden. Slide number 9 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. During the Q1, the bank's mutual funds business in Sweden had a net inflow of SEK 6,000,000,000, which represents 23% of the total net inflows in the Swedish market. Our share of the total stock is still only around 11%.
The trend has been positive for a number of years. And since 2010, the accumulated net inflows in our Swedish mutual funds has been SEK 137,000,000,000 which compares very well with the other large banks. During Q1, asset management in our home markets also had a good growth, adding SEK 2,300,000,000 of net inflows. Several of our home markets had all time high volumes under management. Now to Slide number 11, please.
In Q1, 2016, as you know, we took a provision for primarily early retirements in Sweden. Since then, the number of employees in Sweden is down by 4 49 people. At the same time, we have continued to grow outside of Sweden with some more branches and more employees in existing branches. Interestingly, for the first time now, we have more employees in our home markets outside Sweden than in Handelsbank in Sweden. The bank also continues as before to invest in IT Development, which explains staff increase in other units.
All in all, the number of staff is now 236 fewer than at the end of 2015. The adjustment work initiated in 2016 continues according to plan, and the target remains. All else equal, costs should be lowered by SEK 600,000,000 to SEK 700,000,000 from 2018. On Slide number 12, we summarize the main focus areas for IT spending. We have a high ambition to be local and digital.
These are 4 main areas where we focus our efforts. Within the savings business, we are in the final stage of installing a new securities platform where investments have been made for a number of years. This, in combination with a massive improvement in the support for advisory services, will provide an even better offering in the savings area. Digital meeting places are gradually adjusted to new modern frameworks that can be used in our various home markets. This enables the customer to get the same experience regardless of meeting place.
We can also use video for within the bank. And finally, of course, DST2 will enable the bank to provide a whole range of new digital opportunities for our customers. On Slide 13, you can see our development in the UK during the quarter, which continues to be strong. Operating profit in local currency improved by 7% compared to Q1 2016. So there was a good business development and growth was achieved entirely in the existing branch income increased by 6%, while fees and commissions increased by 30%.
Assets under management in Hartwood grew by GBP 200,000,000 in the quarter and were GBP 3,100,000,000 at the end of Q1, the highest level ever. At the same time, household deposits increased by 60% compared to 1 year ago. And all of this illustrates that our branches have been successful in gaining a larger share of the customers' total business. One important reason, of course, is the fact that the bank has the most satisfied customers of U. K.
Banks and the gap to peers is meaningful. The loan loss level fell to 2 basis points for the quarter. On the back of Brexit, there is a scenario where we may need to turn the U. K. Branch into a subsidiary.
We still don't know if that will be the case, but of course, we are making all the necessary preparations to be able to do that. Slide number 14 shows Netherlands, where the development has also been very good. Operating profit increased by 73% in local currency compared to Q1 2016. During the Q1, we opened branch number 26. Business volumes grew strongly.
Lending was up 38% and deposits 84%. On the corporate side, most of the growth is within the SME segment. Also in Netherlands, the bank has the most satisfied customers and among corporate customers in particular, the gap to peers is substantial. Optimix that we acquired last year has EUR 2,000,000,000 under management and contributes highly to the increase in fee and commission income. Cost income ratio fell by 4.2 percentage points, and return on equity was 12% in the quarter.
The loan loss ratio was 2 basis points. As you can imagine, we have high expectations on our Dutch business also going forward. Slide number 15 shows the capital and liquidity position. During the Q1, Swedish FSA approved our new PDA models for corporate lending. And using these new models, the bank had a common equity Tier 1 ratio of 23.8% at the end of Q1.
This represents an increase of 1.1 percentage points compared to Q1 twenty sixteen in spite of the high risk weights for corporate lending that the new models generate. Total capital ratio was 29.7 percent, up from 28.8 percent a year ago. The bank assessed that the common equity Tier 1 requirement from the Swedish FSA was 20.3% at the end of Q1, taking the new models into account. The target of being 1 to 3 percentage points above the requirement for common equity Tier 1 remains. The actual common equity Tier 1 ratio was therefore 50 basis points above the target range as set by the board.
As we have said, we see good growth potential for the bank, and this can be expected to consume some capital. At the same time, the bank is continuously generating capital as we have seen. If the capital position remains above the target range, the board intends to distribute the excess capital to shareholders. This can be done by activating the share buyback program and or paying an extra dividend. As you can also see on this slide, liquidity continues to be very strong for the bank.
LCR was at 148% and the NSFR was well above expected upcoming minimum level. So to summarize on Slide number 16. The Q1 was another stable one where operating profit increased by 8% from 1 year ago. Equity per share, including dividends, again grew with an annualized rate of 15%. The business activity was high and the bank had lending growth in all home markets.
Net interest income grew by 4% year on year in spite of higher estate fees, thanks to increased business volumes. Fee and commission income also grew in all core markets and the strong development in asset management continued. The costincome ratio improved to 44.8%. The digital development provides many opportunities for the bank, and we have decided to ramp up the ambition to be local and even further, meaning that IT development spending will increase by SEK 200,000,000 in 2017. Loan losses were 4 basis points in the quarter.
The common equity Tier 1 ratio was 23.8%, being 50 basis points above the target range. We see good growth opportunities in the bank. However, should the capital position remain above the target range, the board intends to distribute the excess capital to shareholders by share buybacks, extra dividend or a combination of those take the capital back into the target range. With that, I conclude my presentation and open up for questions. Thank you.
Thank Our first question comes from the line of Olly Staromo from Goldman Sachs. Please go ahead. Your line is now open.
Hi, good morning. This is Ulisse Perna from Goldman Sachs. I have two questions. The first one is on capital. When I look at the impact of the from the model changes this quarter, it's well below the estimated impact you provided during the last quarter.
And I was just wondering if you could elaborate on the differences and confirm if this is the final number approved. So there is nothing more this year that should change in the capital and capital requirement or just minor changes. And related to that, when you state that you will use the flexibility of a special dividend of buyback if the Courtyard 1 remains above the target. Could you elaborate a little bit in term of timing and what target we are talking about? Thanks.
Hi, thank you. First of all, regarding the corporate risk weights, we have not changed what we have communicated before is not the change from what we see today. So the estimation we have done is about the same. The total impact of the new PD models is a reduction of core equity Tier one ratio of 1.8 in total. And that should be within estimation we have given already last quarter.
And then regarding the flexibility regarding buybacks, we I mean, the reason why we have communicated clearly here is that, first of all, we want to be clear about the fact that the target that we have to be 1 to 3 percentage points above the SREP requirements is something that we stick to. So that remains. And we think that is well suited for, first of all, the growth we want to be able to have and that we see and also to take care of some of the volatilities that we experience in the capital now and then depending on external factors that we can't affect. And I also want to be very clear on the fact that we want to grow. So now we find ourselves being above target range.
And as we have communicated before, we first of all, we want to be compliant, of course. Secondly, we want to be able to grow to the extent that we and take all the opportunities we have in the market when we get onboard new clients. And what is then left is something we will distribute back to shareholders. And that is something we can do through using the share buyback program for paying extra dividends. So and we'll use those tools to calibrate ourselves back into the target range.
But I mean we see still very good growth opportunities. And we during Q1, we have also seen a slight pickup in lending to corporate clients. And that is something that normally is slightly more capital consuming than lending to, for instance, property management companies. So now we are above the target range. That is, to some extent, also explained by the change in the asset values in pension assets.
So that's something that is a major explanation to the change compared to Q4. Now we will follow the development and then in the long run, we'll calibrate ourselves back into the target range. So that is the message. But we don't communicate any specific point in time when that is
going up. Okay. And related to the growth opportunity that you're seeing and specifically, you mentioned corporate client side, could you give me a bit more detail in terms of geographies? And if you see some in Sweden, in which sector you would see them and talk a bit about the competition as well?
Yes. So regarding growth, we have we are growing in all home markets, but we have seen lately a change related to Sweden. So we have some positive signs here in the corporate market. And then regarding competition and margin development, on the corporate side, margins have been quite stable during Q1, so no major changes. I mean, we see, of course, fierce competition, but no major changes.
And that goes for most of our home markets. So the margin pressure we have seen is mainly on the private side and particularly so in the U.
Okay. Thank you very much.
Our next question comes from the line of Matti Aukas from Danske. Please go ahead. Your line is now open.
Yes. Good morning. Two questions from my side as well, please. Also on the excess capital distribution, you're right in the report that if the current situation remains, is this dependent on the outcome of further regulatory issues? Or is it purely the current state in terms of the buffer to the 300 basis points?
Then on Slide number 21, you have the EUR 47,000,000 negative margin impact in Sweden. Could you break that down into corporates and mortgages, please? Thanks.
So I will take the first question and then I will pass the second one on to Michael Hallacher. So regarding regulatory issues and the potential impact of that on the estimation regarding the capital situation. That is not the main reason why we communicate the way we do. I mean what will happen regarding changed regulations is still very unclear to us, and that is and it will remain so for the rest of the year, we expect or at least a couple of months, especially in the Basel process. And we also feel that we have a really good starting point when we have to adjust to that depending on the outcome.
And so that is not the main reason, and that is not the basis for the conclusions we have made. That is rather based on the market opportunities we do have and growth opportunities we do see. And then regarding the margin question, I will pass it on to Mike.
Mikael, hi, Matti. Looking at the Swedish lending margins, it's really on the mortgage side, we report a drop from 107% to 106%. Really, to be honest, a decimal, half a point when you look at the decimals. Decimal. Small part of that is on the mortgage side.
Then so the rest is on the corporate side. But let me add, we also have changed in this quarter to start measuring lending margins at the rate paid by customers less our internal prices that we charge to the branches. And it turns out that, there was a positive excess NII in the Treasury Department that would indicate maybe that our internal prices have been a little bit too high and that there's been some excess pressure that's really a margin. So the internal prices have really been a little bit higher than what we've actually paid to the market. I would say that maybe the orders have exaggerated through margin business, but most of it would be corporate.
Great. If I just may have a quick follow-up on I also see that you've increased the allocated capital to the business units quite a lot. Is this related to the PD model approvals? Or is it something else? And what's the reason behind
it? So the allocation, first of all, we do allocate all the caps that we have to the different business units. And we have started to change the allocation based on the PD models, but that has been done in the first step and particularly to the U. K. And then it will be finalized during in next quarter.
All right. Thanks a lot.
Our next question comes from the line of Anton Klyadjuk from UBS. Please go ahead. Your line is now open.
Good morning and thank you so much for the presentation. Just two questions, please. 1 on NII and one on capital. Just on net interest income continuing on the theme of mortgage margins. And I understand that you don't set prices centrally, but when you talk to your branch managers in Sweden, how do they view margin development in Q1 when we had basically for the first time in many years a stable rising on average Q on Q rather than falling?
Are they looking to pass that funding cost increase fully onto the consumers? Or are they looking at it in aggregation with the improved deposit spreads that they're seeing? So that's my first question, please. And then the second question is on capital. It seems that you are emphasizing the buyback rather than the special dividend that you've relied on in recent years.
So can you please remind us what is currently within your mandate for a buyback in the AGM, if there is 1? And also, do buybacks need to be approved at the end of the year? Or can those be launched earlier if required? Thank you so much.
Thank you, Anton. So regarding net interest income and how the branch managers view the fact that market rates have moved somewhat in the short end. And I'd like to say that we so first of all, we do not that is not reflected. The external movements in short term rates are not necessarily passed on in the internal rates applied because the internal rates we do apply and that is what the branch managers do face is something that is dependent on the mix we have and the funding mix we need to have to fund mortgages, and that is much more long term debt behind that. So that has that number and the internal rates haven't been affected.
So and then also as a consequence, branch managers haven't been affected by that. But what we see when we look at the trend on mortgage margins, it has been fairly stable. I mean it's down 1 basis point during the quarter, but in reality, it's more half a basis point. So it's really a small change. Regarding capital, so and share buybacks and us preferring that, that is not the case.
The intention is just that we want to be what we tell is that if we have excess capital and we continue to see the situation we have today. If that will remain, we will calibrate ourselves down into the range. And when we do that, we have 2 tools that we could use, and that is share buybacks and its dividends. And so we don't have a particular preference, I want to underscore. So it's that was not the intention to send that signal.
Regarding the circumstances regarding share buyback program is that, 1st of all, we need to if we would want to use that, we have to apply with the Swedish FSA to do so to get a permission. And if we would do that and when we have filed a full application, the Swedish FSA will have 60 days to give an answer. And if they when they have approved it from that particular day, we would need to deduct the whole amount from capital at day 1, no matter if
we would have bought anything back or so. But
we haven't filed any application. We have no immediate intentions to do so. So we just want to underscore that this is one of the tools. So we have no preference that we want to communicate. Regarding the size of the potential share buyback program approved by the Annual Meeting was 120,000,000 shares at the maximum.
Thank you. This is very clear and very helpful. If I may just circle back to your answer to the first question on the margin. I remember that a couple of quarters ago, you used to show a slide which indicated lost net interest income from lower interest rates in Swedish operations on deposits and equity. I guess my question on the mortgage margin is linked to that.
Do you think that in a rising interest rate environment, you will be able to get back that lost income that we have seen on that chart? Or do you think that your branch managers kind of when you pass on the funding costs, they will think in aggregate about the mortgage margin and deposit margin? Thank you.
Hi, Antony. It's Michael here. I mean, I think, obvious, on the deposit side, it will all depend on I mean, we are currently paying basically 0 on deposits, and I guess most banks are. And when rates start to go up, I'm sure all banks would like to stay at 0 as long as possible. So it's really going to be the competition that determines how much market rates will go able to go up before you start seeing somebody start raising the deposit rates.
But there's no doubt that as long as deposit rates are not hiked at the same pace as market rates go up, there's no doubt that we're going to start regaining some of that those lost deposit
margins. Got it. Thank you so much. Very helpful.
Our next question comes from the line of Jeff Dorst from SocGen. Please go ahead. Your line is now open.
Hi, good morning, everyone. Jeff Doris here from SocGen. A couple of questions from myself. One quick one. On Danish credit quality, you had obviously a very big loan loss impairment last quarter and then practically a zero value this quarter.
What was the cause of that? Was that some reversals from the losses you took last quarter? Or is it just the ebb and flow of kind of loan losses as they come through the P and L? Can you just give us a bit more color on that? Because it's obviously quite a big swing from well above expectations to well below.
And the second question is you'll need to subsidize in the U. K. Does that have any implications on your funding model there? Obviously, you run a very big surplus of loans over deposits. So would you need to issue locally?
Or would you still just take the balance from the group under a subsidiary model? And then finally, on the branch opening program, you did state it slowed down a little bit. I know we've spoken about this in the past. Is there any specific reason for And do you expect it to pick up as the year goes on that now you've got capital commit to commit to that? And those would be the 3 questions.
Thank you.
Hi, Jeff. Thank you. So about the credit Danish credit loss, that was one major exposure that we had had on the books for a long time and that had been long time problem loan. And now we have dealt with that through the loss we took in Q4. And apart from that, the credit quality in Denmark is really stable.
So it's not so what you see now is more normal figures that we could expect from Denmark. So it's low credit problem level. So we have stable credit quality in Denmark, I would say. And then on the UK and Brexit and what that might mean to us. So it is too early days to tell what the impact will be because we don't know for certain.
We have discussions ongoing both with Swedish and U. K. Regulators about the potential impact and how we are going to face that. I mean today, we round operations through a branch, and that is something we find very efficient. So we'd like to continue to do it that way.
If that will be possible in the future or not, it's still unclear to us. And so we have those discussions ongoing. And if we will have to we are, of course, making the preparations necessary to be able to set up a subsidiary and to file an application to do that if need be. But we simply don't know at this stage. And I think also the legal circumstances around that and so on are still unknown, but we are making preparations.
And what the potential impact will be on funding and funding requirements, That is as a consequence also too early to tell. And then finally, on the branch opening program and the fact that we haven't opened as many branches in the U. K. Last year compared to what we did a few years back. So we have come to a point where we feel that we have a really good presence in the different local markets, and we have a quite good footprint in the U.
K. So we do cover a very large part of the market geographically. And so the focus has, for the time being, shifted more towards, as I say, digging where we stand and added on new employees and new business to the existing branches. That does not exclude us from opening up branches in the future, but we haven't felt the need to do that so far. So we have the footprint we need to continue to grow.
And if you look at the development when it comes to loan growth and deposits growth and also seeing commission income growth and so on. That is we are still growing quite steadily in the same pace from quarter to quarter more or less. So and that is fine of us not being dependent on the exact number of branches we do have. So although we have a strong branch focus, shouldn't overemphasize the number of branches as a good proxy for the potential development we have going forward. And that also goes for Netherlands, where we have added now one new branch office.
But the new branch openings have been that many. But we although that is the case, we continue to grow in that market as well.
Great. Just to quickly follow-up on the second question. Within the scenarios you're looking at, is there the possibility that you might need to fund entirely in the UK?
I mean that's too early to tell actually because that depends on the outcome and there are different potential outcomes. And since we don't know, it's too early to assess. If you look at the formal requirements, I mean, the most demanding form is if you have a ring fence activity. But we are looking at our total balance sheet and so on. We are quite far away from being in that corner so far at least.
So and that is where you would find the most requiring demands regarding local funding. But I once again, I think it's actually too early to actually know exactly at this point.
Okay. Thank you for your answers. Thank you.
Our next question comes from the line of Bradesh Kumar from Societe General. Please go ahead. Your line is now open.
Hi, good morning all. Brajesh from SocGen Credit Research. Just one question for me please on 2017 funding plan. Have you guys given any thought around issuing non preferred senior? And what about sub debt issuance?
Can we expect some this year? Or are you guys happy with the current AT1 and Tier2 levels? Thank you.
So first of all, on the plans to plans for MREL instruments issuance of MREL instruments. No, we don't have any immediate plans to do that during 2017. We still are in a wait and see mode when it comes to getting greater clarity legal circumstances in
Sweden, in particular.
So we'd
like that
to change or at least to know what will come in that end before we start issuing. And we also think that we have a really good position And we also think that we have a really good position since we have a lot of maturing senior unsecured debt that we could start replacing when we know the rules of the game. So we think we still have time to wait a bit until we move. And regarding sub debt issuance, we have no immediate plans to make any.
Okay. Thank you.
Our next question comes from the line of Riccardo Rovere from Mediobanca. Please go ahead. Your line is now open.
Yes. Good morning to everybody. Is it just 2, 3 clarifications from my side. On the excess capital, and correct me if I'm wrong, my understanding is that you want to go first for growth opportunities. If there is anything left, you will go for capital distribution.
You have no preference between extra dividend or buyback. What is not clear to me in this equation is where you put the regulator issues, something like IFRS 9 and in a special case, if you are in the position now to say whether you have a guidance where the impact could be and Basel IV. My understanding is that you are kind of sick of waiting for clarity on this topic. So am I getting it right in, let's say, condensating all the message they have been given so far? And still this is my first question.
The second question is, when you talk about excess capital, you say you have a range a kind of managerial range between 100 and 300 basis points. But the range is pretty wide. Should we my understanding is that we should be using 300 rather than 100, but I want to be 100% sure that I get it correctly. And last thing I wanted to ask you is a follow-up on the exactly on the first question, whether the corporate risk weight on PD models and then or something like that is the impact is over because the corporate risk weight on IRB advances still 27%. Just want to be 100% sure of that.
And lastly, and literally lastly, 4 basis point risk cost, if rates remain where they are, do you think this is a sustainable level? Thanks.
Okay. So first question, yes, if you had did get us right when it comes to the communication on capitalization, yes, you have understood it completely the way we want to communicate it. Are we sick and tired of waiting for the outcome of Basel IV and so on? Well, no, we are waiting and we will see where it will end. It's really hard when it comes to Basel IV and potential output floors to know what that exactly will mean.
And what I refer to then is still the uncertainty, not around maybe the calculation as such, but which buffers that would still count when you use that measure or and which ones that will not count. So and that is really important to understand the impact. That is something that will be quite far away in the future or several years from now. So we will have time to adjust to that. So that has not impacted our way of thinking around today's capitalization, I must say.
We feel that we have a really strong position. So we are very well capitalized. We and we have a great or a good capsule generation capacity, and we have also the possibility to manage that situation if that was to become requirement. Regarding IFRS 9, we haven't communicated the impact in our case. We are working on that, of course, and building developing models and adjusting models and so on.
And so and we will come back later with guidance on that, what it will mean to us. But what I can say about that is that, I mean, considering our credit quality and how stable that is tend to be over time, that is something that also impacts the outcome of IFRS 9. So you shouldn't expect any major disruptions in our case. We have a good starting point considering our credit quality. So and then regarding the target range of us being then 1 to 3 percentage points above the SRIP requirement and that being a wide range.
Yes, well, it's compared to some other banks, it's wider. What is the thinking behind this is that we want to have this buffer because we have a growth strategy. And credit growth is capital consuming. And we want to be able to catch the opportunities we get when we get them and without any restrictions. So that's why we want to have a buffer.
And yes, that's correct. If I am to prioritize capital, the first thing is, of course, to make sure that we are compliant. But secondly, we want to grow the business. And but if we then have excess capital and more capital than we need, considering our growth, considering capital requirements and considering also potential volatility in the capital requirements related to issues that we can't control. Yes, then we will distribute that back to shareholders and calibrate ourselves back into the target range.
So do we have to be should we think about this as a 3% target or a 1% target or somewhere in between? Well, we have this buffer for us to be able to deal with some volatility and also growth opportunities we have. So and we should be in that range. And that also means that we should be in that range. But if we see growth opportunities, it's of course good not to be too close to the limits, but the range is the buffer we want to have.
And then corporate risk weights, is the game over for now? Yes, I would say so. We you never know, and it's really hard to know exactly what will happen in the regulatory arena and how regulators will actually act in the future. So I can't forecast that. But from the things we know today and the work of and requirements that were raised a year ago by the Swedish FSA, that has been dealt with now through the approval of the PD models we had just introduced.
And then finally, the question regarding the loss level loan loss level of 4 basis points. Is that a sustainable level? And I would say, yes, it is. If you look at the credit losses and the loan loss levels we have had over the last years, the underlying credit quality has been very strong all the way through. And we have an underlying low loan loss level.
And then we have had on top of that a few major cases that actually explains a very big part of the total loan losses we have seen. So I would say so.
Very clear. Thanks. Thanks a lot.
Our next question comes from Jacob Kruse from Autonomous. Please go ahead. Your line is now open.
Hi, thank you. Just two questions. Firstly, on the mortgages, could you comment at all on the back and front book dynamics in Sweden, where your front book stands relative to your back book? And also on the whole issue of fixed rate versus floating rate mortgages, how the margin looked there and what the outlook you see there? And my second question was just on your digital plus local strategy.
Does that basically mean that you keep your entire branch network more or less unchanged and then you also have a competitive digital platform relative to the other banks? And if so, is do you see that as creating a problem in staying competitive on cost? Or can you kind of merge these two strategies together without having to pay up twice? Thank you.
Okay. So regarding mortgages and the front book and back book, if we look at that, we are actually seeing very similar margins both on the front book and the back book. And regarding the question of fixed rates and variable rates, I'll pass that on to Michael Hallacher.
Yes, we're closer to 60% variable or 3 months rates now at 40% on the fixed side. But this is also something that tends to change very rapidly when rates start to move. But currently, it's slightly more on the variable than on the fixed.
But is there a margin difference between the products? Okay.
And then on the topic of the branch network and keeping that. So we the branch is the bank. And the branch as the way of being close to the customer will continue to be the case. So that's the ambition, and we haven't changed that. We want to be local and be close to the clients.
So that's really the core of our business model, to be local and build strong relationships. So that will remain the case. If we look at the number of branch offices we and meeting places we have in Sweden, that has been reduced by 10 branch offices during the quarter. And that is something it has not been a target from our side. To be honest, is the fact is that, yes, we realized that when we concluded the Q1 report, it has not been important to us.
What is important to us is that we are cost efficient and run a good business. And that is something we can do also keeping branches. And the branches as such are not the big cost base in the bank. The cost base in the bank is mainly headcount and IT systems. So we'll stick to that.
We want to be local and digital in good combination. And that also means that we and the message we want to stand around this is that we us being focused on running the operations through branch offices doesn't mean that we neglect IT and digitalization. On the contrary, that is something that we'll add on and does already today add to our offer to clients. And that is something we feel that we have to develop and we want to improve what we have today. We have a good offer, but we need to, of course, adjust that and improve it and take business opportunities that the digitalization also gives to us.
Okay. But I guess my question is just, are you not then running both the distributed distribution network? And I appreciate that the rent of the branch is not a big cost, but clearly, you also have people in the branches and they have systems, etcetera. And you're also then running a centralized distribution in the digital form. So wouldn't that put you at a cost disadvantage to somebody who decides to go much more firmly down one of those two strategies?
No, we don't think so. And if we look at the development so far, we what we can conclude is that we are an efficient bank. So we the costincome ratio we run at is low compared to many other banks. And we also see opportunities in improving that. So, so far, we that has not been the case.
And also, I mean, if you want to serve clients well, no matter if you do that from a central point or you do that being present locally, you need people to do that and you need IT systems to do that. So and that's the reason behind it. We want to have the people local because we have the experience that, that is good for business and building relationships and also getting business and make a good return out of that because if you're close to the client, you can do more business and get a service. So that is our starting point, and that is also our experience that we are able to do that in an efficient way and cost efficient way. Okay.
Thank you. And then I'd like to add one thing and that is I mean, the business model we have is flexible. So we do all the time adjust the way we work, the way we approach clients and so on to move with the types of it.
Okay. Thank you very much.
Thank you.
Our next question comes from the line of Jan Wolter from Credit Suisse. Please go ahead. Your line is now open.
Yes. Jan Wolter here, Credit Suisse. A couple of questions on my side. I joined late, so apologies if they have been asked already. So first on the liability margin and STIBOR 3 months is up around 5 basis points in the quarter.
When we look at the breakdown in the presentation around the NII, Why don't we get positive impact from higher liability margins just in principle? If you could elaborate on that? So that's my first question. And second one is on, I think you mentioned the cost savings of €600,000,000 to €700,000,000 kicking in, in 2018 from the program. Can you say anything how much of that could flow to the bottom line?
I am aware that salary inflation as well as IT investments will eat up some of the savings, but still any color there whether or not that could hit the bottom line or to what extent? So those are the 2 first questions, please.
Okay. So I pass the first question over to Michael.
Hi, Jan. Looking at it, we state in the report that we actually changed a little bit the way that we calculate the margins of this quarter, moving away from Steibor as the benchmark rate and we calculate margin as the customer rate less the rate our internal prices that we charge or credit the charge for loans and credit for deposits over to the branches. And that has changed. So that has an impact on this because obviously we are living in a positive rate environment with 0 on deposits and we're still charging on the asset side whereas LIBOR is so far outside that range. So that's why we made the change.
But it's true in the sense that, of course, as long as we keep 0 on deposit rates and the part of the loan book that is funded by deposits, obviously, have an increase in margin when STIBOR goes up. But it's partly that we changed from this quarter the way we calculate margins.
Okay. Just follow-up quickly on that answer, Michael. Then did the bank materially change deposit rates in the quarter? For example, if we look at the retail deposits in Sweden?
The answer is no. It would be a little bit of change in the rates, no.
Okay. Thank you.
General is stable. And then regarding the cost savings program, well, that is running according to plan. And what we have communicated before is that we will, all else equal, reduce the cost by SEK 600,000,000 to SEK 700,000,000 per year on an annual basis from 2018. And although we don't communicate how far we have come in that and we are still estimating that, that will be the case. So it's running according to plan.
And I think you can see that, although we don't disclose the exact figures, I think you can also get a notion of how far we have come through looking at the staff numbers we do communicate. So we are 449 people less in the Swedish branch operations and Swedish regional banks. We also have made some reductions in some other countries, the older markets outside Sweden and not big ones, but some and then also in head office. But on the other hand, that is we have recruited new people and added on people in the IT development side to be able to increase the development phase. And so I think that gives so that is feeding through the numbers today.
But on the other hand, of course, we are then growing outside Sweden and particularly in the U. K. And Netherlands. And we also invest in IT. So that would, of course, move in the other direction.
But I don't know if that is clear enough.
No, that's very helpful. And just a final question on data here. Have all the applications been approved now with Swedish MSA regarding the model adjustments for higher corporate risk weights? Or is any application still pending?
No, no. So we got the approval by the end of Q1. So and that covers all the corporate risk weight models.
Okay. So we shouldn't see any type of RWA inflation coming from that side really even though and you have in your the share price you communicate in the report the so called all the effects from the higher corporate risk weight order is included in that one that you state in the report 20.3, I think?
Yes. So that is the complete history around the corporate risk weights. But then, I mean, we never know what will happen in the future when it comes to regulatory discussions. But for now everything we know now, that has been dealt with when it comes to the PD models.
Sure. Okay. No, thanks for that.
Our final question comes from the line of Jesse Kian from Citi. Please go ahead. Your line is now open.
Thank you. I just have a quick question on the resolution fee contribution starting from 2018 onwards. And given the increase in the contribution rate, how much higher contribution fee year on year do you expect to see in 2018 contribution for the assets that are in the U. K. So how much savings can you get from moving U.
K. To a subsidiary? And then a quick follow-up question, specific number question on the operating costs in Sweden Banking. This quarter, it's relatively higher. And in your comments, you mentioned around RMB 100,000,000 higher in cost from internal purchase services.
Is this something that would be considered as ongoing or is it just specific to this quarter? Thank you.
Okay. So regarding the Swedish Resolution Fund Fee for 2018. So now you need to keep in mind that the increase is just a proposal. So it's early stage. That might happen.
If it happens and it will be increased then to 12.5 basis points, that would mean on an annual basis that total cost would be SEK 2.5 1,000,000,000 per year. Now it's estimated to be SEK 1,800,000,000. So it's a SEK 700,000,000 increase if that happens. Now that hasn't been finalized, so we don't know if that will be the case, but we certainly see the risk for that. So if we have to put up a subsidiary in the U.
K, we don't know that, that is the case, but potentially it would be. Yes, then we don't have to pay the resolution fund fee for the UK book to the Swedish Resolution Fund. So that would, of course, reduce the amount. And I don't know if we have communicated that.
I mean it's clearly we have said that increasing cost obviously for a subsidiary will partly be funded by low resolution fund fee. So that will be helped some because, of course, running a subsidiary will be more costly than running a branch.
And the number is in the range of SEK 200,000,000 that we would save. But on the other hand, we would have some costs, of course, in transforming the branch into subsidiaries. And then finally, operating cost increase in Sweden is that ongoing and that is related to development projects we are running both to for business development purposes, but also to a very large extent to compliance related products. Okay?
Okay. Thank you.
Thank you.