Good morning, everyone, welcome to this conference call for the third quarter 2016. My name is Rolf Marquardt, I am the CFO of Handelsbanken. I have a long background in the bank, although I'm new in this position. My most recent position was head of group compliance, I have also been CRO for six years, I have headed our U.S. operations for two years and a half. Joining me today, I have Mikael Hallåker, head of investor relations, Lars Höglund, head of debt investor relations, and also Jörgen Olander, head of group accounting. The slides used for this presentation are, as usual, available on handelsbanken.com. Now turn to slide number 2. As you know, Handelsbanken business model was implemented in the bank more than 45 years ago. It has been developed over the years, the essence remained the same, I would say.
The model is based on a very basic idea, that is that decentralized decision-making, close to the clients and to the local markets, is successful in its way of creating satisfied customers, high cost efficiency, and also in creating good returns for shareholders. This is also what you can see on this slide. The bank has reached its goal regarding return on equity for 44 consecutive years. During and after the worst financial crisis in modern times, we have produced stable growth in equity, and we have continuously had more satisfied clients than the average of our peers in our home markets. The model has been very successful, not only in producing a good outcome, but also in adapting to changing conditions, as we also experience today. Now turning to 2016 and the first quarter.
The return on equity for the first nine months was 14%, and it was 14.7% during Q3. Our common equity Tier 1 ratio was 24% at the end of the quarter, and the latest requirement from the Swedish FSA in the SREP was 21.1%, which means that our capital position is within our target range. This also means that from 2017, the bank has decided to resume allocations to Oktogonen, provided of course that the return on equity for the bank is better than the average of our peers. Now turn to slide number 4. Here you can see the P&L for the third quarter compared to Q2. Operating profit increased by 8% to just below 5.7 billion SEK. If adjusted for capital gains from the sale of Industrivärden shares and also some dividends received during Q2, the underlying operating profit decreased by just below 1%.
Looking at more or less unchanged underlying operating profit, improved net interest income and seasonally lower costs compensated for slightly higher loan losses. Net interest income increased by 3% to just over 7 billion SEK. Higher lending volumes somewhat improved lending margins in Sweden and lower funding costs were the main drivers. At the same time, lower interest rates, especially in Sweden, added further pressure on deposit margins. That is something we have seen over the last two years, as you know. Net fee and commission income was more or less unchanged. Higher fees in the fund management business compensated for seasonally lower activity-driven fees in equity brokerage and also advisory services. Total expenses were down by 2%, which is explained by normal seasonality in other expenses. Staff costs declined marginally. The adjustment in Sweden, which we talked about over the first quarter, proceed according to plan.
We still assess that the expenses in Sweden will be SEK 600 million to SEK 700 million lower from 2018 and onwards, all else equal. During Q3, the average number of full-time employees in Sweden and then Swedish regional banks and branch offices was 84 people less than in Q2, and that is if you exclude temporary summer staff. Compared to the start of 2016, the reduction is just over 130 people. At the same time, we continue to expand in the U.K. and Netherlands, and that of course adds staff. This is completely in line with the ambition we have to increase efficiency in Sweden and to grow in the new home markets. Loan losses increased in Q3 to SEK 476 million and this is corresponding to a loan loss ratio of 10 basis points.
This is to a large extent due to an increased provision on an older problem loan in Denmark, the underlying credit quality still looks stable in the portfolio. Now on slide 23, we dig deeper into net interest income. Lending margins in Sweden improved somewhat. The mortgage margin was up two basis points in the quarter and ended up at 106 basis points. Together with higher Swedish lending volumes, that added SEK 85 million during the quarter. On the other hand, STIBOR dropped another eight basis points in the quarter, and that has a negative impact, of course, on net interest income. It was reduced because of that by SEK 106 million. The strong volume growth we also have in household deposits actually means a negative impact on net interest income, of course. Outside Sweden, lending volumes continued to increase in all of our home markets.
We have seen some lending margin pressure in most of them outside Sweden during the quarter. All in all, lending volumes outside Sweden contributed SEK 23 million to net interest income. Also, deposit volumes continued to increase outside Sweden, together with somewhat higher deposit margins in Norway, deposits also added SEK 23 million this quarter. The third major element in the improvement of net interest income is found in the other item. This is primarily due to lower funding costs achieved during the quarter. All in all, net interest income increased by 3% during Q3. Now on slide number six, you can see the stable growth we have in our lending volumes. During the third quarter, lending grew sequentially in all core markets. Sweden continued to have a growing mortgage market and also after the introduction of the amortization requirement in June, that happened.
The market has grown about 8% on an annualized basis, we think that the long-term impact of the requirement still remains to be seen. Our market share here is very stable over time, though. Corporate lending volumes in Sweden are still more or less flat. In the U.K., the growth expressed in SEK is of course affected by the depreciation of the pound. In local currency, U.K. lending grew by 12% year-on-year with a slight bias to the household sector. Our other real growth market, the Netherlands, grew by 17% sequentially and 35% year-on-year. Even though the growth numbers are large in U.K. and Netherlands, we really make sure that we grow carefully by selecting high-quality customers on the household side as well as on the corporate side. Now turning to slide number seven.
This slide shows you the impact of the negative interest rates in Sweden. You can see that the impact is quite dramatic. Since Q4 2011, when short rates peaked, the annual impact is SEK 7.5 billion, measured as the net interest income drop on deposits as well as lower yield on the bank's equity. This dramatic impact is not really seen in the actual net interest income of the bank, and there are many explanations why that is the case. One key explanation is the ability we have shown over time to reprice assets. Our mortgage margin in Sweden in Q4 2011 was 82 basis points, and in Q3 this year it was 106. Quite a big change. This development has also been affected by the increase in capital requirements, of course. Now moving to slide number eight.
Here you can see another explanation why profitability has been stable despite the sharp drop in Swedish interest rates. You can see that net interest income in Sweden and in other home markets have been improving. About 15 years ago, we relied almost entirely on the Swedish operations in our net interest income. Looking at the home markets outside Sweden, net interest income has increased by over 60% or close to SEK 1 billion since Q4 2011. That's quite massive. The volume growth we have outside Sweden in many cases also comes with higher lending margins than we normally see in Sweden. All in all, in this period of dramatic interest rate decline, the bank has been able to grow net interest income by over 10% in the third quarter this year compared to 2011.
The fact that we have an organic growth model clearly has been instrumental in this period of falling interest rates. Once the interest rates stop falling, the positive impact of this model will become more visible, we expect. On slide number 13, a few words about the U.K. We continue to be very optimistic about our growth prospects in the U.K. Operating profit in local currency increased by 9% year-on-year. Fees and commission income continued to increase its share of revenues, and the growth was 28% in the first nine months. Loan losses have dropped during the course of 2016 and were 6 basis points for the first nine months and 4 basis points in the third quarter alone. We have opened up one new branch during the quarter and have appointed also two new branch managers for new openings, soon we hope.
No branch in the U.K. has a share in the local market of more than 1%, clearly there is a lot of room for improvement and additional business opportunities for the current branches. On slide number 15, you can see the development we have in the Dutch business. Our newest and smallest home market has had a strong development with operating profit up 67% in local currency year-on-year. Cost-to-income ratio dropped by more than 6 percentage points and the loan loss level was zero. Lending volumes increased by 39% to households and 35% in total. During Q3, we have opened up two new branches and also finalized the acquisition of Optimix. In spite of this expansion of our geographical presence in Netherlands, return on equity is already at 10%. On slide number 16 you see our capital position and liquidity ratios.
The bank has built substantial capital during 2016, and common equity Tier 1 ratio at the end of Q3 was 24%. Total capital ratio was 30.1%. Common equity Tier 1 has increased by 1 percentage point since Q2. 60 basis points of that is due to the divestment of our Industrivärden shares. Profit in the quarter added 30 basis points and conversion of the staff convertible another 10 basis points. No other material items affected the capital ratio in this quarter. Discount rates in the pension system was further lowered to 1.8% in Sweden. The negative impact from the low rates was compensated by higher values of pension assets. A few weeks ago, as you might have seen, the Swedish FSA concluded their SREP for 2016. The common equity Tier 1 requirement for Handelsbanken at the end of 2016 was assessed at 21.1%.
This includes the new Pillar 2 requirement and add-on for higher corporate risk weights and the maturity of two years and a half. Part of this add-on will be moved to Pillar 1 once the FSA have approved our application for the new IRB models on corporate exposures. Once that is done, it means that all ratios will change and be recalculated. In summary, the bank is well within the target range or 2.9 percentage points above the SREP requirement in Q3. On the back of this position, the bank has decided to resume allocations to Oktogonen in 2017, provided of course that profitability target is reached. Now summarizing my presentation. The business model continues to deliver a stable profitability, and it did so also in the third quarter. Operating profit adjusted for capital gains and dividends decreased slightly in the third quarter. Net interest income improved.
Costs were seasonally lower, and these effects compensated for slightly higher loan losses. In spite of continued lower interest rates in Sweden, net interest income increased due to high lending volumes in all home markets, high lending margins in Sweden, and lower funding costs. Fund management fees had a good development again, and the bank attracted 70% of all the net inflows into Swedish mutual funds in the first nine months. The adjustments in Swedish operations proceed according to plan, and the average number of full-time employees in Sweden was lower than in Q2. We still assess that expenses in Sweden will be SEK 600 million-SEK 700 million lower than from 2018, all else equal. Our capitalization has strengthened further. Common equity Tier 1 ratio was 24%, and the SREP requirement from the Swedish FSA is 21.1%. Our capital position is strong and within the target range.
This concludes my presentation, and I now 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. Our first question comes from the line of Omar Keenan of Deutsche Bank. Please go ahead. Your line is open.
Good morning. Thank you very much for taking the questions. I just have one question on net interest income, secondly, I have a macro question. Firstly, on NII. As you pointed out in the NII bridge, there's about SEK 221 million of non-specified other, which was put down to funding cost. It's quite a large number to come through for lower funding cost in a quarter. I was just wondering if you could add some color around the moving parts and how much of that figure is, shall we say, real NII to carry forward from next quarter. Shall I give the second question, or?
Yes, please.
The second question, I just had, I guess, a macro question. I just wanted to get your views around monetary policy in Sweden. Obviously, it's at very negative levels. CPI is around 1% and growth is quite strong. What do you expect in terms of what the Riksbank does in terms of monetary policy in the next couple of quarters? You seem to imply that the good development on NII outside of Sweden and on the lending margins had been masked a little bit by the lower deposit margins. Do you think that when eventually rates do start to move up, much of that can be kept and we'll see much better growth development in net interest income going forward? Thank you.
Thank you. Starting with the net interest income question. That is actually the internal rates we charge our branch offices when they do lending to clients. That is slightly higher than sometimes than the funding cost we have within the bank, and that ends up in that part of the accounting. It's actually lower funding costs and the difference between internal rates we do apply and the funding costs we do have. It's a deposit or, sorry, net interest income margin. That's for sure. We don't give any guidance specifically how we expect that to change going forward. It is, of course, very much affected by the interest rate level we do have in particular in Sweden.
I guess I understand the internal accounting point, but that's just how it's represented between the divisions. If I look at the group quarter-on-quarter numbers, which has gone up by SEK 221 million, regardless of whether it's in the branches or in the treasury, if I annualize that, it's SEK 800 million. If conservatively I put a 100 basis points funding spread on that, we're talking about a notional of SEK 80 billion, it seems like an extremely large number for one quarter. I was just hoping you could help me to understand what were the issuance versus the redemptions. Was there a particularly expensive block of funding that came off this quarter? It is a very large number.
No specific issues of that kind, I would say. Anything more to add?
Hi, Omar. It's Mikael here. I think there are always small things moving around in a balance sheet of SEK 2,900 billion. Generally, I would say that the level in Q3 is a reasonable level to start from when we look forward as a quarterly NII.
Okay, the full SEK 220 million is for various reasons sustainable going forward.
You know, you and I had a conversation about this earlier this morning, and I told you that there are some other movers, but the majority of this is related to lower funding cost and real money.
Okay. Understood. Thanks. The second question on Swedish macro
Swedish macro. Well, yeah, the forecasts are not as good going forward as they have been in the past. Sweden still are in a very good position. When it comes to macro and the development seem to slow down a bit. We don't expect that to have any significant impact on the bank as far as we can see. Then you had a related question regarding margins also outside Sweden, is that correct?
Yes. I guess my question was, what are you expecting from monetary policy? What do you think the Riksbank does from here? I guess, given inflation and where growth has been. If essentially we do get some relief on the monetary front, say, a year from now, do you think most of the lending repricing can be kept?
Yeah. As you know, we don't make any forecasts regarding that. Historically, we have been able to do the repricing necessary. What we actually do is to, both when it comes to capital and also liquidity, we do charge internally the true cost of funds. Historically, we have seen that we have been able to reprice accordingly. I also think it's important to underline that in a way, we try to achieve a business model and run a business model that is macro independent in a way, meaning that the changes in interest rates shouldn't have a really big impact on the margins we receive and the net interest income.
Okay, great. Thank you very much.
Thank you. Our next question comes from the line of Willis Palermo of Goldman Sachs. Please go ahead. Your line is open.
Hi, good morning. I have two questions. The first one is on capital. You had a very strong progression during the quarter. We also had one area of clarity regarding the corporate risk weight. The buffer that you want to keep remained unchanged. I was wondering, is this a sign that the remaining risks around capital are unchanged as well, despite this additional source of clarity? Is the buffer all related to additional requirements from the Basel update, suggesting that this impact could be as big as the 300 basis points that you plan to hold? Is there anything else, any other risk to keep in mind? That's for the first one. The second one is around the U.K. operation. I was wondering if you could give a bit more granularity and describe the landscape and what you saw during the quarter.
Especially if you could describe the pricing pressure that you're currently seeing in the U.K. Secondly, if there was somewhat a slowdown in branch opening this quarter. Is this the growth pace we should expect going forward? That's all for me. Thanks.
Thank you. If I start with the capital related question. Now the Swedish FSA has made the assessment, as you have seen. The requirement is at 21.1% in common equity Tier 1 ratio. We are quite a bit above that, which is good. The reason for the outcome is that mainly the corporate risk weights that came out maybe lower than the market seems to have expected and what was also communicated by the Swedish FSA earlier this year. That is a reflection of, when we have done this, we have looked at our historical losses, and then we have made very conservative assessment of those. Based on that, we have proposed a new model, which we also have applied for with the Swedish FSA. That came out lower than the 30%.
Will that mean that we expect to change the range 1%-3%? That is a decision that is going to be made by the board, actually. They make that decision. The reason why we do that is that we want to be sure that when the world go into the next crisis or in more difficult times, there are always movements in risk-weighted assets and so on. We need the buffer to take care of that volatility, and we will make an assessment of how big that buffer will be. The decision will be made by the board later on this year. We don't make any particular forecasts around that. That is 1%-3% is what we do apply, and that's where it is now.
When we decide not to change that, have we reflected on what could come out of Basel IV? Regarding Basel IV, I think it's important to keep in mind that it's really difficult to say at this stage what the outcome will be. That is really unclear to us, both when it will happen, when we will have an outcome, and also what the outcome will be. On top of that uncertainty, we don't have any additional information than others do have about this process. It's really hard to know where it will end up. What also comes into the picture is how that is going to be applied in Sweden, and that is also something we don't know for sure. We just have to wait and see, I would say.
Regarding the U.K. operations, well, the development we have seen in the U.K. and here as well, through quite a big degree, we are not that macro-dependent, and we see really good opportunities in the U.K. going forward. We are not a mass market bank. We have a very small part of the total British market. We also have good prospects to develop that and increase our footprint in the U.K. even more. We see that we're not that negatively impacted by Brexit and other things like that. We think that we could have good progress also going forward. When it comes to the question of the number of branches we have opened recently and also what will happen in the future. We don't make any forecasts about that either.
I also think that in the past, that was a very important issue because that was the way we really created growth in the U.K. Now we have such a big presence in so many different places. We have great growth opportunities even though we don't open up new branches. It is not as relevant as it used to be when we didn't have the geographical spread we wanted to have in order to really be able to grow in the way we want and to the extent we want in the U.K. Today we have the footprint we need in order to have that growth anyway.
All right. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Yafei Tian of Citigroup. Please go ahead. Your line is now open.
Thank you very much for taking the questions. I have three quick questions. The first is on net interest income. I would like to understand that, given two other Swedish banks have talked about the possibility of repricing SME loans in light of higher corporate risk rates, is there any plan from Handelsbanken point of view when it comes to higher repricing on corporate loans, especially SME loans? Then the second question is a follow-up question on the capital point. We know that Handelsbanken is now almost at the top range of the target capital. Does that mean from a dividend or capital distribution point of view, you would be at least paying out as much as last year, even if the EPS this year is somewhat lower?
Lastly, very quickly on the loan losses in Denmark, is it possible to specify which sector is this loan losses related to? Thank you.
Okay. Thank you. About the repricing of SME loans, on the back of the corporate risk weight increase. Now we do not set prices centrally in the bank, meaning that is left to the branch offices to do in each one of the customer relationships and as part of the total client relationship. It will be their decision. What we do is to allocate capital and to internally price. When the price of the raw material, which is money in this case, and the capital that we need to keep goes up, that is something that will feed through in our internal pricing system. That means that the branch offices will have that as part of their business decision.
If you look at what we have been able to achieve when it comes to adjusting margins in the past, we have been quite good at repricing when there has been a reason to do so. That's how we approach that issue.
Yeah.
Regarding capital and us being now in the top range of where we want to be, 1%-3% range. We don't make any forecasts about dividends, we haven't done so in the past, we will stick to not doing that. That decision will be made by the board after Q4 when the year has ended and when they see what they have at hand. I also think what is important in our case is that we have three things in mind when we make those decisions. Number one is to make sure that we are compliant, now things have cleared up a bit. We know at least for the time being what would be expected, we still have some uncertainties around that, of course, then I refer to Basel IV. To be compliant is the basis, of course.
We want to also grow, and that is capital consuming. We have been able to grow on a quite steady pace over the years, and that is capital consuming. We need capital to do that. Thirdly, there is additional money available, what happens with those is something that will be decided by the board, that will happen after the Q4 report. When it comes to the Danish credit loss, no, we don't give any specific guidance on what industry that is related to, but it is an old exposure. An old problem loan.
Okay, thank you for the clarification. Can I just follow up on the SME repricing question?
Yeah.
Do you have a timing when from a pricing point of view, pricing of the raw material point of view, will you pass that cost to the branch?
What happens, we always allocate all the capital we have within the banks. We don't keep anything centrally that we now start allocating. We have allocated all the capital we do have. What will happen is that we make an adjustment of the internal pricing. Exactly when that is going to happen has not been decided. It's too early to say.
Okay. Thank you.
Thank you. Our next question comes from the line of Anton Kryachok of UBS. Please go ahead. Your line is now open.
Thank you. Good morning, and thanks a lot for the presentation. Just a couple of points, please, from me. First one, I just wanted to follow up on the question that Omar raised on net interest income outlook. Do you think they will keep it or will they reflect this in their asset pricing? The second question, please, on deposits. I remember that at the end of last year, you've made a point of shrinking the balance sheet towards the year-end, particularly by getting rid of some of the corporate deposits by the end of Q4 2015. I've noticed that this quarter corporate deposits have fallen as well. I have two questions regarding this. Firstly, is this at all related to the reform of the money market funds in the U.S.?
Has it affected your business at all? Secondly, are you planning to shrink the corporate deposit base further by year-end? Thank you.
If we are going to pass on, regarding the question about passing on the lower funding cost internally to the branches and to the different segments, we haven't decided about that, so I can't give any guidance. Regarding how we manage the balance sheet according to year-end, that is also something that I'd like not to comment about. How we have been affected by the money market reform in the U.S., it hasn't impacted us in a significant way so far. I think it remains to be seen to some extent how we will be affected, but it doesn't pose a problem to us. We have kept a lot of volumes also. It's not a big problem, and we are not totally dependent on that source of funds either. Yeah, that's where we are.
Understood. That doesn't change the economics around the carry trade that you used to have with the short-term U.S. liquidity?
Far I would say that, no, we haven't seen any major changes.
Very clear. Thank you so much.
Thank you. Our next question comes from the line of Matti Ahokas of Danske Bank. Please go ahead. Your line is now open.
Great. Thanks a lot. Two questions, please. Firstly, on the only area which you don't seem to be growing that much, i.e., the Swedish corporate lending. As pointed out, you seem to have some repricing opportunities, but the volume growth has been really low. Is it because of risk, or why is the volume growth in the Swedish corporate lending so low? The second question is regarding Denmark. That is an area on the mortgages which is growing extremely fast. Have you done any pricing changes here, or is it just that you like the risk reward in the Danish mortgages? Thanks.
When it comes to Swedish corporate lending, yes, it has not been growing. It has been very flat during the last year. We are looking into that, of course. Of course, we want to grow. We are looking into it. The demand hasn't been that big, no dramatic changes in that market. We will have a closer look, of course. Denmark, the mortgage book increasing. No, we haven't made any significant changes. Do you have any?
Hi, Matti. It's Mikael. I think we could say, we always charge the price. Of course, it's up to local management how they do in the branches in Denmark to how they go about the business. There's no other change being made in this. I think on the previous question, I think it's fair to say that there's been very little demand in Sweden from ordinary companies. If you look over the last couple of years, there's private equity business out there. There's been a lot of property and the property financing business out there that we're not entirely happy with the structures of those. The underlying demand from ordinary companies is still quite low in Sweden.
Great. Thanks, Mikael. Just to follow up on the Danish mortgages, still 12% volume growth in a market which is not really growing. How come are you winning this market share?
Matti, I don't have a good answer really to that question. We have a good product, and we are a small bank. We are working with prospect lists, and we're doing that for a long time. You can also see in other times in the financial crisis, when actually the entire market was shrinking in Denmark, we actually grow quite nicely and even almost 20% at some years. I think it's a very good job done by the Danish management.
Great. Thanks a lot.
Thank you. Our next question comes from the line of Adrian Chiggy of RBC. Please go ahead. Your line is now open.
Hi there. This is Adrian Chiggy. Thank you for taking my questions. I have two follow-up questions, one on capital and one on net interest income. On capital, we have credit risk migration contributed to a negative 50 basis points on a year-on-year basis. Can you provide any color on this, especially in an increasing real estate price environment, and maybe how you see this developing over the next 12 months? A follow-up question on repricing, please. You mentioned that the process of repricing based on the internal price allocation is ongoing. Can you maybe discuss the expected quantum of these reprices? Are we talking about five basis points, 10 basis points, or more on average? Thank you.
Sorry, could you please repeat the last question? I didn't catch it completely.
Sure. The repricing question. You mentioned the process of repricing based on the internal price allocation is ongoing. Can you discuss the expected quantum of this repricing? Are you thinking about five basis points, 10 basis points, or potentially more on average?
Yeah. Okay. Could you also repeat, there was something on the line. The first question as well, the capital question.
Sure. The credit risk migration contributing to the 50 basis points year-on-year basis. Can you provide any color on this, especially in the increasing real estate price environment, and how do you see this developing over the next 12 months?
Yeah. Okay. Thank you very much. Regarding risk weight changes, that is a slight migration between really good risk classes to slightly lower. It is a quite minor change. We had a few cases also that migrated in the bad end of the scale that did make that contribution. We're not talking about major changes here, but that is what is behind that development. Regarding repricing and the level of that margin, we haven't commented about that externally. I won't give any guidance on that.
Okay. Thank you.
Thank you. Our next question comes from the line of Johan Ekblom of Bank of America. Please go ahead. Your line is now open.
Thank you very much. Just two questions, please. Firstly, on the SREP release, my understanding is that's based on a REA projection based on 2015 full year. Clearly you've made some disposals and maybe growth have surprised positively in some areas and negatively in some. Should we expect the 21.1 to move materially when the Swedish FSA releases their Q3 update in November? That's the first question. Secondly, since the release of the SREP, dividend expectations have increased by about 10% for this year. I know that you don't want to give any guidance on specific dividend levels, but do you view it as consistent to pay 70-ish% to your shareholders and maintain zero allocation to Oktogonen then in the same year?
Okay. Regarding the SREP outcome, yes, that's correct. It's based on the figures of the basis for the calculation made by the Swedish FSA is the figures for end 2015. Then they make a forecast of where they expect us to be by the end of 2016. Of course they have information about what has happened so far during the year. They have a quite good way of making that estimation. The 21.1 we have communicated, and they have communicated also to us, is something that is a forecast for year-end. That also gives you guidance for what you can expect from them when they publish these figures in November.
Also on that topic, what could move the figures is if we later on during the quarter and ahead of Q4 would get an approval of the application we have made for the new PD models, because the capital requirement will be the same on the bank, but that would move this from the capital requirement to risk weights instead. That would make the figures change, but the underlying capital requirement would be the same. Regarding dividends, as you know, we don't make any forecasts about dividend decisions, and that will be made by the board in Q4. We don't have anything to add in that respect. The same goes for Oktogonen.
The decision to stop making provisions to Oktogonen was made, as you know, for the full 2016, and we will resume January 1st, 2017, provided, of course, that we meet the goals that have to be met in order to make those.
Is that a final decision that cannot be changed?
Sorry?
Given the capital and maybe the ability to pay a bigger dividend is there, does that mean that the decision not to allocate anything to Oktogonen for this year is final, or can that be reviewed in conjunction with the full-year dividend decision?
That is up to the board to make that decision. I'm not giving the guidance regarding that. That will be decided by the board.
Understood. Thank you.
Thank you. Our next question comes from the line of Daniel Dutoit of JPMorgan. Please go ahead. Your line is now open.
Hi, thank you. Just have two questions. The first one was, again, on corporate lending, the second one more on regulatory costs. Can you just give us a little bit more color on what part of the corporate loan book was most impacted by the higher capital requirements following the SREP? Can you also confirm that it is at least your ambition to neutralize the SEK 10 billion or so krona increase in capital requirements that resulted from the risk weight review? Secondly, on cost, looking at 2017, would you just be able to provide us with some rough guidance on the additional tax expense due to changes in tax deductibility of hybrids? Any increase also with regards to the resolution fund contributions in 2017 versus 2016. Of course, anything else I might have missed in terms of regulatory costs. Thank you.
Regarding the risk weight question and which part of the corporate book that was most heavily affected, that is not something we have communicated externally. That is also an ongoing process because we have applied to the Swedish FSA, so we don't really know the exact outcome of that process. That is too early to say. When you will have information about that, when we have received it and the approval and when we publish those figures. That is too early to tell. The second question, I didn't get that. Could you please repeat that?
The second question was just on any increase in costs in 2017 versus 2016. For example, from higher tax expense due to changes in regulation around tax deductibility of hybrid debt AT1s. Secondly, if you expect any increase in the resolution fund contribution in 2017 versus 2016. Thank you.
Yeah. The question of the first effect is about SEK 200 million.
SEK 200. Mm-hmm.
The contribution to the resolution fund. The fee will be doubled next year. The fee is half in Sweden this year, which will increase to nine basis points next year, or roughly nine basis points because it's risk-based.
Just to confirm, the run rate is currently around SEK 250 million per quarter, that is to double next year?
Yeah, that's right.
Okay. Thank you.
Thank you. Our next question comes from the line of Jan Walter of Credit Suisse. Please go ahead. Your line is now open.
Yes. Hi, Jan Walter here. A couple of follow-up questions. First, can you say how much is left of the staff convertible to convert, and what impact that could have on the core capital? Then wonder if there is any excess capital in Handelsbanken Liv at this point, and if the bank then can consider to upstream this as the bank did earlier this year. Thank you.
On the first question, very limited amounts still outstanding on the staff convertible. 2011 one, most has been converted. The second question, I didn't get that. I didn't take that.
I wonder in Handelsbanken Liv, if there at this point there's any excess capital that the bank could consider to upstream as a dividend. I think the bank did that earlier in the year.
The answer is no, don't expect so.
A follow-up on I think the remarks earlier on the cost reduction there. I think also Anders Bouvin commented earlier today that the cost reduction SEK 600 million-SEK 700 million should be achieved by 2018. It's also, I think it's a decision of branch managers to make that given the decentralized structure of the bank. Does this mean that it could take longer? Or how do you think about this situation? Thank you.
Thank you. Well, first of all, yes, we still make the assessment that we will lower cost by SEK 600 million-SEK 700 million from 2018, and that assessment remains. The work is ongoing, and that is not only ongoing in the branch network and the regional banks, but also at head office, particularly in Sweden, of course. Regarding the number of branches, we are not focusing on the number of branches, actually, because the major cost we do have is cost for headcount. That is the main contributor to our cost base. The number of branch offices, that is the tiny cost in relation to the cost of staff. That work is ongoing, and it will continue during 2017. We still have made the same assessment as we did a quarter back.
Okay. Many thanks for clarification.
Thank you.
Thank you. Our next question comes from the line of Andreas Håkansson of Exane. Please go ahead. Your line is now open.
Hi, thanks. Sorry, just a follow-up from the meeting earlier today. On the NII discussion, you say that the driver has been the lower cost of funding. If I look at the mortgage book, isn't the main driver of the margin expansion on mortgages just the lower cost of funding? Shouldn't we see that overall as mortgage margins are going up rather than calling it a lower cost of funding? Isn't that really the same thing?
It is to some extent. Of course, it's related.
Yeah. Because since there's no lending on the corporate side really at the moment, there's no growth. The main driver really need to be the mortgage side, right? Rather than corporate. Is that correct?
Yeah. We have the improved margins, as you know, on the mortgage book. That is the main contributor. We also have improved margins slightly.
Yeah.
Mikael here. It's also the fact that our funding is of course rolled over gradually. Even if it's not growth in the book, we still have to fund the book and we have-
Sure. Yeah, of course. Yeah
off the balance sheet and we have new funding coming in, which also has an impact on the funding cost.
Can I just check, when you have been improving your margins so significantly on the mortgage side over the last two years, have you all the time said that it's driven by the new capital rules and not really to be offsetting the negative rates on the deposit side? If so, when rates go up, shouldn't you just continue to keep the same margin? Is that correct, or?
It has mainly been driven by the increase in capital requirements. As you know, they have been fairly dramatic. That has been repricing going on for a while. That's the main part of it.
Yeah. Okay, thanks.
Thank you. Our next question comes from the line of Riccardo Rovere of Mediobanca. Please go ahead. Your line is now open.
Good morning to everybody. Couple of questions, if I may. I am looking at Bloomberg, I see a statement from your CEO according to which a 24 capital ratio might not be enough. When I see these statements, which seems to be a bit clashing with what you have been saying so far, is it fair to assume that when you provide the range between 22.1 and 24.1, we should actually look at 24 rather than any other number? The other thing I wanted to better understand, he also saying that it's not clear at the current stage whether building capital buffers has come to an end or not. During your call, you have been mentioning Basel IV, but Basel IV is not going to come probably right at the end of the year. What are you referring to?
Do you think there is possibility of having further initiative from the Swedish FSA? The other question I have is on the Danish provisions. You're not telling what the name is. Fine. You don't even want to say the industry related to this one-off provision. How can we be convinced that this is a one-off provision?
Okay. I start with the first question about 24% in core equity one ratio. We haven't, as far as I know, communicated that we should know more. The capital targets we do have is to have one to three points more than, or percent above the SREP requirement, and that is what we stick to. When it comes to Basel IV, if that is going to happen or not, no, we don't know that. We don't expect the Swedish FSA to, as far as we know, to have something in their mind in addition to what you have seen already during 2016. Basel IV, we have to see what happens, and we don't know. Potentially there could be a decision, but that we don't know. That hasn't been a major part of our assessment of the capital we need to have.
About the Danish exposure, no, we simply don't comment. That's one specific case, and we have made the best assessment we can make according to what we know today, and that's the basis for that decision, and that's the way it is. We don't comment the industry.
Okay. Fine. Okay, I understand. If I may, just one little follow-up. With regard to the provisions on Oktogonen, this year you will not charge anything, but you say that next year you might resume the provisioning for Oktogonen. This year it should be treated like a capital gain, like a one-off. In your dividend policy, normally, how do you treat one-offs? Do they enter into the distributable amount, and especially in the current uncertainty on regulatory requirement?
Okay. When it comes to Oktogonen, the reason I said we are going to resume allocations to Oktogonen, provided that we fulfill our targets that needs to be fulfilled in order to do that. We are back to the normal situation. When we have a higher return on equity than the average of our peers, there will be an allocation. If we don't reach that to the extent needed, then there will not be an allocation. It's back to normal, so to say. Yeah. That part. The second question, where that will end up in Okay, Mikael, please.
We can do Riccardo. I mean, why don't you call or can talk with after the meeting, he can go into details on the
Okay, fine. No problem. All right.
Calculation.
Okay. Thank you.
Thank you. Our last question comes from the line of Jacob Kruse of Autonomous Research. Please go ahead. Your line is now open.
Hi. Thank you. I guess it's two questions. On this repricing issue of corporate. In terms of what you're sending down to the branches from a central level, does that then include the full capital weight, so that SEK 8 billion, SEK 9 billion of capital? Do you also include the sub-debt cost, the Swedish bank tax that might be coming in 2018, as well as the resolution fund fee. If I add all of those things up, I guess I end up with something like 30, 40 basis points of repricing requirement. Is that the way we should think about this? Is that roughly how the kind of quantum you're looking at?
Secondly, just on the Oktogonen thing, I recognize it's a board decision, what kind of feedback are you getting from your branch managers and staff with respect to the prospect of you paying a special dividend and not rewarding your staff in the same year? Thank you.
Regarding repricing, what we do is actually to feed that through to the branches based on what clients they do have and so on. We will change the way we do that slightly. It's the same amount of capital that we will continue to allocate. There might be some impact, of course, of the internal estimates based on where we will end up when we have the final approval from the Swedish FSA. That's the business model. When we have a cost for taxes or when we have to pay for the resolution fund and the deposit guarantee scheme and so on, that is also something we charge internally and then also give the branch offices the incentive to charge their clients, to the extent they decide to and they need to.
Regarding Oktogonen, well, once again, we haven't made any forecasts about the dividend. That's a board decision, I can't comment more on that, I think, than I have already done that will shed light on the question.
Okay. Thank you very much.
Thank you.
Thank you.
Okay.
I'll now hand the call back.
That was all from our side this time. Thank you very much for calling in to this telephone conference. If you have additional questions, we are very happy to support you and to answer those. Please then contact investor relations through telephone or email. Okay. Thank you.
That concludes our call. Thank you for attending. Participants, you may disconnect your line.