Good morning, everyone, and welcome to this conference call for the Q3 2016. My name is Rolf Markquart, and I am the CFO of Handelsbanken. And I have a long background in the bank, although I'm new in this position. My most recent position was Head of Group Compliance, And I have also been CRO for 6 years, and I have headed our U. S.
Operations for 2 years and half. Joining me today, I have Michael Hallacher, Head of Investor Relations Lars Hoglund, Head of Debt Investor Relations and also Olander, Head of Group Accounting. The slides used for this presentation are, as usual, available on hansbanken.com. So now turn to Slide number 2. As you know, hanersbanken business model was implemented in the bank more than 45 years ago.
It has been developed over the years, but the essence remain the same, I would say. So the model is based on a very basic idea, and 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 efficiency and also in creating good returns for shareholders. And this is also what you can see on this slide. The bank has reached its goal regarding return on equity for 44 consecutive years. And 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 experienced today. And now turning to the 2016 and the Q1. The return on equity for the 1st 9 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 20 1.1%, 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 4. Here you can see the P and L for the Q3 compared to Q2. Operating profit increased by 8% to just below SEK 5,700,000,000 And if adjusted for capital gains from the sale of industry dividend 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 SEK 7,000,000,000.
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, and that is something we have seen over the last few 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. And the adjustment in Sweden, which we talked about over the Q1, proceed according to plan. We still assess that the expenses in Sweden will be SEK 600,000,000 to SEK 700,000,000 lower from 20 18 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, and that, of course, adds staff. And 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 4.70 6,000,000. 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.
But 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 2 basis points in the quarter and ended up at 106 basis points. Together with higher Swedish lending volumes that added SEK 85,000,000 during the quarter.
But on the other hand, STIBOR dropped another 8 basis points in the quarter, and that has a negative impact, of course, on net interest income. And it was reduced because of that by EUR 106,000,000. 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.
But all in all, lending volumes outside Sweden contributed EUR 23,000,000 to net interest income. Also deposit volumes continue to increase outside Sweden. And together with somewhat higher deposit margins in Norway, deposits also added SEK 23,000,000 this quarter. The 3rd 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 6, you can see the stable graph we have in our lending volumes. During the Q3, lending grew sequentially in all core markets. Sweden continued to have a growing mortgage market. And also after the introduction of the amortization requirements in June, that happened.
The market has grown about 8% on an annualized basis, but we think that the long term impact of 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 UK, the growth expressed in Swedish krona is, of course, affected by the depreciation of the pound. But in local currency, UK lending grew by 12% year on year with a slight bias to the household sector.
And our other real growth market, Netherlands, grew by 17% sequentially and 35% year on year. Even though the growth numbers are large in UK and Netherlands, we really make sure that we grow carefully by selecting high quality Now turning to Slide 7. This slide shows you the impact of the negative interest rates in Sweden. And you can see that the impact is quite dramatic. Since Q4 2011, when short rate peaked, the annual impact is SEK 7,500,000,000 measured as the net interest income dropped 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 106,000,000.
So quite a big change. This development has also been affected by the increasing capital requirements, of course. Now moving to Slide 8. 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 percent or close to SEK 1,000,000,000 since Q4 2011. So that's quite massive. The volume growth we have outside Sweden in many cases also comes with higher London margins than we normally see in Sweden.
So 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 Q3 of 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. And once the interest rates stop falling, the positive impact of this model will become more visible, we expect. On Slide 13, a few words about the UK. We continue to be very optimistic about our growth prospects in the UK.
Operating profit in local currency increased by 9% year on year. Fees and commission income continued to increase its share of revenues, and the graph was 28% in the 1st 9 months. Loan losses have dropped during the course of 20 16 and were 6 basis points for the 1st 9 months and 4 basis points in the 3rd quarter alone. We have opened up 1 new branch during the quarter and have appointed also 2 new branch managers for new openings soon, we hope. No branch in the UK has a share in the local market of more than 1%.
So 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 6% to 7% in local currency year on year. Cost to income ratio dropped by more than 6 percentage points on the loan loss and the loan loss level was 0. Lending volumes increased by 39% to households and 35% in total.
During Q3, we have opened up 2 new branches and also finalized the acquisition of Optimix. And in spite of this expansion of our geographical presence in Netherlands, return on equity is already at 10%. On Slide 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 industry dividend 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.
But the negative impact from the lower 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 maturity for of 2 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 stable profitability, and it did so also in the 3rd quarter.
Operating profit adjusted for capital gains and dividends decreased slightly in the 3rd 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 1st 9 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 600,000,000 to SEK 700,000,000 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 Our first question comes from the line of Omar Kinan 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. And then secondly, I have a macro So firstly, on NII. As you pointed out in the NII bridge, there's about CHF 221,000,000 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 the 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 NI to carry forward from next quarter? Shall I give the second question or?
Yes, please. And then
the second question, I just had, I guess, a macro question. Kind of I just wanted to get kind of your views around kind of monetary policy in Sweden. Obviously, it's kind of at very negative levels. Kind of CPI is kind of 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?
And you seem to imply that kind of 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, then much of that can be kept and we'll see much better growth development in net interest income going forward? Thank you.
Thank you. Yes, starting with the net interest income question. So 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. So it's actually lower funding costs and the difference between internal rates we do apply and the funding cost we do have.
So it's a deposit or sorry, net interest income margin. That's for sure. And we don't give any guidance specifically how we expect that to change going forward. But it is, of course, very much affected by the interest rate level we do have, in particular, in Sweden.
Yes. I mean, I guess, kind of I understand the internal accounting point, but that's kind of just how it's represented between the divisions. But if I look at the group quarter on quarter numbers, which has gone up by 2 €21,000,000 regardless of whether it's in the branches or in the treasury. If I annualize that, it's SEK 800,000,000. So if conservatively, I put a 100 basis point funding cost funding spread on that, then we're talking about a notional of SEK 80,000,000,000.
And it seems like an extremely large number for 1 quarter. And 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, I no specific issues of that kind, Jose. Anything more to add?
Hi, Omar. It's Michael here. I think if you're looking for I think there are always small things moving around in the balance sheet of SEK 29 100,000,000,000. But 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. So the full €220,000,000 is, for various reasons, sustainable going forward?
And Mario 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 yield money.
Okay. Understood. And the second question on Swedish macro.
Swiss macro, well, yes, the forecasts are not as good going forward as they have been in the past. So but I mean, Sweden still are in a very good position. So when it comes to macro and the development seem to slow down a bit. But we don't expect that to have any significant impact on the bank as far as we can see. And then you had a related question on regarding margins also outside Sweden.
Is that correct?
Yes. I guess kind of my question was, what are you expecting from monetary policy? What do you think the RIXS Bank does from here, I guess, given kind of inflation and sort of where growth has been? And 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?
Yes. As you know, we don't make any forecasts regarding that. But I mean, historically, we have been able to do the repricing necessary. And what we actually do is to both when it comes to capital and also liquidity, we do charge internally the true cost of funds. And I and then in historically, we have seen that we have been able to reprice accordingly.
So but 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 changes in interest rates shouldn't have a really big impact on the margins we receive and 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.
However, the buffer that you want to keep remained unchanged. And 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 bps that you plan to hold? Or is there anything else, any other risk to keep in mind? That's for the first one.
Then the second one is around the UK operation. I was wondering if you could give a bit more granularity and describe the landscape and what you saw during the quarter. And especially if you could describe the pricing pressure that you're currently seeing in the UK? And secondly, if there was somewhat a slowdown in branch opening this quarter, is this the growth pace we should expect going forward? And that's all for me.
Thanks.
Thank you. Well, if I start with a capital related question. So now the Swedish FSA has made the assessment, as you have seen. And so the requirement is 21.1 percent in core Equity Tier 1 ratio. And we are quite a bit above that, which is good.
And the reason for the outcome is that mainly the corporate risk weights that came out maybe lower than the market's teams have expected and what was also communicated by the Swedish FSA earlier this year. And that is a reflection of I mean, when we have done this, we have looked at our historical losses, and then we have made very conservative assessment of those. And then based on that, we have proposed a new model, which we also have applied for with the Swedish FSA. And that came out lower than the 30%. Now will that mean that we expect to change the range at 1% to 3%.
We that is a decision that is going to be made by the Board actually. So they make that decision. But that is also the reason why we do that is that we want to be sure that when we when the world go into the next crisis or in more difficult times, there are always movements in risk weighted assets and so on. So we need the buffer to take care of that volatility. And we will make an assessment of how big that buffer will be.
But the decision will be made by the Board later on this year and so we don't make any particular forecast around us. So that is 1% to 3% is what we do apply, and that's where it is now. And have we 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 because that is really unclear to us, both when it will happen, when we will have an outcome and also what the outcome will be. And on top of that uncertainty, we don't have any additional information than others do have about this process, so it's really hard to know where it will end up.
But what is 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. So we just have to wait and see, I would say. And then regarding the U. K. Operations.
Well, the development we have seen in the U. K. And here as well, we quite a big degree, we have we are not that macro dependent, and we have we see really good opportunities in the U. K. Going forward.
So we are not a mass market bank. We have a very small part of the total British market. And so we also have good prospects to develop that and increase our footprint in the U. K. Even more.
And we see that we're not that negatively impacted by Brexit and other things like that. So 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. But 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.
But now we have such a big presence in so many different places. So we have great growth opportunities even though we don't open up new branches. So 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 UK. But 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 2 other Swedish banks have talked about the possibility of repricing SME loans in light of higher corporate risk rate? Are there any plan from Hanover's Banking point of view when it comes to higher repricing on corporate loans, especially SME loans?
And then the second question is a follow-up question on the capital point. We know that the Honda's Banking is now almost at the top range of the target capital. And 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. And 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. So about the repricing of SME loans and on the back of the corporate risk weight increase. So now we do not set prices centrally in the bank, meaning that, that is left to the branch offices to do in each one of the customer relationships and as part of the total client relationship. So it will be their decision.
But what we do is to allocate capital and to internally price. And 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. And that means that the branch offices will have that as part of their business decision. And 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. So and yes, so that's how we approach that issue.
Yes. So
regarding capital and us being now in the top range of what we want to where we want to be, 1% to 3% range. We don't make any forecasts about dividends, and we haven't done so in the past. And we will stick to not doing that. That decision will be made by the Board after Q4 when the year has ended and when we see and they see what they have at hand. But I also think what is important in our case is that we have 3 things in mind when we make those decisions.
So number 1 is to make sure that we are compliant. And now things have cleared up a bit. We know to at least for the time being what would be expected. But we still have some uncertainties around that, of course, and then I referred to Basel IV. And so that's to be compliant is the basis, of course.
Then we want to also grow, and that is capital consuming. And I mean, we have been able to grow on a quite steady pace over the years, and that is capital consuming. So we need capital to do that. And then thirdly, there is additional money available. And what happens with those is something that would be decided by the board, and that will happen after Q4 report.
And then 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 now.
Okay. Thank you for the clarification. Can I just follow-up on the SME repricing question? 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?
So 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. So what will happen is that we make an adjustment of the internal pricing. And exactly when that is going to happen has not been decided.
So it's too early to say.
Okay. Thank you.
Thank you. Our next question comes from the line of Anton Kreychok 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. Are you planning to pass on this lower funding costs onto the divisions?
And do you think they will keep it? Or will they reflect this in their asset pricing? And 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 2015. I noticed that this quarter corporate deposits have fallen as well.
So 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? And secondly, are you planning to shrink the corporate deposit base further by year end?
Thank you.
So if we are going to pass on the regarding the question about passing on a lower funding cost to internally to the branches as and to the different segments, we haven't decided about that. So I can't give any guidance. And regarding how we manage the balance sheet according to year end, that is also something that I'd like not to comment about. And how we have been affected by the amount of market reform in the U. S, it hasn't impacted us in a significant way so far.
So we and I think it remains to be seen to some extent how we will be affected, but it doesn't pose a problem to us. And we have kept a lot of volumes also. So it's not a big problem, and we are not totally dependent on that source of funds either. So yes, that's where we are.
Understood. And that doesn't change the economics around the carry trade that you used to have with the short term U. S. Liquidity?
So far, we 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 Haakas 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 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 over during the last year. And we are looking into that, of course. Of course, we want to grow. But so we are looking into it.
And I mean the demand has been that big, so no dramatic changes in that market. But 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 I
think Jaime, it's Mikael. I think we could say, I mean, we always charge, I mean, the price. Then of course, it's up to local management how they do in the branches in Denmark to how they go about the business. But we have 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 been a lot of 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. But the underlying demand from ordinary companies is still quite low in Sweden.
Great. Just a follow-up on the Danish mortgages, still 12% volume growth in a market which is not really growing. Is it because how come are you winning this market share?
Matt, I don't have a good answer really to that question. I mean we are we have a good product, and we are a small bank. We are working with prospect list, 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 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 Chigi of RBC. Please go ahead. Your line is now open.
Hi there. This is Adrian Chigi. Thank you for taking my I have two follow-up questions, 1 on capital and 1 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? And 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 5 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. So 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 5 basis points, 10 basis points or potentially more on average?
Yes, okay. So and could you also repeat? I was there was something on the line. So the first question as well, the capital question.
Sure. So 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?
Okay. Thank you very much. So regarding the risk weight changes, that is a slight migration between really good risk classes to slightly lower. So that is it is a quite minor change. And then we had a few cases also that migrated in the bad end of the scale that did make that contribution.
So we're not talking about major changes here, but that is what is behind that development. And regarding repricing and the level of that margin, we haven't commented about that externally. So 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 that's based on a REAP projection based on 2015 full year. Actually, you made some disposals and maybe growth have surprised positively in some areas and negatively in some. Should we expect the 21.1 percent to move materially when the FSA releases their Q3 update in November?
So that's the first question. And then secondly, since the release of this rep dividend, expectations have increased by about 10% for this year. And 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 percent to your shareholders and maintain CRO allocation to Oktogonen in the same year?
Okay. So regarding the SREP outcome, yes, that's correct. So it's based on the figures of the basis of the calculation made by the Swedish FSA is the figures for end 2015. And then they make a forecast of where they expect us to be by the end of 2016. And then of course, they have information about what has happened so far during the year.
So they have a quite good way of making that estimation. So we and I mean so the 21,000,000,000 we have communicated and they have communicated also to us is something that is a forecast for year end. And that also gives you guidance for what you can expect from them when they publish these figures in November. And 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 to for the new PD models because that will the capital requirements will be the same on the bank, but that would move this from the requirement capital requirement to risk weights instead. So that would have a make the figures change.
But the underlying capital requirement would be the same. Regarding dividends. So as you know, we don't make any forecasts about dividend decisions, and that will be made by the board in Q4. So we don't have anything to add in that respect. And the same goes for Oktogonen.
So the decision to stop making provisions to Oktogonen was made, as you know, for the full 20 16, and we will resume January 1, 2017, provided, of course, that we meet the goals that have to be met in order to make those.
And is that a final decision that cannot be changed?
Sorry?
I mean, 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 Oxo go on for this year is final? Or is can that be reviewed in conjunction with the full year dividend decision?
That is up to the board to make that decision. So I haven't given the guidance on regarding that. That will be decided by the board.
Understood. Thank you.
Thank you. Our next question comes from the line of Daniel D'Aitoye of JPMorgan. Please go ahead. Your line is now open.
Hi, thank you. I just have two questions. The first one was on 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 SRAD? And can you also confirm that it's at least your ambition to neutralize the SEK 10,000,000,000 or so kroner increase in capital requirements that resulted from the risk weight review?
And then secondly, on costs, looking at 2017, would you just be able to provide us with some rough guidance on the additional tax expense due to changes in taxability of hybrids? And any increase also with regards to the resolution fund contributions in 2017 versus 2016? And of course, anything else I might have missed in terms of regulatory costs? Thank you.
So regarding the risk weights question and which part of the corporate book that was most heavily affected, that is not something we have communicated externally. And that is also an ongoing process because we have applied to the Swedish FSAs. We don't really need we don't really know the exact outcome of that process. So that is too early to say. But when you will have information about that, when we have received it and the approval and when we publish those figures, we that is too early to tell.
And the second question, I didn't get that. So could you please repeat
that? The second question was just on any increase in costs in 2017 versus 2016. So for example, from higher tax expense due to changes in regulation around tax deductibility of hybrid debt AT1s? And secondly, if you expect any increase in the resolution fund contribution in 2017 versus 2016?
Yes. So the question of the first effect is about SEK 200,000,000 SEK 200,000,000. And then the contribution to the resolution fund will so that the fee will be doubled next year. So it's the fee is half in Sweden this year. It will increase to 9 basis points next year or roughly 9 basis points because it's risk based.
So the run just to confirm, the run rate is currently around $250,000,000 per quarter and
that is to double next year?
Yes, that's right. Okay. Thank you.
Thank you. Our next question comes from the line of Jan Wolter of Credit Suisse. Please go ahead. Your line is now open.
Yes. Hi, Jan Wolter 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?
And then wonder if there is any excess capital in Handelsbanken Lieb at this point and if the bank then can consider to upstream this as the bank did earlier this year? Thank you.
So on the first question, very limited amounts still outstanding on the staff convertible. So 2011, so most has been converted. And the second question, I didn't get that. I can take
Yes. I wonder in Handelsbanken leave 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.
And the answer is no, I don't expect so.
Okay. And then a follow-up on, I think, the remarks earlier on the cost reduction there. Should be should be achieved by 2018. But 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 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 600,000,000 to SEK 700,000,000 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.
And so and then regarding the number of branches, we are not focusing on the number of branches because the major cost we do have is cost for headcount. So that is the main contributor to our cost base. So the number of branch offices, that is a tiny cost in relation to the cost of staff. And that work is ongoing and will continue during 2017. But we still have the same made the same assessment as we did a quarter back.
Okay. Many thanks for clarification.
Thank you.
Our next question comes from the line of Andreas Hockensen of Exane. Please go ahead. Your line is now open.
Yes. 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. But if I look at the mortgage book, isn't the main driver of the margin expansion on mortgages just the lower cost of funding?
And shouldn't we see that overall as mortgage margins are going up rather than calling it a lower cost of funding because isn't that really the same thing?
It is to some extent. I mean, of course, it's related.
Yes. So because since there's no lending on the corporate side really at the moment, there's no growth, the main driver really needs to be the mortgage side, right, rather than corporate. Is that correct?
Yes. I mean, we've had some I mean we have improved the margins as you know on the mortgage book. So that is the main contributor, but we also have improved margins slightly.
Yes. And then Yes. And then
Yes, Michael, it's also the fact that our funding is not called rolled over gradually. Even if it's not growth in the book, we still have to fund the book and we have to
Sure, sure.
Yes, of course. We have new funding coming in, which also has an impact on the funding costs.
Yes. And also, can I just check when you have been improving your margins so significantly on the mortgage side over the last 2 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? And 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. And as you know, they have been fairly dramatic. So that has been repricing going on for a while. So that's the main part of it.
Okay. Thanks.
Thank you. Our next question comes from the line of Riccardo Rovere of Mediobanca. Please go ahead. Your line is now
Good morning to everybody. A couple of questions, if I may. I am looking at Bloomberg. I see statements from your CEO according to which 24 capital ratio might not be enough. So when I see these statements, which seems to be a bit clashing to with what you have been saying so far.
Is it fair to assume that when you provide the range between 22 point $1,000,000 $24,100,000 we should actually look at $24,000,000 rather than any other number. And the other thing I wanted to better understand, you're also saying that it's not clear at the current stage whether building come probably be at right at the end of the year. So 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 mentioning you're not telling what the name is, fine, but 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. So I'll start with the first question about 24% in core Equities Tier 1 ratio. And we haven't, as far as I know, communicated that we should know more. The capital targets we do have is to have 1%, 2%, 3 points more than or percent above the SREP requirement, and that is what we stick to. And when it comes to Basel IV, if that is going to happen or not, no, we don't know that.
So and 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. So but past before, we have to see what happens, and we don't know. But potentially, there could be a decision, but that is that we don't know. And that hasn't been a major part of our assessment of the capital we need to have. And about the Danish exposure, no, we simply don't comment that, 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. And we don't comment the industry.
Okay. 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. So but you say that next year you might resume the provisioning for Oktogonen. So this year it should be treated like say like a capital gain like a one off. Now in your dividend policy normally how do you treat 1 offs?
Do they enter into the distributable amount and especially in the current uncertainty on regulatory requirements?
Okay. So when I when it comes to Oktogonen, the reason I said we might, it's not we are going to resume allocations to Oktogonen provided that we fulfill our targets that needs to be fulfilled in order to do that. So we are back on back to the normal situation. So when we are have a higher return on equity than the average of our peers, there will be an allocation. And if we don't reach that to the extent needed, then there will not be an allocation.
So it's back to normal, so to say. So yes, and that's that part. And the second question, where that will end up in okay, Mikael.
If you can do Ricardo, I mean, why don't you call, Lars, can you talk with after the meeting? He can give you the details on calculation.
Okay. Fine. No problem.
Our last question comes from the line of Jakob Khors of Autonomous. Please go ahead. Your line is now open.
Hi, thank you. I guess just two questions. Firstly, on this repricing issue of corporate. Could you just in terms of what you're sending down to the branches from a central level, does that then include the full capital weight to that SEK 8,000,000,000 SEK 9,000,000,000 of capital? But then do you also include the sub debt costs, the Swedish bank tax that might be coming in 2018 as well as these the resolution funds.
If I add all of those things up, I guess I end up with something like 30, 40 basis points of repricing requirement. So is that the way we should think about this? Is that roughly how the kind of quantum you're looking at? And secondly, just on the Oktogonen thing. I recognize it's a Board decision, but 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.
So regarding repricing, we what we do is actually to feed that through to the branches based on what clients they do have and so on. So we will change the way we do that slightly. It's the same amount of capital that we will continue to allocate. So 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. And we also and that's the business model.
We 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. And regarding Oktogonen, well, once again, we don't we haven't made any forecast and about the dividend. And that's the Board decision. And so 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. So that was all from our side this time. Thank you very much for calling in to this telephone conference. And if you have additional questions, we are very happy to support you and to answer those. So please then contact Investor Relations through telephone or e mail.
Okay. Thank you.
That concludes our call. Thank you for attending. Participants, you may disconnect your lines.