Ladies and gentlemen, welcome to the Handelsbanken Q4 external conference call. Today, I am pleased to present Anders Bouvin. For the first part of this call, all participants will be in listen only mode, afterwards there will be a question and answer session. Speaker, please begin.
Good morning, everyone. Welcome to this conference call for the fourth quarter and full year of 2016. Joining me today, I have Mikael Hallåker, Head of Investor Relations, Lars Höglund, Head of Debt Investor Relations, and Jörgen Olander, Head of Group Accounting. The slides used for my presentation are as usual available at handelsbanken.com. Let's start with slide number two. 2016 was the 45th consecutive year when the bank reached its target to be more profitable than our peers. At the same time, the business has grown further and capital generation has been strong. The growth rate in equity per share, including dividends, still was 15% also when adding 2016. Also in 2016, the bank had more satisfied customers than the industry average in all our home markets.
Lending grew in all home markets, we see good growth potential for our lending business. Asset management also continued to develop very well. The board is proposing a dividend of SEK 5 per share and also a renewal of the share buyback program. Our capital position at year-end was at the upper end of our target range, taking into account the known changes in the capital framework which will take place during Q1. This capital situation gives us a very good position to capture the profitable growth potential we see in all of our home markets. Now turning to slide number five. You can see the P&L for the full year of 2016 compared to 2015. Operating profit increased by 1% to SEK 20.6 billion. Adjusting for extraordinary items, operating profit was unchanged. Net interest income increased by 1%. Adjusted for currency, the increase was 2%.
Both full-year number and net interest income for the fourth quarter were all-time highs. Higher lending volumes in all home markets together with lower funding costs did more than offset the negative margin impact on deposits. Net fee and commission income decreased by 2%, chiefly due to the impact of lower interchange fees in the card business and also lower equity brokerage income. Asset management fees, on the other hand, continued to increase. Net gains and losses on financial transactions increased due to higher capital gains on shared divestments this year. Adjusted for that, this line was unchanged. Total expense increased by 1%, where staff costs were unchanged. Adjusting for the provision in 2016 and the allocation to Oktogonen in 2015, staff costs were up by 1%. Other expenses increased by 4%, mainly driven by higher costs for IT and purchase services.
Loan losses increased by 8%. The loan loss level for the full year was unchanged at nine basis points. During the fourth quarter, we took a provision for one problem exposure in Denmark, which entirely explains the jump up to 17 basis points from 10 basis points in the third quarter. The underlying credit quality was still stable. On page 24, you can see the quarterly development of Net Interest Income. Lending margins in Sweden continued to improve somewhat, adding SEK 24 million. The mortgage margin increased by one basis point during the quarter. Together with higher lending volumes, the total impact from lending in Sweden was SEK 38 million. The STIBOR rate declined somewhat. Deposit volumes continued to increase. All in all, the deposit business in Sweden had a negative impact of SEK 53 million in the quarter.
Outside Sweden, lending growth in all home markets added SEK 31 million. Some pressure on primarily household lending margins reduced Net Interest Income by SEK 43 million. Corporate lending margins were more stable in most of the markets. Deposits outside Sweden continued to increase. In total, deposits in other home markets contributed SEK 12 million this quarter. The benchmark effect, which over time is around zero, this quarter contributed SEK 88 million and currency effects another SEK 77 million. The rest of the increase in Net Interest Income was primarily due to lower funding costs. On slide number 6, you can see the Net Interest Income development over a longer period of time. The fourth quarter was the best quarter ever for our Net Interest Income. The increase was seen outside Sweden as well as in Sweden.
With interest rates still in a negative territory in Sweden and some other countries, and meaningfully lower at the end of 2016 than at the beginning of the year, Net Interest Income has still gradually improved throughout the year. For the group as a whole, the increased business volumes in all our home markets have contributed to Net Interest Income growth of 5% in Q4 2016 compared to Q4 2015. This shows the strength of our business model, adding customers selectively in all our home markets and creating organic growth. All-in-all lending in the group grew by 5%, or almost SEK 100 billion in 2016. On slide number 10, let me talk a bit about our Swedish operations. In 2016, we saw a positive development in our Swedish branch network. The decline in deposit margins in Sweden was just over SEK 1.1 billion compared to 2015.
Still, Net Interest Income grew by 6% in Q4 2016 compared to Q4 2015. The gross margin on the mortgage portfolio improved by one basis point during the fourth quarter to 107 basis points. Total revenue was up 7%, while total expense was down 2%. Again, comparing the fourth quarters. Loan losses in Sweden this year were six basis points in the quarter compared to 11 basis points one year ago. All in all, this gave an operating result that improved by 18% in the fourth quarter compared with 2015. We find this very encouraging and see good activity and improving results in our Swedish branches. On slide number 11, we take a look at the staff situation in the bank. As you recall, we took a provision in Q1 2016, primarily for early retirements in Sweden.
In 2016, we reduced the number of employees in Handelsbanken in Sweden by 332 persons. The ongoing work continues according to plan. At the same time, we have continued to expand outside Sweden with new branches and new colleagues. All in all, the total number of employees at the end of 2016 was 255 lower than a year ago. Slide number 12, which shows our development in the U.K. Operating profit in local currency improved by 6% during 2016. Business volumes have continued to grow steadily throughout the year in our existing branch network, another nine branches have been opened. More and more customers also entrust us with a larger share of their total business. This resulted in a continued strong deposit growth and Net Fee and Commission Income grew by 28% in local currency.
In the lending business, margins on the household side have been under some pressure during 2016, while they were more stable on the corporate side. Again, in 2016, Handelsbanken had the highest customer satisfaction among the U.K. banks, the gap to the industry average is substantial. Loan losses dropped to eight basis points for the full year. As you can see, the revenues have outgrown costs at a steady rate for many years in the U.K., we continue to have a very positive and optimistic view on our U.K. business. To slide number 14, please. Since 2010, lending has been growing steadily year by year and has increased by 165% in local currency. At the same time, the number of customers has grown even more by some 240%.
In this period, our branches have attracted an increasing number of household customers, making the portfolio more balanced between corporate and private customers. That can also be observed in the development of deposits, which have grown by some 600% during the same period. This is a natural result of a growing share of household customers, also that we step by step are getting a larger share of the customer's total business. The slide also shows you that growth of business volumes and customers continue at a steady pace Despite the fact that we have opened less new branches in 2016 than previously. All our branches have very low market shares within their respective geographical areas, we have a significant potential to grow our business by digging where we stand. Having said that, we will of course, continue to open up new branches in the U.K.
Slide number 15, which shows our other growth market, the Netherlands. Netherlands has been a home market for only four years, despite this, the performance has been very strong in 2016. Operating profit in local currency increased by 130%, business volumes increased significantly. Cost-to-Income Ratio fell by 11.6 percentage points, Return on Equity was 12%. The loan loss level was still zero for the full year. During the fourth quarter, Optimix was fully included in the numbers, gave a significant contribution to Net Fee and Commission Income. That line item for the full year already represented 14% of the revenues in the country. Apart from the acquisition of Optimix, we have continued to build the platform, two new branches were opened. The customer satisfaction was again the highest in the market, the gap to peers is significant.
Against this background, we continue to be very optimistic about the prospects we have in the Netherlands. On slide number seven, we summarize the lending growth of the various home markets since 2012 in local currencies. This shows the outcome of our organic growth strategy in a period of time that for some markets have been challenging. The Netherlands and the U.K. experience obviously the most rapid growth, but also our other home markets outside Sweden have had a positive development with growth rates of 5%-7%. Slide 16 shows our capital and liquidity position. The board is proposing an ordinary dividend of SEK 5 per share, compared to SEK 4.50 in 2015. This corresponds to a payout ratio of 60%. The board is also proposing that the share buyback program of maximum 120 million shares is renewed for another year.
Looking at the capital position at year-end, the Common Equity Tier 1 ratio was 25.1%, up from 21.2% a year ago. The increase during the fourth quarter was to a large degree related to the pension calculation according to IAS 19. Higher asset values and the increased discount rate to 2.4% in Sweden improved the ratio by one percentage point. The Common Equity Tier 1 requirement from the Swedish FSA was 21.3% in the third quarter, and I will soon come back to the impact of upcoming changes and the capital requirements and actual capital ratios. This quarter, we also published the NSFR, which was 102% at year-end. It is still not clear to us whether NSFR will become a binding requirement from January 1st, 2018. As you can see, we are already fully compliant. Now please turn to slide 17.
I will explain the impact of already known changes to the bank's capital requirements. As we have said before, the bank has applied for new Pillar models regarding our corporate exposures. They have not yet been approved by the Swedish FSA, but we expect to have an approval during the first quarter. Higher corporate risk weights will increase Risk Exposure Amount, and if we apply the new models on the year-end numbers, our Common Equity Tier 1 ratio would have gone down to 23.3%. At the same time, the capital requirement will go down as a result of parts moving from Pillar 2 into Pillar 1. We also know that from March 19th, the countercyclical buffer in Sweden will increase from 1.5% to 2%. Taking also this into account, we estimate that our pro forma Common Equity Tier 1 ratio requirement would have been 20.3% at year-end 2016.
All in all, adjusting for the known changes, the capital ratio of the bank was at the upper part of the target range. We see a good growth potential in our lending business and therefore choose to keep the capital position in that higher end of the range. To summarize with slide 18. Also, the fourth quarter was a stable one, and the average growth rate in equity per share and dividends of 15% continued. Return on Equity for the full year was 13.1%, and the bank reached its profitability target for the fourth to fifth consecutive year. The U.K. and Sweden were on top with 15% Return on Equity, and the Netherlands was at 12%. Operating profit for the full year increased by 1%, but was unchanged adjusting for extraordinary items.
Net interest income was the highest ever for the full year as well as for the individual quarter. Net fee and commission income also reached a new all-time high in the fourth quarter. We continued to see a good growth potential for our lending business, which was strong also in 2016. The board is proposing a dividend of SEK 5 per share. With the known changes in our capital ratios and capital requirements, the capital position at year-end was at the upper end of the target range. The board is also proposing a renewal of the share buyback program. With that, I conclude my presentation and open up for questions. Thank you.
Thank you. Ladies and gentlemen, if you have a question, please press 01 on your telephone keypad and you will enter a queue. We have our first question from Mårten Bjurman of Danske Bank. Please go ahead. Your line is open.
Yes, good morning. It's Mårten Bjurman here from Danske. A question on the dividend. Your capital ratios, the core Tier 1 ratio is up by almost 400 basis points or was up during 2016. Still the dividend increase was fairly moderate, the payout ratio below 60%. How much was this impacted by the fact that there was no Oktogonen and allocation? If there is Oktogonen and allocation during 2017 and going forward, will this also mean that we could see a rising payout ratio? Anything you could shed light on the dividend would be really useful. Just a quick second question. Could you remind me what is the expected resolution fund fees for 2017? Thanks.
Okay. Hi, Mårten. The dividend decision was not related to the Oktogonen and question at all. Those are two separate issues and that's the way we deal with it on the board level. No connection. The reason behind the decision is the focus we have on growth and growth opportunities we do see. That is the explanation. That is also against the background we have presented in this presentation, you can see and you know already how we have been growing in the past, and we see no reason for that to change. We see good growth opportunities, and that is what is behind the decision. I also think when we think about and make decisions about dividends, the number one thing is, of course, to be compliant. Today we are quite far away from not being compliant.
We are really on the safe side as you can see from the figures. Regarding the uncertainties in the regulatory environment, that is nothing we have a problem with. The can has been kicked down the road, it seems like. No major worries there. The second thing we care about is the growth opportunities we have, and that's the reason why we have made this decision.
If I just may have a quick follow-up on that. If you're above the 300 basis points level, should we assume that that could be potentially paid out, or is it just the growth opportunities which are the decisive factor in that decision?
Okay. First of all, when we take everything into consideration that we know will happen fairly soon regarding, first of all, the decision from the Swedish FSA about corporate risk weights. Secondly, regarding the countercyclical buffer change during March. We are at the upper part of it. We are on the top part of the range. We are within the range. If we will be above the range, we will communicate the intentions we have at that point. Yeah, that's it about that. Okay. Regarding the question about the resolution fee, that is expected to increase to approximately SEK 1.8 billion during 2017. It will be increased.
Very clear. Thanks.
Thank you.
Thank you. Our next question comes from the line of Willis Palermo of Goldman Sachs. Please go ahead.
Hi, good morning, and thanks for taking my question. The first one is on capital. I noted that the willingness to highlight this year in the PowerPoint the extension of the existing mandate to buy back share, whilst it has been many years now that it was renewed. Could you please comment a little bit on the thinking behind that? Would you be willing to use the mandate during the year? How would you balance the growth you mentioned in the lending business and the willingness to use the buyback mandate? The second question is on the U.K. business, specifically on the Net Interest Income. Could you share some thoughts maybe on the competitive landscape, what you see and what feedback you receive from the branches as over the last year and also today there are many players that have cut the pricing much further.
Do you still manage to be competitive and gain market share in the U.K.? Finally, still on the U.K. and the asset quality, there was a somewhat high level of provision in the fourth quarter. Is this just a fourth quarter adjustment, or is it just that the asset quality is deteriorating a little bit in the business? Thanks.
Okay. Starting with the capital related issue and the share buyback program. The number one thing for us is to be able to have growth. We haven't used the buyback program for many years. I think the last time we did it was in 2007. We still want to have the mandate because that gives us another tool to manage the capital situation if we would find ourselves in that position. What we see is growth opportunities, and that's the reason why we have made a decision we have made. That is a tool in the box, but the aim we have is to grow. Secondly, regarding U.K. and Net Interest Income development and margins and margin pressure and so on.
We have continued to see a steady inflow of new customers deposits, in particular from private individual clients, and also growth in the lending business. On the corporate side, margins have been fairly steady during the last part of the year. We have seen during 2017, an increased pressure on margins on the private individual side. There we experienced some margin pressure. We-
2016.
Sorry, yeah. 2016. Sorry. We see that we are competitive in that regard, so we would not see any major problems in that respect. The third question, could you please repeat that? I-
No losses in Q4.
Yeah. No losses in the U.K.
No losses in Q4. Okay. That's something that is related to single exposures. Yeah.
Okay. Thank you very much.
Yeah, thank you.
Thank you. Our next question comes from the line of Anton Krech of UBS. Please go ahead. The line is open.
Thank you. Good morning. Thanks a lot for the presentation. Just two questions on my side. The first one on Net Interest Income, please. If I look at the amount of lost NII that comes from deposit margin compression and lower Return on Equity in Sweden in isolation, then I get to roughly SEK 3.5 billion for around 100 basis points fall in STIBOR. If we do get rate hikes in Sweden, would you expect that this income can come back and is SEK 3.5 billion for every 100 basis points is good enough sensitivity, or are there any factors on the way up, such as force, for example, that can limit the sensitivity of your top line? Please, that's the first question.
The second question, please, sorry to come back to capital return, I would really appreciate if you can share a little bit more color on how management thinks about the buyback versus special dividends going forward. Do you think that the buyback might be a more flexible tool to use given the regulatory uncertainty? Also, do you need to get clarity on Basel IV before any buyback can be triggered? Thank you so much.
Okay. I turn the question about Net Interest Income estimate to Mikael Hallåker.
Yeah. Hi, Anton. I think if you look at the NII bridge we always have in the presentation pack, and you track that to the change in STIBOR, I think you have a fairly good proxy of the sensitivity in Sweden. Of course, on the way up, I'm sure the initial impact would be positive, certainly when rates start to go up. It's always a question how far will competition let rates go up before you start to see competition in the market? We don't know that. I think the best proxy is really to look how things have developed when you look at those quarterly NII bridges that we provide.
Got it. Okay. If you can preserve lending margins, SEK three and a half billion might be a good estimate, you don't know what will happen to lending margins. Is that right?
It might be a good estimate, again, it all depends on when the market starts to get really competitive also on the deposit side, that's something nobody really knows at this point. It's no doubt that it would be positive for us when short-term rates go up.
Got it. Thank you.
Okay. Regarding the buyback program and the flexibility. Obviously, share buyback program is a flexible tool, so it's easy to use. At the same time, what has changed is that when you use that today, you have to apply and get approval from the FSA to use it. Immediately when you get that approval, you have to deduct everything you intend to buy back from capital. That of course makes it different compared to what it used to be going back in history. Yes, it is a tool we have there, but the intention is actually to focus on growth and growth opportunities, and we see some good opportunities in that respect. What I also think is part of that picture, since I'm also receiving many questions about this, is that increasing lending is something that is capital consuming.
I would say that for us and also for other Scandinavian banks, what has been part of the history going back is that average risk weights have been going down as a consequence of increasing lending volumes to property management companies. That is typically something that is a more low risk weight business. If we would have lending growth in other areas, that could be something that changes that balance somehow. We want to have the capacity to take care of that as well.
Thank you so much. That's very clear. If I may push my luck just a little bit further and rephrase the last question. If in six or 12 months' time from now you find yourself with excess capital even after you've satisfied all the growth opportunities, would management be inclined more towards the buyback rather than a special dividend as a way of distributing that excess capital even when it occurs?
The main target we have as a company is to have a good Return on Equity. On the other hand, we have no reason to keep a lot more capital than we need to. Of course, we have to consider what would happen in that respect. We are not there yet, and we have other things in mind, and that is growth opportunities. We don't make any forecasts or statements about what we intend to do in that situation.
Okay. Thank you so much.
Yeah.
I think, Anton, historically, if you followed us, in the good old times, also in Basel II, when we have been outside the range, above the range, we have always adjusted that historically. Like Rolf says, we only have a return equity target, so there's no incentive to keep the equity in the bank. Also, like Rolf indicated now so many times, we do see growth opportunities.
Perfect. That's very clear. Thank you for that explanation.
Thank you. Our next question comes from the line of Omar Keenan of Deutsche Bank. Please go ahead. Your line is open. Mr. Keenan of Deutsche Bank, you may go ahead and ask your question.
Hello? Hi, can you hear me?
Hello, yeah.
Hi. Sorry, you confused me. It's actually Omar Keenan here from Deutsche Bank. I'm not sure what name that was. I have a group strategy question, and it's related to the payout and the growth. You said quite clearly that you're maintaining the top end of the 1%-3% management buffer because of growth. If I look at the past year, you have 5% growth in loans, and you've generated capital every quarter. What's missing here? Do you see opportunities that exceed loan growth of 5%? Are you thinking about uncharacteristic M&A or something like that? I can't quite square everything together, could you fill this in?
Yes, I can. First of all, we haven't made any as usual, and I know we are boring, but we don't make forecasts about what we expect exactly. We want to have the capacity to harbor that kind of growth and more if need be. Referring back to the development we've had in our capital position during 2016. If you look at the different explanations to that, it's not only about us being a profitable bank and being able to build capital in that and through that meet the increasing capital requirements that comes from growth in lending. We have also been growing our capital and strength and our capital position for many other reasons. If you look, for instance, at the Q4 development, that is almost exclusively explained by IAS 19 effects.
there are many things that have been contributing to the development of the capital position during 2016.
Going forward from here, I understand that you don't guide on loan growth, but we seem to have been perfectly fine growing loans around 5% and being able to organically generate capital and solve for 70% payout ratio as well. I understand there's opportunities for growth, but it's difficult to see the group level loan growth far exceeding 5%. Is there something else that you're seeing that we're not? Are you expecting a decline in returns in 2017? Is this driven by growth or is it driven by returns?
I would like to refer back to the reasoning I had on the previous question regarding the mix also between different parts of the portfolio growing. What we have seen recently in Sweden when it comes to mortgages is that we are not growing at the same pace as we used to. We are still growing and so on. A change in the mix in the portfolio is something that could also impact the capital requirements we face. That is something we want to be prepared to deal with. Not only in Sweden but also outside Sweden where we actually do experience most of the growth.
I guess asking the question another way, is the current 13% ROE, should we expect that to continue going forward?
We don't make forecasts about that, as you know. I think I will stop there.
Okay. Thank you.
Thank you. Our next question comes from the line of Jan Walter of Credit Suisse. Please go ahead. Your line is open.
Yes. Hi, Jan Walter here, Credit Suisse. Thanks for taking my questions. A couple of things. First, on the NII Bridge on page five in the presentation there. I think we've discussed that a couple of times in previous quarters. Now, when we look at the year-over-year impact, the line other in branch operations, that's SEK 800 million up compared to 2015, and that's the second-biggest factor explaining the NII change year-over-year. Any light that you could shed on what this is? What it relates to? The underlying impact coming from that or underlying factor driving that? That's my first question.
Okay. That's the item we have been talking about before, I think, several times. The majority of that is related to negative interest rates and actually how we internally do set charts. That is actually the impact of negative interest rates, and that ends up as a profit in the treasury department. It is related to lending margins to a large extent.
If it's related to lending margins, you say, in reality then, the lending margin impact, which we see now, for example, in markets outside Sweden, minus SEK 588 year-over-year. In reality, should we net them out? Is that the principle then, or?
Not completely. A part of that is explained, and a fairly big part of that is explained by lending margin. You can't completely net it out, I would say.
Okay. The next question is on the repricing effort in the Swedish market on the back of the higher corporate risk weight. What have you seen so far on that? Do you see that starting, and to what extent can we see that in the P&L later in the year, please?
It's a little bit too early to tell, actually. We noticed that our peers, at least some of them, have been quite expressive about this and been talking about it. What we have seen in terms of lending margins when it comes to corporates in Sweden during the last quarter, it has been stable and somewhat improving. No big changes, but we have seen a few signs, I could say. It's too early to tell, actually. On the other hand, I think since the talk has been there and also there are good reasons to, all of the Swedish banks will have to relate to increasing risk weights and capital requirements on corporates. It's quite natural that there might be movement in that direction. We've seen a few small signs.
Also to be clear on that, I don't know about the others, but in our case, we have still not yet received the approval. We expect that to come in the near future or at least during Q1 as far as we know. We don't know about the outcome yet, but we expect a decision. In our case, when we get that, we will feed that into our system, and then incentives will be there to do something about it. Of course, this is a known change. We have, of course, been communicating about this in the bank to prepare. That's where we are at the moment, I would say.
Okay. No, that's very clear. The final one on the cost side there. In the first quarter 2016, the bank took a one-off charge SEK 700 million for potential branch closures and staff cuts. How much of that is used so far by the different businesses?
We have used SEK 197 million so far. What we have also communicated is that we expect to come down, all else equal, SEK 600 million to SEK 700 million from 2018 onwards. Everything is moving according to plan, and we still make the assessment that we will achieve that. I would also like to underscore that we also do take other efficiency measures that will not go against that reserve. That also comes into the figures.
Thanks. Just a quick follow-up then. Of the cost cuts that you were highlighting there of SEK 600 million to SEK 700 million, have we seen anything of that in the P&L so far this year in 2016?
Yes, I think so. What we have been quite satisfied about is the improvement we have had in the Swedish operations and costs were down, as you can see from the slides. That is part of the explanation, of course, some of the work that has been done during 2016 to reduce costs.
Okay. Very clear. Many thanks.
Thank you. Our next question comes from the line of Daniel Du Toit of JP Morgan. Please go ahead. Your line is open.
Thank you. Good morning. Just one question, really just following up on the issue of rate sensitivity. Would you be able to give us the proportion of your loans in Sweden and Finland that are subject to lending floors? Thank you.
We haven't done that. I think it's partly competitive. We haven't given a number, but a large, if it's the STIBOR floors you talked about-
Yes, exactly
we have a large portion of our loans on that. Again, we also see some peers in the market that seems to have been moving away from the floors a little bit. There is some competition on it. We haven't given any number, but that has been the standard in Sweden so far. We also have seen signs in the market that maybe some of our peers are not fully following that any longer.
Okay. If I understood correctly, you seem to suggest that it shouldn't materially impact your rate sensitivity on the way up, i.e., the presence of these STIBOR floors.
No. I think that's correct, yes.
Okay, fine. Thank you very much.
Thank you. Our next question comes from the line of Magnus Andersson of ABG. Please go ahead. Your line is open.
Yes. Hi. Just a follow-up on your efficiency enhancing measures in Sweden. Now we see that you've closed down close to 40 branches in June 2016 and headcount is down 7%. You also moved the restructuring reserve from the Swedish branch office operations to the group level in the Q3 report. Does that mean that you see efficiency enhancing measures now also in the other Nordic countries and that you intend to use some of that reserve for efficiency enhancing measures also there? The reason I'm asking is that the Cost-to-Income Ratio trends in your other Nordic countries are far from inspiring, particularly in Denmark and Finland, and it's fairly flat in Norway. Just how we should see about further efficiency enhancing measures there. I guess digitalization is impacting also those countries. Thanks.
Hi, Magnus. The reserve has mainly been used in Sweden, and that's the intention. The reason why we moved it to other from the Swedish branch operations was that we see opportunity to work on efficiency measures across the board, also central parts of the bank. That's also quite natural because there is a play. If you improve things, one way of improving things in the branch office network is actually to move things to other parts of the bank and the other way around. There is a play. We wanted to be more flexible in the use of it, but all with the aim of improving efficiency from support units out to branch offices. Regarding the Cost-to-Income Ratio development in some of the other home markets. In the other Scandinavian countries, that is to some extent explained by one-offs.
Also, if you look at the outcome during Q4 this year and compare that with Q4 previous year of course, there is a few one-offs actually. It's not a major trend. I also think you can see that it's not that dramatic. It's mainly one-offs in those cases. Having said that, what we are facing as a bank, so that we are keeping the majority of the branch offices and want to be local and want to have many branch offices, even though we have excluded a few of them during 2016. That's the aim. We certainly have to work on efficiency and also to use the new opportunities that we see from new technology and improving technological development and so on in the bank.
That's also part of improving efficiency, both in the central level of the bank, but also in branch offices.
Should I read it that the SEK 700 million reserve is still primarily from Sweden, although it is also for central parts of the group office functions, et cetera, rather than just the branch office operations, and that it should not be used for the other geographical regions? When I look at the Cost-to-Income Ratio trends, I look at much longer trends than the last year, and it seems that there could be some potential there as well.
Yeah, okay. It is mainly for Sweden.
Yeah.
Sweden then includes also central parts of the bank and the group level-
Okay
All the way through.
Yeah.
Efficiency is also something that we have to deal with in all operations outside of Sweden. Obviously, we will focus a lot on efficiency also in the other Scandinavian home markets.
Finally, do I understand you correctly, Mikael Hallåker, that the STIBOR floor will not have any impact at all on Handelsbanken when short-term rates in Sweden move up?
No, I didn't say that. For us, not having any hedges in place on the way down on the interest rate is mainly, I would argue, on the household side that we have the big sensitivity, not as much on the corporate side. For us, we certainly believe that on the household side, yes, when rates start to go up, initially at least, we're going to see the benefit of that. Again, nobody knows when the competition will heat up again, so how long it will go. We see it mainly on the retail side.
No. Of course. On the corporate side, you should get the margin squeeze, right?
We may get some, we'll see. When we talk about this, we see mainly on the retail side, we do expect the positive impact.
Yeah. Okay. Thank you.
Thank you. Our next question comes from the line of Riccardo Rovere of Mediobanca. Please go ahead. Your line is open.
Yes, good morning to everybody. A couple of questions from my side, if I may. You have been pretty vocal in stating that your main target is to grow the loan book in terms of using the capital available to Handelsbanken. In this respect, what we have noticed over the past couple of years is that actually the book kept growing, the risk-weighted assets kept declining. Are you basically saying that from now on, we could assume that the risk-weighted assets of the group will grow in line with the loan book increase? Otherwise you're not going to erode any capital by increasing your lending volumes. This is the first question.
The second question I have is, it is not clear to me whether you consider a 300 basis points buffer on top of the requirement, whatever the requirement is going to be in three months, as a level beyond which you are in a kind of surplus capital position. Sorry to ask that again, but it is not clear to me. Thanks.
Hi, Riccardo, and thank you. What has happened in the past is that the average risk weights have gone down, and that has sort of compensated for the increased capital requirements we would otherwise have been facing when the volumes have been growing. We haven't made any forecast about the future development. What we have seen is that some parts of the business that have been growing more rapid in the past continue to grow, but not at the same pace. That's the part that has been in the low-risk weight range of the scale. What we assess is that we want to have the capacity to also deal with the situation where we grow in other parts of the business that have slightly higher risk weights. If the balance would change, that would of course impact the development.
Behind that, we don't have a master plan or a forecast. Regarding this 300 basis points level, what we have been stating before, and I want to repeat that, is if we go above that range, we will communicate what we intend to do and why. As long as we stay within the range, we don't necessarily do that. Then it's a managerial decision to sort of manage the capital situation. If we exceed that, we have communicated that we will then tell how we perceive the situation and what we intend to do.
Okay, thanks. Very clear on this. Just to be 100% sure I understand, if in six, nine, 12 months' time down the road, we still have no clarity on Basel IV, in the meantime, you continue to generate capital, is this a problem for you to give the market a guidance on how you can use your capital?
No, I would say that the reason behind this decision is about growth. It's not about increasing worries or anything like that regarding the regulatory development. I think that is still impossible to know. That is not the reason why we have made this decision. What could happen in the future is that we gain more insight into what will actually happen. That is regarding both Basel IV and also the review that is ongoing now regarding CRD, or in the CRD V and CRR II package. At this point, that is still far ahead in the future. We don't know about that, and that has not been behind this decision.
Okay. Very clear. Thanks. If I may, one very final remark. With the most recent comments from Mario Draghi, do you think it is reasonable to assume interest rates hike in Sweden?
I pass that on to Mikael.
I think it will come at some point. We don't have a firm view when it will happen, but I guess our view is still that the next change, we're going to be upwards. I think you should ask the macro experts about that.
Thank you, Mikael. Thank you very much. Very clear.
Thank you. Our next question comes from the line of Jacob Kruse of Autonomous. Please go ahead. Your line is open.
Hi. Thank you. Just two questions. Firstly, could you say anything about what % of your staff in the Swedish retail business are client-facing, so telephone bank branches, and what % is the back office or non-client facing? Secondly, just on this buyback dividend discussion. I just wanted to ask you, I guess you've put this extension of the buyback more prominently on the front page of your report for a reason. What are you trying to signal here? Are you trying to signal that we are more likely to get a buyback? Because I think your answers to most of these questions seems to be relatively non-committal. That will be my two questions. Thank you.
Okay. First, on the staff issue and how big part of the staff in the branch network that is client-facing. I don't have that information. Michael, do you have any deeper insights?
What we can say, since we, unlike some of our peers, we don't have any back office units, since all the back office is done at the branch, I think quite a few of our staff will do both actually. We don't have any central back office units. All the back office work is basically done at the branch. It's a job for the people at the branch, I would say, and they would not be entirely doing either client facing or back office. We have that locally at the branch.
Maybe in terms of staff hours then, rather than staff numbers.
We do have some internal views on that that we follow up, but it's nothing that we have talked about externally.
Okay. Thank you.
Back to the buyback question. I want to try to be clear here. As I have stated many times during this presentation, the number 1 thing we have in mind is, of course, being compliant. Number 2 is growth. That is what we focus on, and we see opportunities. I think it goes back to, we won't make any forecast. We won't tell if we don't have any immediate plans regarding any buyback. That we have to leave at that. What you can keep in mind is that the target we have is to be more profitable than our peers through having a higher Return on Equity than the average of our peers. We want to produce a high Return on Equity. That's a corporate goal.
Of course, that also means that we want to be stable and well-capitalized, but we don't see any reason to be over-capitalized. What we then have at hand is the different tools, and the share buyback program is one of those tools. Okay. I hope that is as clear as I can state it.
Okay. Thank you very much.
Thank you.
Thank you. Our last question comes from the line of Andreas Håkansson of Exane BNP Paribas. Please go ahead. Your line is open.
Yes. Hi. Just two short follow-ups. One is on the NII Bridge. Jan was asking questions there, and I just wanted to check. It looks like the lending margin on Swedish retail hasn't really been going up. Should we just read this since you have it down as 838 in other, as it's not the pricing that's gone up for clients, it's the funding cost that's gone down. It's of course still the margin that's been expanding, but you just report it in that way.
Yes, to some extent that is part of the explanation. If you look at the lending margin on mortgages in Sweden, that improved by one basis point during-
Yeah, I was looking for the full year
last quarter.
I was looking for the full year and averaging from last year, of course. Could you then tell us, because you have then in, was the funding costs would have gone down for retail outside Sweden as well. Could you tell us what the margin doing? You say that they're going up a bit in Sweden, but given this big drop you have outside Sweden, what the margins doing in your various home markets?
The margins in the different home markets have been steady when it comes to more or less flat when it comes to corporate lending. There are some variations between the countries, but no major shifts. On the private individual side, we see some margin pressure and declining margins to some extent, yes.
Last question. In the old days, I think you used to talk about that you needed a buyback mandate every year so that your markets division could be trading in the Handelsbanken share. Is that still the case? Is that actually the main reason why you ask for the buyback mandate?
No, it's not the main reason, it's right. If you look at the AGM, we always need a small part. The buyback mandate theoretically is much larger than what we need for being able to trade the share. That I think is quite clearly stated. If you look at the AGM material from last year, you will see that.
Yeah.
The SEK 120 million that we have shares is far, far, far larger as a mandate than what we need for being able to trade our own share.
Yeah. You need it if you're going to trade it. If you don't ask for it, then you can't do it, right?
You need the mandate, yes.
Yeah. Okay. Thank you.
There are no further questions. Speakers, please go ahead.
Okay, thank you very much for participating in this telephone conference, which we now close. Thank you.
This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.