Ladies and gentlemen, welcome to the Handelsbanken Q1 External. Today, I am pleased to present Mr. Ulf Reis, CFO. For the first part of this call, all participants will be on listen only mode and afterwards, there will be a question and answer session. Speaker, please begin.
Good morning, everyone, and welcome to this conference call for the Q1 2016. Joining me today, I have Michael Hallacher, Head of IR Lars Hoglund, Head of Debt IR and Jurgen Olander, Group Head of Accounting. And the slides used for my presentation are as usual available at handersbanken.com. My first slide number 2 is very, very familiar to you. Here you can see the value creation of the bank with equity per share including dividends continuing its 15% annual growth rate also when adding the Q1.
During the quarter, interest rates have continued to fall in most of our home markets and or even deeper into negative territory in Sweden, for example. On the negative side, we also had a stock market decline that affected fee income on mutual funds, and the card business has been affected by lower interchange fees since December last year. Still with these different challenges, the business model of Handelsbanken has continued to generate this very stable development as has been the case for so many years now. Our capital position has continued to strengthen and was at the end of the first quarter at the level that we already now believe is compliant with the new and higher capital requirements that the Swedish FSA has proposed for implementation towards the end of the year. Return on equity for the Q1 was 13.1%.
Now to slide number 6. Operating profit, all in all, decreased 10% compared to the 4th quarter. However, there were a few non recurring items this quarter to consider when comparing the quarters. During the Q1, the bank has sold non core shares in Mastercard and Visa with a total capital gain of SEK 827,000,000. And in the Q4, as you probably remember, we had a gain of SEK 1,207,000,000 from our divestment of SCA shares.
The bank has also decided to set up a reserve of SEK 700,000,000 mainly for early retirement in order to facilitate for the Swedish branches to adopt to and take advantage of the changed customer behavior that our digitalization creates. And finally, regarding Oktogonen, the bank has decided not to do any allocation during 2016. This is on the back of the higher capital requirements that have been proposed and to which I will come back to. In the Q4 of 2015, Doktorbornen allocation amounted to SEK 438,000,000. And adjusting for these items, operating profit actually increased by 2% quarter on quarter.
Then on Slide number 4, you can see the profit and loss for the Q1. Here you can see that net interest income was down 2% compared to last year, but adjusted for currency effects, NII was unchanged. Net commission fell 6%. Card fees decreased because of the lowered interchange fees that apply from December 2015. But on the other hand, we have increased annual card fees, which will gladly be reflected in the income throughout 2016.
Equity brokerage fees were also lower, while there was a strong development in advisory fees. Net gains and losses on financial transactions increased, but this was, of course, entirely due to gains from divestments of shares in the Q1 this year. Revenues all in all increased by 5% including the capital gains. On the cost side, personnel costs rose by 17% and adjusted for the non recurring items currency effects and IAS 19 for pension costs, underlying staff costs rose by 2% year on year. This increase is explained by annual salary increases and of course the expansion we have in our growth markets.
Other expenses increased by 5% and expenses all in all increased by 14%, but again excluding the non recurring items, underlying expenses increased just under 3% year on year. Loan losses fell to 4 basis points, down from 7 basis points 1 year ago. Impaired loans dropped to 18 basis points, down from 25 basis points and credit quality remained stable. If we then jump to Slide 23, you can see the sequential development of net interest income, a decline of 3%. The main reason for this decline relates to higher state fees.
As you may remember, in the Q4, we had a reversal of earlier booked fees to the stability fund. This year, we start to pay half the fee to the new resolution fund, and we estimate that to be DKK 255,000,000 for the Q1. All in all, high estate fees reduced net interest income by NOK169,000,000 dollars quarter on quarter. The strongest Swedish kroner gave another €84,000,000 negative impact in the quarter and more negative interest rates in Sweden decreased NII by 41,000,000 dollars Some decline in margins in Sweden were compensated for by volume growth in Sweden and elsewhere. The mortgage margin in Sweden was flat in the quarter and lending margins in Denmark, Finland and Norway were under some pressure, while deposit margins in Norway increased.
All in all, total net interest income from lending and deposits in all home markets had a very marginal decline of SEK 13,000,000. Now back to slide number 5. Here you can see that the bank has had a good business development in the Q1, both on the private and corporate side. Lending volumes increased in all our home markets. And for the group, lending increased by 2% or DKK 36,000,000,000 since year end.
The incremental positive impact from lending volume growth in the group is clearly seen here in the chart on the dark blue bars. It has been a steady growth, as you know, for a long time. In the Q1, the Riksbank lowered the repo rate by 15 basis points to minus 0.5% and average cyber dropped 4 basis points. The impact on deposit margins was still increasingly negative, however, with the smaller incremental deterioration than we have seen in previous quarters, this is what the light blue bars show in the graph. And of course, when interest rates only stop falling in Sweden, let alone increase the underlying positive impact from our organic growth will become visible in the net interest income.
Then on slide number 7, this shows our balance sheet, which again has continued to strengthen. Total capital ratio, which we calculate with a 50% payout ratio in 2016, rose to 28.8 percent, up from 27.2% last quarter. Core Equity Tier 1 ratio at the same time increased to 22.7%, up from 21.2% at the end of 2015. A number of factors contributed to the strong increase. And here, profit generation was the largest item.
We also had, again, positive volume migration, improved use of collateral as well as a positive contribution from IAS 19 in the pension system in this quarter. As you know, our very strong capital generation means that our core Equity Tier 1 ratio has in fact more than doubled since the Q1 in Sweden Norwell will rise and the recommended level of 18.6 communicated by the Swedish FSA as of year end 2015 will therefore increase further. And then in March, the FSA also communicated some proposed changes regarding the IRB models for corporate exposures. One of the changes regards to risk weights in Pillar 1, which according to the proposal is anticipated by the FSA to be at least 30% for corporate exposures. In order to achieve that, the banks will be asked to increase the assumed probability of default in the models by including a severe downturn here every 5 years to the statistics of actual loan loss history.
The other proposal regards the maturity factor in advanced IRB models where a floor of 2.5 years is proposed as an additional Pillar 2 requirement. The details in these new proposals are not yet decided by the FSA, but they are expected to be implemented later in 2016. Our assessment is that the bank already at the end of the Q1 was indeed compliant with the new higher capital requirement that these changes may bring if the proposal is implemented. On Slide number 10, you can see the return on equity in our home markets. And this quarter, again, U.
K. Was in top with 16% in spite of the continued growth in the branch network in the Q1. Denmark, still with negative interest rates, was at 14% and so was Sweden if you exclude the provision taken in the Q1. Norway with an economy being in downturn was at 12%, while the Finnish economy continues to struggle and it has now for many years as you know. And however, the Finnish return on equity still amounted to 11%.
And finally, the Netherlands, where we have invested substantially in our product offering, was at 10% ROE. The underlying profitability in the Netherlands is strong and we are very enthusiastic about the opportunities here. In the Netherlands, our fee generating business is still very small compared to the lending business, but with large opportunities now when we add savings and asset management to the product range. On Slide number 11, let me talk a little bit more about the Netherlands. Our Dutch business is developing very well.
Operating profit in the first quarter doubled compared to the Q1 2015. Household lending grew by 38% and the loan loss level remained at 0. Cost efficiency improved and costincome ratio fell by 10.6 percentage points in spite of the continued substantial investments we do in the business. We have the most satisfied customers of all Dutch banks, both in the private and corporate segments served by our 23 branches. On the private side, the products we now offer to the customers include lending, various deposit accounts, cards, mobile app and Internet.
And we have today also announced the acquisition of the Dutch asset manager Optimix, and I will come back to that in a second. In terms of lending, half of the loan book is now to household, and this is where we have seen the strongest growth during the last year. Now with Optimix, we also have the complete product range and have become a full service bank for private customers in the Dutch market. This gives us the opportunity for a higher product penetration with our existing customers and of course also stronger competitive position to attract new high quality customers in the Netherlands. We are highly enthusiastic about the opportunities we have in the Netherlands.
On Slide number 12, you can see a little bit more information on our announced acquisition of Optimix. This firm is mainly active within discretionary asset management and its assets under management are €2,000,000,000 including mutual funds and a very good customer base. Through this acquisition, we get a strong platform for growing the savings business also in the Dutch market. In the Netherlands, as well as in our other home markets, our customers have a strong demand for qualified asset management product. And as we did in U.
K, we have been looking carefully into this market in order to find the right type of asset management that fits into the Handels Banking culture and our way of servicing the customers. We are very happy to have found Optimix to make our Dutch product offering complete. And we expect the deal to close during the Q3, subject to normal approval from authorities. Then on Slide 14, you can see the continued strong development for our mutual fund business in Sweden. During the Q1, Handelsbanken again was the largest provider in the Swedish market in terms of net new savings in mutual funds.
While the market had a deteriorating trend in the quarter with net outflows, we gained $7,600,000,000 in net new savings. Looking at the entire period since 2010, Handelsbanken has received 27 percent of new net mutual fund volumes in Sweden. On Slide let me now discuss some of the improvements we will do in Sweden. As I mentioned, the bank has a strong development within the savings area, and we have had that a long time. But we also still have a large, large potential and want to focus even more now here, taking our best expertise even closer to the customers.
Therefore, we have decided we will now start 10 new regional advisory units covering savings, pensions and private bank. By decentralizing our regional business support to more locations, this also allows us to improve the administrative efficiency in the regional banks. And as a consequence, we are merging the purely administrative functions of the Eastern Regional Bank with the Southern one. Our digital strategy is, as you may know, based on providing all the tools to the customers and to let the customers decide how they like to interact with the branch. In Handelsbanken, all customer interaction leads to the local branch.
This has proven to be very successful, and we have the most satisfied customers and the use of and opportunities, I would say, provided by our mobile app continue to grow very rapidly. New features are constantly added, and this enables the branches to work in a different, more efficient way and to focus their time on proactive customer interaction in all different channels and on providing good advisory services apart, of course, from also always decide on and monitoring the credits. In order to facilitate the way the branches adapt to this new way of working, we have now set up a reserve of SEK 700,000,000 to primarily allow for early retirements. With all else being equal, this is expected to reduce cost in Sweden by some NOK 600,000,000 to NOK 700,000,000 per year from the end of 2017. So to summarize, the value creation in the bank continued with an average increase in equity per share including dividends of 15% per year.
Operating profit increased 2% quarter on quarter, adjusted for the extraordinary items in the 4th and 1st quarters. We have decided to further increase the local footprint in Sweden with respect to savings, pension and private banking by creating 10 new regional advisory units. Divestiture of shares gave $827,000,000 in capital gains and at the same time the bank has an upper reserve of NOK 700,000,000 to facilitate the Swedish branches in their continued transformation to the changed customer behavior on back of our digital development. This in turn, all other things assumed equal, is expected to lower cost in Sweden by some SEK 600,000,000 to SEK 700,000,000 annually from the end of 2017. In the Netherlands, the bank has agreed to acquire the asset manager, Optimix.
This acquisition will provide a platform to expand our offering within asset management products in the Netherlands. And thereby, the bank will from now on be a full service bank with a complete product offering. Core Equity Tier 1 ratio increased to 22.7%, up from 21 point 2% at year end. And we assess that the bank is thereby already compliant with the new higher capital requirements proposed by the Swedish FSA that may be implemented towards the end of the year. And with that, I conclude my presentation and open up for questions.
Thank you.
We have a
We have a question from Omar Keenan
of Deutsche Bank. Please go ahead. Your line is open.
Good morning. Thanks very much for taking the questions. I've got 2 questions. Just one on corporate risk weights and then secondly, on dividend accrual and the payout outlook. So firstly, I guess we've started to discuss what the impact of higher corporate risk weights is going to have.
Could you talk through the potential for lending margin increases on the corporate book? Any would you expect that lending margins can increase generally later in the year? And how would that come about? And then my second question, just on dividend accrual. We've noticed that the accrual methodology in capital has changed from 70% last year to 50%.
Could you just elaborate if that change is just of a technical nature, whether there's any link to higher capital requirements? And should we take it as a signal that kind of the extra dividends kind of are not currently being planned for and could be replaced with a, say, a flexible buyback program? Thank you.
Thank you very much for those questions. On the first one, as you may know, we are in discussions with the FSA to understand the mechanics behind the proposal that they have put forward. And they have always said that they will make some sort of decision on this proposal in May. So we don't actually know exactly what the details are here. And then you ask, could that be compensated by lending margins?
And I guess that has to do, 1st of all, with the impact and second, of course, what how the market looks. I mean, in general, it has always been the case in Sweden that this in terms of taxes or whatever has been transferred to the clients, but I have no more intelligent answer to that. And as you know, we don't do any forecast or budgets or so on. On the second one, I think it's important to understand that the 50% payout ratio deduction we are doing when we are calculating the core Tier 1 ratio for the Q1 does not contain any forecast element. Our capital policy is very clear.
We should, 1st of all, be compliant with the regulation. Secondly, we should have enough capital to cater for our growth, which is, as you know, very profitable. And money that is left over after that, we are happy to distribute. So the Board will, of course, as usual, come back after year end with their proposal to the AGM on this year's actual dividend, what it will be. I think it's very comfortable though to note that we clearly state that our best estimate, desktop analyst analysis of the FSA proposal shows that we are already after Q1 in compliance with the proposal should it come into effect later in the year.
And as a technical detail, you might be interested to also know that that would have been the case also if the payout ratio would include an extra ordinary dividend. So no forecast value whatsoever in that part. Thank you.
Okay. That's very clear. Thank you.
Thank you. We have a question from Jan Wolter of Credit Suisse. Please go ahead, sir.
Yes. Good morning. Jan Wolter here, Credit Suisse. Thanks for taking the questions. Excuse me.
If we look at the adoption of the Swedish branch operations, you expect that to yield up to EUR 700,000,000 in cost cuts, just to clarify on that? And also if those cost cuts or savings would flow to the bottom line or if you think that they would be used for investments rather? So that's my first question.
Yes. Thank you for that. We are putting aside the reserve, as you've seen, of SEK 700,000,000 which is to be used predominantly to early pension as individual solutions for early pensions in Sweden. And we see quite a lot of different parts when it comes to what we see in terms of efficiency gains in Sweden. One is, of course, the reduction of personnel and also the competence shift that this will mean.
But also, we have a very good, as you know, customer appreciation of our app and that is growing very much. Those simple transactions are now more and more done by the clients themselves. We also, as you know, are now further decentralizing and reinforcing our capability when it comes to giving advice. I'm thinking of the 10 new units that we are setting up in terms of private banking, savings product, the pensions product and so on. And I think that all of these the message here is that all of these things brought together, we anticipate will have a very good impact in terms of efficiency.
Then if you look purely on the 700,000,000 and the effect of the 700,000,000 that you put aside, we say that all things being equal, that should correspond to the €600,000,000 to €700,000,000 in cost reduction as of the end of 2017.
Thanks. And on those EUR 600,000,000 to EUR 700,000,000 cost savings, do you expect that to flow to the bottom line or used for investments? How should we think about that, please?
Well, as you know, we don't have any budget like that. So we don't have any cost plan or so on in its totality. And also I think it's important to note that we're not doing this because of a cost reduction scheme. We are doing this in order to reinforce what our interaction with our clients and make our clients even more satisfied. But it also causes very beneficial from an efficiency point of view and from a financial point of view.
Okay. Many thanks. And if I may, another question on the capital side there. There was a dividend paid out from Handelsbanken Leave, boosting the capital this quarter. Is there any excess capital left in Handelsbanken Leave, please?
We are, of course, very much hoping that Handelsbanken also this kind of dividends to the mother company also in the future.
Okay. And the final question, the decision not to pay Oktogonen this year, I don't think that has happened more than a couple of times in the past 25 years. And typically, when Oktogonen is not paid, that is because the ordinary dividend is cut. How should investors think about this? Thank you.
Thank you. That was a very good point that I've never thought of. So thank you very much for bringing that up. There is no link whatsoever in this decision. This is not at all linked to any such decision.
So this is purely linked to the fact that the new capital rose has been proposed from the FSA. And in that context, we think it's a good idea to take a time out with Oktogonen for 2016. On the back of that, that's a good decision for the bank, and it's a good decision for the bank's shareholders. And it so happens that the largest shareholder of the bank is Oktogonen and the employees of the bank. So it's not a very dramatic decision.
As you know, the Oktogonen decision is actually a discretionary decision each year of the board. But of course, it goes without saying that from a practical purpose, this is something that we have discussed in the bank among ourselves to come to this conclusion. So what's good for the shareholders is good for Oktogonen.
Okay. Many thanks for your help.
Thank you. We have a question from Christoph Rokos of Barclays. Please go ahead, sir. Yes.
Good morning. Christoph from Barclays. Thank you for taking the questions. First one on capital and then secondly one on margins. So just on capital following up on the previous questions here.
I mean, you give the impression with those moves that you're actually sort of increasing your ability to build capital. But it's very clear what you said that neither Doktogonen or accrual of dividend is has that purpose. But could you perhaps refresh what you've said previously about your main concerns in the regulatory space? You've spoken today about the Swedish FSA announcement in March, but also said that you already meet those requirements, the rising requirements and are comfortable with that. So are you also worried about Basel IV or other initiatives outside of Sweden?
That's the first question. And then secondly, on margins, you said that your Swedish mortgage margins were flat in the quarter. While in the market, we can observe that discounts seem to be decreasing and the spread to short rates increasing. So I was just wondering if you could elaborate a little bit on the mechanics behind your flat rates and perhaps how you expect that to develop going forward? As on your slide, you seem to have a quite positive view on the short rate development at least.
Thank you.
Thank you. On the first question, I mean, the Swedish FSA proposal is the immediate one and the one that we are thinking about. And also we, of course, know that the countercyclical buffer will go up in Sweden, Norway as of June this year. And then also it's proposed for March in Sweden March next year. So that's a factor that we're factoring.
We are also, of course, thinking of the 2 elements in the Swedish Chef's Day proposal. When it comes to the Basel IV paper, it's very much early days. And I mean that will should also first be decided what is the view of the Basel proposal, and then it should be implemented in EU, and then it should be implemented in Sweden. So I mean, are we talking 2019 or 2020 or what? So it's very much too early to say anything of that.
So I think it's interesting when you compare what the Basel paper that was put out now have said And of course, that does not go as far as the Swedish FSA does. If I ask you to do a sort of top down summary, I would argue that the Basel is maybe going 20% of the way that the Swedish FSA are doing. It's not exactly the same because the Swedish proposal has more to do with the PD side and the Basel is also a bit on LGG side. But ballpark, that's much more lenient, if you like, compared with the Swedish proposal. But we have to see margins.
You are talking about mortgage margins in Sweden, and that's a very interesting subject. We don't do any forecasting on this, but I can only say that in the quarter, it was very flat. And when I'm talking about the back book, that's the only thing we talk about. So I would very much say anybody's guess what's happening next year. I don't really have any intelligent guidance to give you here other than the general observation that when capital rules change or taxes are implemented or resolution fund fees are implemented or so on, over time in Sweden, it has always worked in that way that the full effect is actually paid by the end client.
But that has nothing to do of course on a quarter on quarter basis. But over time, we have always found that.
Thank you. Can I just I mean, on the first point on capital? Today, we have at least the first iteration of the Swedish rules. And when you look at the iterations coming out of the Basel Committee, those papers seem to become more and more lenient. So would you say that overall, when it comes to the threat of rising regulatory requirements on the capital side that today we have slightly better visibility than in the Q4 and that you're sort of seeing a more dough ish picture?
Or is that not the case at all?
In a way, I think you're right. But of course, if you look in a longer perspective, we've seen Basel I, Basel II, Basel II.5 transitional rules Basel III, TRD 4, CRR, Swedish implementation rule and now Basel 4.
So I
don't think it will the world will stop after Basel IV unfortunately. But on the other hand, I think that there is a limit to how high you can push capital levels without sort of having a detrimental effect on the economic activity. And I think that is on a general level, on a sort of European level and so on, now really coming more and more into the considerations when implementing new rules. So I definitely see when talking to the decision makers in EU, Brussels, etcetera, that this is more and more of a concern. So I think that is when you say more lenient, yes, I mean compare Basel to Basel the first Basel proposal on Basel IV and the paper that has come out now, I think it's very clear that the trend has gone in that direction.
Thank you very
much. Thank you. We have a question from Anton Kreychuk of UBS. Go ahead, sir.
Thank you and good morning. Two questions from my side, please. Firstly, on the contribution to Oktogonen, if the capital generation this year turns out to be better than you currently expect and you will be in a position to pay more than 50% payout ratio by the end of this year. Will this trigger a payment to Oktogonen towards the end of the year, maybe an elevated payment in Q4 like we've seen last year? Or have you completely ruled out making any payments to Oktogonen in 2016?
That's the first question please. And then the second question on capital. In the interim statement, you say that 90 basis points of profits sorry, of capital build came from profits and other capital measures. But if we just look at the 50% of the profitability this year, that would account for roughly 40 basis points capital build Q on Q. So I was wondering what else is in that 90 basis points.
And linked to that, when determining how much to pay out at the end of this year, do you still stick to having a significant buffer over the Swedish FSA capital requirements as being a prerequisite for having an elevated payout ratio, I. E. Do we need to see a capital buffer of 300 basis points or so for you to be able or for you to be comfortable to be distributing elevated level of dividend? Thank you.
Thank you very much for those questions. On number 1, Oktogonen 2016, yes, we have decided that no matter what the development will be, there will be no Oktogonen allocation in 2016. On the second item, capital measures include, for instance, that we have things like we are using derivatives to lock in all currency effect and interest rate effects of our funding to match that 100%. And therefore, of course, when we now have cleared and chosen to clear more of that counterparty risk goes down and therefore capitalization goes up. We took EUR 2,300,000,000 in a dividend from Handelsbanken Leave to the mother company.
We have also been able, which has been a lot of technical IT work actually to link more of the securities we have, the pledges we have concerning some British lending on the real estate side. We were not able technically to get the information, the granular information. So things like that are when we talk about capital measures. The last question, we have not taken any other decisions regarding our capital goal. So yes, we certainly want to have a buffer.
And why do we want to have a cycle turns up, there will be good demand from our clients in terms of new lending. Investments are coming back to the system and so on, and we want to be prepared to meet that demand for our clients. There is always also some volatility in the capital measures when you measure it. And thirdly, there are always some details in the regulation and so on that you can have a small shift quarter by quarter. So to be comfortable there, you certainly will need to have a buffer.
So no change on that reasoning.
Thank you. That's very clear.
Thank you. We have a question from Jan Eklund of Bank of America. Please go ahead, sir.
Thank you very much. Just a few quicker follow ups. Firstly, on capital, can you confirm that when you say you're compliant, you've assumed a 30% corporate risk weight as opposed to anything more granular given the available information today. And secondly, with regards to the upcoming cost saves or the restructuring of the Swedish operations, What's the broad timing? I mean, is this something you're starting now and most of the branch mergers and early retirements will come end of this year and next year?
Or is this already moving sort of full speed ahead and we should expect to see this already in the second quarter?
Okay. Thank you very much for those. On the first question, yes, we have desktop actually that what will happen in risk weighted asset if we use 30. We're actually a little bit over 30 as the risk weight. And you come to that you will need about $100,000,000,000 more in risk weighted assets just under that and calculate it from that.
And we also know the effect or more certainly, we know the effect of the M factor, the 2.5 year floor in Pillar 2, which both we and FSA estimate that 0.5% in CET1 terms. So that's how we come to that. So it's not a granular calculation saying that we should be less or so on. We are actually doing what they anticipate in the paper. The timing, this is up to the timing on the Swedish changes and improvements and so on.
That is, of course, up to the branches and the regions to implement this. But this is not something that has come, I want to stress, top up from the top in any way. This has come from the branches and that has talked with the regional heads and so on. So they have been working on these ideas for a long time. But we don't do any budgets.
When you do budgets and those kind of timing plans, you always get some sort of awkward effect. This is a natural process. It's good for the clients. It's good for everyone. And it's a lot of positive things that this will bring, more expertise out closer to the client, more focus on the pensions and savings, more possibilities to free up time since our app has been so fantastically well appreciated.
The new features here are not only planned, but close to be delivered from the technical side on the app. So a lot of things happening here. But I don't want to have any view of the time. We have said that we estimate that at the end of 20,07 2017, we will have the full effect.
Perfect. Thank you.
Thank you. We have a question from Anil Dothoy of JPMorgan. Please go ahead, sir.
Hi, good morning. I have two questions, please. The first one is on fees and the second one is on the pension impact on capital. On the fees, in particular, on the interchange that you were talking about earlier, if I take the Q1 number, down 7% quarter on quarter for payment fees and I extrapolate that for the entire year, that gets me to about €200,000,000 in lower fees on an annualized basis. Now you mentioned that there was some mitigation from an increase in annual fees.
But is the €200,000,000 a reasonable estimate? Or will it or is it likely going to be less than that? And then secondly, on the pensions, I think you commented last quarter that if the level of interest rate remained where they were, which I suppose they have, you would gradually start to increase the discount rate over the course of 2016. I guess you've already increased it by a little bit this quarter. I'm just wondering whether if rates remain where they are, we should expect to see you further revising the discount rate upwards in the following quarters?
Thank you.
Thank you very much for those questions. On the first one, the interchange fees, I think your calculation is in the right ballpark. And when it comes to the contracting annual fees on the cards, the contracting effect, it works like this that, of course, not all cards have got new fees as of year end because it depends on when you pay the card fee and that depends on when did you in the year when did you start your card, so to say. So this is an effect that will come gradually during the year. When it comes to pension interest rates, you're absolutely right.
It was 2.25@yearend and we are now using 2.5. If the new or if the interest rates are as they are today, it will not have any effect. We are at the same number. So this is the case at the moment.
Okay. Just to confirm then, then if rates remain where they are, then the 2.5% discount rate is the appropriate level?
Yes. If nothing happens until Q2 is ended, we will use 2.5 percent also for Q2.
Okay. Understood. Thank you.
Thank you. We have a question from Edward Firth of Macquarie. Please go ahead
sir. Yes. Good morning. My question sorry is back to capital. And I just trying to check where I'm going wrong here because I hear what you say about meeting future capital requirements.
But if I look at the regulatory minimum of 18.6, it seems to be most of the numbers are pretty clear. You've got plus 0.3 for countercyclical and plus 0.5 for the M factor, which gets you to about 19.4, which if I then put your buffer on top is somewhere around €21,000,000 I guess broadly, it is not precisely. And that's against your current €22,700,000,000 percent. But if you put an extra €100,000,000,000 of risk weighted assets here, which I think is what you said was the 30% risk weighting, that takes your 22.7% down to about 19%. So that seems to me a gap of about 200 basis points.
So could you tell what number am I missing in the sense of you saying that you're meeting your requirements already?
Yes. This is a very interesting exercise. I don't know if we've got the time to go through it all, but the complexity when you talk about quotas is of course the fact that in Pillar 2, you have some absolute numbers while the rest is a quota. So for instance, when risk weighted assets goes up, our number, of course, goes down, as you say. But at the same time, the FSA number goes down because some parts of the quota is in Pillar 2 terms with absolute numbers.
So you will actually have to think through the whole thing, the whole quota. And what we have done is that we take all our situation at the end of Q1. That includes things like the pension system concentration, risk interest rates in the interest rate risk in the banking book, etcetera, etcetera, and this risk weighted asset, the minimum risk corp effect. And we look at what our number will be and we look at what how does the FSA, if they will put in all the numbers that we know now is a fact because Q1 has ended. They don't have the numbers yet, but we put it in our model for them and use their methodology.
Then we come to that, yes, we are indeed compliant. There are uncertainties because we still don't know the details from the FSA. As we move along in Q2 and Q3, things will happen. We will grow and we will generate capital, etcetera, etcetera, interest rates. We talked about the pensions and so on.
So things fluctuate and that's of course why we have a buffer. So take it as our best estimate when we use all the knowledge that we have, we are indeed maybe it's interesting to know that, yes, we're actually compliant even if we in that calculation would include an extra dividend.
So just to be clear, does that mean that you're assuming the 18.6% will go down I. E. The Pillar 2 buffer will be reduced? Is that what you're expecting?
I deliberately refrain from using any numbers because it's so dangerous because when you use a number, you have to be very specific and detailed about what kind of regulation you use when you use the numbers. And that's why I say, we have the numbers that you see in the report. That's according to today's regulation. What we've done is that we've taken the future regulation or the proposed future regulation to our best knowledge and done the calculation. But I don't want to give you exact figures because this is not exact.
We don't know the details. The only thing we can say that, yes, when we do this, we come to the conclusion that, yes, we are indeed compliant already now after Q1.
Okay. Thanks so much.
We have a question from Adonis Cacek of DNB Markets. Please go ahead, sir.
Yes. Good morning and thanks for taking the question. I just have one follow-up question regarding this €700,000,000 in provision that you are taking to facilitate the adoption to change the number of branches? And what would you say is an optimal number of branches for Handelsbanken in Sweden with the current customer behavior? Thank you.
Yes. I when I hear what the branches have said and the regions and so on, there is scope for maybe merging some branches. I'm not talking on a big, big scale, but on the marginal, yes. As you know, in Handelsbanken, the branch really is the bank. We will always be the bank with most branches and so on.
But for instance, in terms of competence, as you know, there will be new legislation now that you have to be certified talking about mortgages. That's new legislation. You got MiFID II. You got more and more legislation regarding investment advice, etcetera, which means that you have we have, for instance, branches that are only 1 person or 1.4 person, 1 part time. And of course, to keep that competence and also be very active in the savings field or private banking field and so on, That is not possible if you don't team up with a branch that is a little bit larger.
So yes, there are elements of this. Again, there's no central plan saying this is the exact number or this is how we're going to be done. It's up to the branch and the regions to go about that. But I think that is an element.
Sure. Thank you very much. And is because I saw some article in the industry today, they're talking about 50, 60 branches less in a couple of years. Does that sound reasonable to
you? Yes. Yes. I think that could well be reasonable. But again, the important thing is the number is not important.
The only important thing is that it's done so that the customers get more happy and the people that are working with their clients are getting more happy and get better instruments, better circumstances to make the customers satisfied and to really use the time on more value creative things because that's what this is all about. Digitalization means that the client can themselves do more of the ordinary transaction, check the balance in an account and so on. In the old days, you went to the branch. Now we have only 1% of our interaction in terms of number of interactions is actually done through the physical visit to the branch. 99% is done through digital ways or app, Internet or so on, which I think is extremely important to stress are tools from the branch.
It's just another way for the client to reach the branch. So the branch is not only for physical visits. The branch is responsible for the client regardless of how the client contact the branch. And this setup, I think I never I haven't seen any other bank that has this thinking. And that gives so much power to the whole digitalization theme and possibilities.
And combine that now with our large, large potential when it comes to savings product and the reinforcement we are now doing with the 10 new local regional hubs for private banking savings and pension.
Okay. Thank you very much. That was very clear.
Thank you. And our final question comes from Jacob Kruse of Autonomous. Please go ahead,
sir. Thank you. Just a couple of quick follow ups, I guess. Firstly, when you say you're compliant, I know you don't want to go into any numbers, but does that compliance include an element of your 1% to 3% management buffer? So is it basically the FSA, whatever that comes out at after Pillar 2 are discounted plus at least 1% management buffer?
And then my second question was, we should get an MREL regulation in the next couple of days from the Swedish debt office. Have you gotten any indication on how that will be treated and how senior debt will be treated? And then lastly, with this digitalization drive, how comfortable are you with your current IT platform?
I don't know if you could say anything about when that was built?
Need for additional investment in that platform? Thank you.
Thank you. On the first question, yes, we are compliant with the regulation. I'm not talking about the amount of buffers over the regulation when I say we are compliant. I mean, we are compliant with the regulation. And yes, there is some buffer, but whether it's enough and how the exact numbers will come, then we have to know the regulation before we can get into that.
But I mean, as we have said and as you've seen from the figures, we want and we have been building capital and we in order to be compliant, we've done that in the first quarter, and we have a good ability to continue to do that in my opinion going forward. The MREL, the answer is no. We don't have any more information than you on the MREL, and I don't want to speculate on what the National Debt Office is coming with. They are coming they have said that they should come soon as you know. Detalization and platform, yes, that's very interesting.
Yes, we have a very good platform. And I think that has to do with the fact that all you as long term as Handelsbanken, we have constantly been investing every year regardless of the business cycle. I see so many banks that have gone to 0 because they don't have the money to invest. But I think this kind of long termness you get with a bank like Handelsbanken where the employees are the largest shareholders because it's very dangerous if you do not constantly invest. So I would describe our IT platform like a plane coming in every night to the airport.
And as you know, because of flight regulation, you have to choose a couple of boats and 2 seats and a meter and so on every night. And then after 10 years when the same plane lands, it's basically a totally new plane. It has got the same sort of number in the tail, but actually all the parts has been shifted. And that's how you have to do it with IT or you will get we've got one example, I think, which I mean in the Nordics, with an incredible amount of work to shift almost everything at the same time. Very dangerous, very complicated and so on.
We would never like to be in that kind of situation. But it takes a lot of you have to be very stubborn to do this year in and year out.
And is that platform common across the geographies that you operate in?
You can say that there are common denominators and there are parts of it that are local. So it's a combination. The way of thinking and then like and the cash management systems and so on are all the same. But you seem to be very detailed interested. So we would be happy to set up a special session with you if you want to know more.
Okay. Sounds great. Thank you very much.
Thank you. Okay. Then I thank you very much for attending today. And as usual, if you have any more questions that we have not had time to cover, please don't hesitate to call us. And we look very much forward to meeting with you in Q2 and hope really to also talk before that.
So thank you very much for attending today. Bye bye.