Good morning and welcome to the Handelsbanken Q2 report for the second quarter 2022. We're going to begin by listening to our President and CEO, Carina Åkerström, presenting the Q2 figures together with the CFO of the company, Carl Cederschiöld. After that, we will have a short break, and then we will have a Q&A session over a phone conference service, not thereafter broadcast in this channel. You can find information on how you log on to the Q&A session on handelsbanken.com under the section IR, and information was also included in the press release that was published together with the invitation. This presentation, the Q&A session rather, will be held in English. Presentation in English, you can do so via logging in to the telephone conference service, where it will be simultaneously translated.
You'll find information on how to log on to that on handelsbanken.com under Investor Relations. Now let's begin with the presentation. Carina, over to you.
Thank you, Louise. Handelsbanken. We have a good first quarter to report, the first six months with a record strong situation of control, cost development, and virtually non-existent credit losses. The capital situation is strong. Handelsbanken, therefore, is well-positioned to continue to grow in a successful manner and with profit in funding, deposits, and asset management. If you look more from a business-focused perspective on the numbers, the picture is painted of a bank which is very well-positioned and standing strong in the new global situation and the new market we're now currently operating in. We're growing in lending and deposits.
We can see this in the net interest income, which reached the highest level so far ever recorded. It's increasing, as can be expected in a bank like ours when the market interest rates go up. In a market with a decline in the stock exchanges, Handelsbanken performance is above and beyond those of many other players in net fees and commissions. The net outflows from the bank were marginal, and we've seen major movements in the market overall. Credit losses are virtually non-existent, so our asset portfolio is continuing to be at a very high quality level. Capital situation remains comfortably strong and stable. The costs are currently at a level which we're happy with. They are going up, but in the right places.
All in all, the stability over the quarter means that C/I ratios continue to drop. Perhaps the most rewarding point of all is the major changes we're witnessing in the U.K. After a couple of years of intensive work, the U.K. is now delivering a very strong performance. Let's have a look at and sum up the first six months compared to the last year. This is January to June. Operating profit up by 1%, adjusted to 2%. C/I ratio dropping. It's at 46%. Income up by 2%. Cost up by 1%. Income is driven by a record strong net interest income and net fees and commission for the six months holding up well.
When we see a drop in the stock exchanges, this is to some extent counteracted by the negative valuation effects which can be seen on the NTF line. Costs, expenses going up by 1%, adjusted for non-recurring items. At the same time, we're stepping up the pace in our development and should also add, while the overall inflation generally appears to be speeding up during the first six months, credit quality, asset quality remains strong, and credit losses, as I mentioned, are virtually non-existent. Let's have a look at this quarter compared to 2022. We see net interest income up by 5% between the first two quarters, increase in business volumes and a positive impact of the increasing market interest rates. Net fees and commissions are dropping somewhat, but it's still holding up.
NTF has an impact here as well. All in all, income is down by two quarters. Expenses unchanged, adjusted for one-off and currency effects, increased by 1%, which can be explained by normal seasonal patterns. The operating profit is to a change of 5%. This is excluding the valuation effects I mentioned on the NTF. The C/I ratio amounted to 46.6%. Underlying credit losses is in fact consisting of net recoveries. We're making general reserves as a result of the current global situation. Let's continue and have a look at our lending. We grow and we see an excellent growth in all of our markets. On the household lending side, we see a stable increase to the tune of 5%.
Looking at corporate lending, we see a good development, 11% compared to previous year. For the first five months of this year, Handelsbanken was the major net lending player in Sweden in terms of lending to corporates. It is a very well-diversified business between property lending and operating companies. If we look at deposits, we see excellent growth here as well, up by as much as 11% and on the private side and on the corporate side, we also see good development. It's an important component in the bank's business. In the current interest rate situation, it's important. SEK 1 invested in Sweden deposited went to Handelsbanken. Let's look at savings continually.
We see a continued good development, the strength and the robustness we've managed to achieve and accomplish over a long time with net inflows into the bank, as you see to the right of this slide. In fact, over more than 10 years now, an average of 25% of the net inflows in the market ended up in Handelsbanken. Gradually, we've increased our market share. We're now at a market share of 12.2%. The market share of the net inflow from the past 12 months has been just over 40%. The savings business is operating well given the current macroeconomic situation. The market sees outflows, but the bank net flows have only been impacted marginally. Now, let's try and sum this up. Where we are currently in a situation where income is increasing more rapidly than expenses.
C/I ratio is trending downwards, and our expectations, of course, is for this to continue. Let's have a look at our assets and our asset quality. As I mentioned previously, credit losses are virtually at zero. With a stable portfolio, low risk portfolio, and as expected, no credit losses. This has been the situation over the past few years. The provisions we're making are linked to the reserves, partially related to the pandemic, but also, of course, because there's a number of uncertainties in the world around us. In addition to robust credit process, skilled people working in the bank, the explanation above and beyond that is explained by the actual identification of the portfolio. Let's zoom out to some extent and have a look at our home markets and the situation for the first six months of the year.
Let's begin by looking at Norway. We continue the good growth. We've achieved an all-time high on net interest income, up by as much as 6% over the first six months. Net fees and commissions in Norway up by 5%, in spite of the market turbulence there. All in all, income is up by 6%, C/I ratio just below 38%. We have an excellent business where we're also increasing our development focus to strengthen customer meetings on the household and private side in particular. Holland and Netherlands, we continue to see excellent growth here as well, lending up by as much as 21% compared to last year and NII up by 16%. C/I ratio continues to move steadily downwards. Let's have a look more closely at the markets in Sweden and the U. K.
In Sweden, our largest market, here we continue to see a stable business development with good key ratios, stable development also in net interest income. Households, mortgages, stable growth, 5%, corporate lending growing by 10%, and with an excellent mix, as I mentioned earlier, between property and operating companies. Net fees and commissions impacted by the development on the stock exchanges, but we're holding on to our position, and we're continuously gaining market shares, as I mentioned earlier. The U.K., well, here, the major trend change is perhaps to be found there. We've had a long period where we've invested a great deal of effort and time, but we've seen a clear momentum in the business, and the tide appears to have turned.
Income is up, costs are down, and expenses saw a rapidly dropping C/I ratio, which ended up at 57%, 57% compared to 73% a year ago. Operating profit in the U.K. is at the highest level ever for the partial year, 43% and a return on equity as much as 14%. We also see a volume development in the U.K. It's beginning to be more and more visible on the corporate lending side. Volumes are up. What we're also doing in the U.K., and been doing for a period, is that some of the corporate lending has been amended. It's sort of hiding the general development in lending. But we've strengthened our portfolio, in fact, by off-boarding to some extent. All in all, we see excellent development in all our home markets, in particular, considering the current macroeconomic situation.
We're increasing business volumes. We see improved margin and keeping expenses at a good level. Let's have a look at our capital then. I mentioned initially that the capital situation is excellent. CET1 ratio 18.7%, 480 basis points above the regulatory requirement and 180 basis points over the bank's target range. All in all, we see strong development in our business. To have the capacity to meet the demand of our customers is placing the bank in an excellent position. We are well-positioned in the new current situation in the world globally and in the market, and we focus on continued growth in the future. Over to you, Carl.
Well, thank you, Carina. We're going to look at the development of the net interest income, and we will start with comparing the quarters 2021 and 2022. You can see that net interest income is up 5%, also adjusted 5%. If you look at the slide, you see the different components. We see that we have a strong volume growth in our net interest income, 2% up is what we see. We can note that previously when we have had good numbers, we have had about SEK 100 million in contribution to volume growth, and now it's SEK 145 million. Very strong growth during the quarter. Margins are up as well with the changes in interest. This is mainly from deposits, and this is something that we see in all our markets.
We have a strong development here as well. The liquidity portfolio also adds SEK 65 million to net interest income. We have another item, and that is an NFT in comparison, and that is something that is relevant as well. Other items are more or less negligible, and the development is strong over the quarter. Over six months, the period is even stronger, up at 9%, adjusted 7%. You see the volume contribution 3% and margins 2% up, which means that we are in a very strong momentum in this respect. FX currencies contributes to net interest as well comparing the years. That is also what we see the difference between headline and the adjusted level, 9% up. A strong development when it comes to net interest income, generally speaking.
If we disregard the development in the U.K., this is what we feel is a really strong component of our report. Looking at net fee and commission income. More generally speaking, we know that the stock exchange development has an impact, and that is what we see here, that we have a robust situation in net fee and commission income with an increase over the first six months in spite of the stock exchanges. Here as well you see the different components, the savings representing about 70%. Our savings commissions over the quarter are down 16%. You can see in the slide that if we compare six-month periods, we have a strong development. Underlying this we have our capital under management that is declining less than the market.
We see less of an impact from securities, and we have flows that are higher than in the market. The payment fees, that is what you see in the middle. Here we see nowadays a positive development. We also see that we're moving away from the COVID pandemic, and this is something that is trending upwards, which is good. Other fees and commission more or less flat. Expenses. If we look at the development, we will start with the six-month period comparing the first six months to last year, and we see costs up 3%. If we look to the left at these different steps, we see that we have FX effects up at 2%, which means that, well, that brings us to 1% that needs to be explained.
and then we have 2%. We see that we here have a strong development when it comes to development expenses, which is where we are investing in the future. At the same time we're making underlying business more efficient. This is something that we like. We want to enable investments in the future at the same time as we become more efficient. If we look at the quarter, it's even less of a change. Here as well we can adjust for FX and the Oktogonen. We see underlying expenses up 1%. Underlying expenses are up 1%. Seasonal variations, this is just natural and it is a very low increase in expenses. Nothing dramatic whatsoever when it comes to expenses. We continue to invest for the future and we make our business more efficient. With that being said, I will hand back over to Carina.
Well, thank you, Carl. As we are to summarize, we have a good first six months in 2022. We have nice growth in our business. The bank is well-positioned for the situation that we're in, and a record high capital situation is high and credit losses non-existent. I have to say that we're strong, stable, and this is a very nice feeling. With that being said, will I hand back over to Louise.
Then we are to conclude this broadcast and there will be a short break. Then in a couple of minutes we are going to have our Peter Grabe, Head of Investor Relations, that will start the telephone conference. Information about how to log in, you find under handelsbanken.com investor relations. Welcome to that Q&A session. That will be in English. Thank you.
Hello, and welcome back, everyone. We are now ready to start the Q&A session. Operator, could we please have the first question?
Thank you. The first question comes from the line of Magnus Andersson from ABG. Please go ahead.
Yes, good morning. Starting with the NII on margins and volumes there. First of all, when I look at this slide 22 where you have the quarterly breakdown, the quarterly NII bridge. I was just wondering if you could break down the 195 there net effect on margins funding cost in home markets by market. It looks like it is a pretty large share in the U.K., but if you could be a bit more specific there. Then secondly, just if you could confirm that the -SEK 95 million you took on your liquidity portfolio from moving it from Finland to the Netherlands, that it's included in the -SEK 19 there in other.
Secondly, on volumes, just wondering if you could say something about the sustainability of the strong corporate loan growth in Sweden. Secondly, you repeatedly talk about the strong volume growth and good volume growth in the U.K. It's the second quarter in a row. I don't really see it on slide 18, at least in the fact book. I see the margin effect, I see the cost effect in the U.K. driving earnings, but I don't really see volumes there. If you could say if something has come in towards the end of the quarter or how you say that. Finally, just on a more strategic note, I saw you took a provision in the Finnish operations for potential future expansions related to the looming divestment there. Should we read anything into that at all? Why are you doing it this quarter? That's all for me.
Okay, thanks, Magnus. I'll start and then I think I'll need some help from Peter in a sec. Let's start then with the NII. What I can say about the margin development in the NII is that if we break it down on a general perspective first of all in the markets, you can say that the Norwegian market, we still haven't a really thorough follow through in margins, and that's because we have notice periods in Norway. In U.K., as you say, we have a strong margin development driven by the deposit margins primarily. In Sweden, we also have a fairly good margin development, not at all in the magnitude as we do in U.K., but nevertheless.
In the Netherlands, we still don't see a margin expansion, and that's obviously due to the ECB being a bit later on in the cycle vis-à-vis the other ones. I'll have to ask Peter to dig into the components of the 1.95% which you were asking for. Then the liquidity portfolio effect, yes, the 0.95% is in the other margin, the -0.19%. What you can say about that is that if we see ECB hiking rates and go into positive environment, that 0.95% will most likely turn into positive over time. As you say in volume terms, yes, we see strong volume in Sweden. We looking ahead there, I mean, I think there's a lot of macro trends obviously around right now.
There is a risk that we see a bit less of a credit expansion going on obviously in the future. Having said that, I think that on the corporate side obviously, they have a fairly challenging market in funding themselves via the bond markets. We deem that we are a bank who can support definitely our core clients, and we will be there, we will try to be there for them. That's a really good situation to be in. I do think that we enter a phase of the market where we could, in relative terms, take a good market shares when it comes to the corporate markets.
As you say, in the U.K., no, we don't see volume growth as of yet in a good magnitude. We still struggle on the household lending there. On the corporate side, as Carina also alluded to in the press conference, is that we have exited some volumes from an AML perspective, so you don't really see the underlying trend of the corporate lending growth there. We have a strong pipeline, and we actually see some decent growth there as well on a gross level. The provisioning in Finland, no, you shouldn't read any long-term consequences out of that one. That's just one-offs, which, when we know that one-offs will come, we provision for them immediately. No long-term consequences.
Just get back to your first question about the margins and funding effects per country. We write explicitly in the report in the respective segment the magnitude, so you can easily find the figures there.
Yep. Okay. Thank you very much.
The next question comes from the line of Martin Parkhøi from SEB. Please go ahead.
Yes. Good morning. I might follow up there a little bit on NII. We now see a steep rate hike. When do you believe that you will actually need to give something to the client here in terms of deposits, i.e., when the rate effect abates? I guess there's only one rate hike in the current numbers. Just we could follow up on the trade losses. I just see that there's a lot of quite big increase in derivatives in the quarter, up to SEK 55 billion. Is that in any way linked to hedges or should I read anything into that? We can start there.
Thanks, Martin. I think. Obviously there's so much moving parts right now in the NII when it comes to margins. As you say, yes, in the early hiking season, we give fairly little to the clients. I do think it's very hard to answer that question just purely on the magnitude the price we give to the clients on the deposits. I do believe that when it comes to the overall margin perspective, on both lending and deposit side, as I say, we've seen some increase now from a few years of actually gradual downward pressure, which I think is definitely not an outlier. It has so far come via increased deposit margins. The way it will play out in the future, I think will be. It will.
It will be a matter of the competitive landscape, both in lending and in deposit terms. We obviously attract quite a bit of deposits. From a pure demand and supply factor, one could argue if we need to hike it. Over time we will play in the competitive sphere, so we will adjust to the levels which we see. My main conclusion is that it's not that on a margin level we don't see extreme levels of margins here, but I do think you can't judge the deposit and the lending separately. The NTF, no, you shouldn't read anything in the increased derivative volumes there. Rather, as we've said, is that we see. We rather.
We divide the NTF into three components more or less, and you can see it on the slide 25 in the pack. That first of all, we obviously have a more or less markets and investment banking business model, which is client-driven. On the green bars on slide 25, you can see that they moved down a touch this quarter, but no dramatic there. First of all, we provision for the life pension, for the guaranteed pension system, and that's included in the light blue bars. Secondly, in these light blue bars as well, it's included all the hedging we do for all the short-term lending, et cetera.
With the movements you're seeing in the currencies now, which doesn't move completely in tandem, that affects that negatively this quarter. Thirdly, the liquidity portfolio, which is the pink bars then, which we have broken out on the right side of the slide, where we include the NII component in gray bars vis-a-vis the pink bars, the NTF component of the liquidity portfolio. As you can see in the dark blue line there is that it hits us quite negatively this quarter. Both the pink bars and also the light blue bars, we think there's definitely they will come back over time to the majority of them. We see fairly little long-term consequences from it.
I think that when it comes to the derivatives, the volume will obviously be quite a lot affected by the market valuations. When the movements become as big as they are, they grow in size. You shouldn't read any long-term consequences into it.
Okay. Thank you. Very clear. Thanks.
The next question comes from the line of Andreas Håkansson from Danske Bank. Please go ahead.
Good morning, everyone. Just going back a little bit to the NII. We heard SEB yesterday talk about mortgage margins and the way they looked at it, just assuming that all the mortgages were funded with covered bonds as the margins are going down sharply. But obviously, that's not the case, and I guess you have some 45% of your mortgages funded with covered bonds and the rest are deposit funded. Could you tell us on your actual funding cost of mortgages, where do you see that mortgage margins are going at the moment?
Well, I can try to start and then Peter, please fill in. I think that for many years now, we've obviously seen first of all a movement where banks are being more interested in the mortgage markets. More or less all of our bigger banks are focusing on the mortgage markets now. We've seen the new disruptors coming in which fund themselves or which more or less broker mortgages, and they fund themselves via the pension funds. I do think that first of all what we've seen lately is that the funding costs for the disruptors are increasing more than it does for the banks and the larger banks.
Obviously, we fund ourselves via, to a high degree, covered bonds, but also deposits in that market and obviously senior funding as well. We do think that from a margin perspective, I see little structural reason to believe that the margin pressure shouldn't abate all else equal. I look fairly constructive actually on the margin perspective when it comes to the mortgages. I do think that it will over time, the competition should loosen a touch and all else equal, the larger banks should have a fairly decent position there. I must though allude to the answer to Magnus' question earlier on that what will end up at the lending side vis-a-vis the deposit side, I don't know.
Yeah, fair enough. Another question. There's been so much noise in the last quarter about asset quality, particularly relating to, I guess, both household real estate in Sweden, but in particular commercial real estate. Since you're one of the biggest player in both fields, could you tell us what you see and what you actually believe is the correct picture?
Yes. I mean, first of all, I think we can go to the slide 27 in the pack. We've tried to break down our exposure now. First of all, obviously, we enter a tough market now, and I think you really need to be humble in these instances, obviously. What we've done on slide 27, we've broken down the exposure we have to the real estate. Obviously, we are a big bank when it comes to lend to the real estate markets. As you can see there, starting from the bottom, more or less half of our lending is household mortgages. Then on top of that one we have another 11% vis-à-vis housing co-ops. Sixty percent of the lending base is towards households.
Then on top of that one we have roughly 30%, which is lending to corporates in real estate. Half of that is commercial real estate, half of that is residential real estate. The consequence of this is that we only have 12% left in lending to other corporates. One of the key pillars which we've always guided on when it comes to our credit policy is that we like to do securitized lending. I do believe that when you look into this, I think that the markets will face challenges. If it comes to household, it will be higher rates or higher inflation figures. It will be strained.
When it comes to the CRE and residential real estate, it will be rather about falling valuations on their portfolio, and it could be about the rental levels, the vacancies. What we are extremely firm on, and what we've always stood firm on, is that we like good clients with solid cash flows. If you obviously have solid cash flows, you are likely to be able to pay your debt. We like the strong owners. If their cash flows move into problem, we like them to be able to pitch in more collateral. We like obviously low vacancy levels, and that's why we are positioned in areas, and we like to lend to areas which we deem feasible in that sense.
Obviously we talk a lot about securitize and low loan-to-value. That's really the pillars of ours. I do think that what Carina was saying, the asset quality we have, we really like this component. Obviously you see that the real estate markets are under strain now, and you can obviously. It is a matter of that the lending rates for them at the moment are below the yields of their portfolio. This needs to find a balance over time, and that could affect obviously the valuations of the portfolios. I think a bank like us with the strong balance sheet we have with the clients we like, we're in a good situation to actually find business opportunities in this market.
We like it is these kind of markets where we normally tend to actually improve in the relative space. I don't know if you want to add something, Carina or Peter, to-
No, I think that you summed it up quite well actually. I mean, you said everything. When we stress this portfolio, we can see that we do have customers with good margins. From our perspective now, we can't see any changes in the near term actually.
Okay. Thank you. That's it for me.
The next question comes from the line of Nicolas McBeath from DNB. Please go ahead.
Thanks. First question on the corporate margins. Your peer SEB yesterday made some update comments on the outlook for corporate lending margins given widening credit spreads this year. Do you share similar optimism for corporate repricing? Yeah, that's my first question please.
Hi, Nicolas . Thanks for the question. Yeah, I mean, I think on the corporate sector, the capital market has definitely cooled off to quite some extent. I do think there's a risk obviously that you see the credit demand as well cooling off on an absolute level. Obviously when the financing capabilities of the bond markets are going away, the relative demand on the bank financing are increasing. We are in a good situation to support that. We have good capital situation and liquidity situation. Yes, I do believe that there is obviously good reason to believe that the margins should increase.
Because obviously if you look, and this is especially true when it comes to the real estate market, if you look at the financing cost in the bond market vis-à-vis the bank market, I think they're at very, very high historical levels. That should all else equal obviously point to higher margins going forward.
Thanks. Another question on mortgages and the NII. Looking at the reactions after the Riksbank's April rate hike, I think your list prices were increased quite quickly. Looking at negotiated rates that you publish, they were slower to increase. What can you say about the timing of the repricing in your mortgage book? How large lag effect do you see from the rate hike? Do you expect continued tailwind to your Swedish net interest margin based on the April rate hike from perhaps a delayed pass-through to mortgage borrowers?
Please, Peter, fill in if you. I don't think we won't play this as a robot. We will obviously always play it from a competitive perspective. We will adjust when we think it's feasible to adjust and accordingly to the competitive landscape. Having said that, I mean, I think that the overall margin development now in Sweden is quite constructive. Yes, it's driven by the deposit side obviously, and we still see downward pressure from the mortgage side. As I said earlier on, I do think that looking forward, I do think it's a bit more constructive margin landscape. I don't think we can't guide how we will behave ourselves going forward. We will rather adapt to the competitive landscape.
Yeah, sure. I mean, not trying to figure out how you'll behave going forward, but just if your mortgage book would be at a similar level as it was by the end of the quarter, would that offer further tailwinds to your NII? Or is the impact from the rate hike in April, I mean, how much of that is reflected in the Q2 NII?
It is actually fairly difficult to quantify that, so I'm afraid we're gonna have to pass on that question and get back when we have Q3, when we have a full quarter after the start of rate hikes in Sweden, then we'll probably have a better assessment.
Okay. Thank you.
The next question comes from the line of Omar Keenan from Credit Suisse. Please go ahead.
Good morning, everybody. Thank you for making the time. My first question was on capital planning, please. You made a comment about commercial real estate and the fact that rental yields are currently below funding costs, which might lead to asset price falls. I'd certainly agree with that statement. I was hoping you could give a bit of a sensitivity as to what the impact of rating migration might be on the capital intensity of the book. If I look at the property company's risk weight, it's 16% today, and it was 22% in 2018. I understand that there's some LGD floors in the book, but I was hoping you could give us some sensitivities of what LGDs might do.
Also more generally, if we get some rating migration, say, equivalent to a one notch downgrade on 20% of the book, can you give us some indication of what that does to RWAs? Just on a related point, is there anything you can tell us about the IRB overhaul? Thank you.
Thanks for the question. Well, first of all let me start then with the capital situation. Yes, as you say, we are in a really strong situation there. We think this is really good to go into the markets where the demand could increase. When it comes to the sensitivity on the capital we've been trying to make a message to all of you for quite some time now that our capital situation is much more stable than it's been in the past. The reason for that one is first of all, obviously pension system which we changed during the last years and with fairly nice timing actually.
With these equity drops which we've seen, that would've been a headache had it been two years ago. Second of all, obviously, we have now risk weights floors or standardized models on roughly 70% of the portfolio. That makes our average risk weightings on our portfolio much higher vis-à-vis our internal risk weights. We could live with quite high actually risk migration or very high risk migration before it really hits on before it affects the capital volatility. The IRB, we're working on that one in the U.K. definitely. We work with a fairly constrained PRA which is affecting the time schedule as well for it. Our best estimate is 2025 going into IRB. As we've been highlighting as well, one shouldn't expect us to go to an advanced IRB model, broader Foundation IRB.
Could I ask a follow-up, please?
Having said that then, I think it's extremely impressive in U.K. terms to run a business model now which we're posting this quarter 14% ROE under the risk-weighted assets calculated on the PRA methodology and the capital levels on the Swedish FI perspective. That's obviously a really good situation to be in.
Is there any color that you can give us in terms of sensitivity in the commercial real estate book? If we have a reduction in asset prices, at what level that impacts risk and defaults?
No, I don't think we can guide on that sensitivity, no.
Okay. Thank you.
The next question comes from the line of Namita Samtani from Barclays. Please go ahead.
Morning. Thanks for the questions. I've got two, please. Firstly, when can we expect to hear about excess capital return? Because correct me if I'm wrong, but there's a significant chunk of excess capital now, and the only headwind I can think of is the IRB model changes. There's actually tailwinds, such as the gain from the Denmark sale. Secondly, looking at the branch numbers, they only declined by 2 in the quarter, which I guess is a lot less than other quarters. Are we now done with the majority of the branch reduction? Thanks.
Thanks for the questions. Yeah, first of all, obviously, yes, as you say, we have a really good capital situation, and we like that. We obviously enter quite tough markets now where with quite high uncertainty on the demand level. So we really like to be well capitalized in the situation we go into. We definitely. We're always a bank who wanna run with the highest confidence and the highest stability levels, and we do think that the markets we enter is a timing where we should play it definitely safe. So it's a good situation to have capital to be able to support your core clients as well. The technicalities is that obviously counter-cyclical buffers will be reinstated, and when they're fully loaded, that will add roughly 1.9 percentage points.
It will add 1.7 percentage points vis-à-vis a year from now. We have, on the positive side, obviously, when we close the Danish sale, we will get the cash for that one, which will affect it positively, and that will most likely be between 20 and 25 billion in risk-weighted assets dropping away, at least. We have the structural FX where the discussions are ongoing with the Swedish FSA, and that's roughly hitting our capital levels today by 0.6 percentage points. We are still moving towards our target range. We wanna run the bank within 1-3 percentage points under normal circumstances.
We really do believe that the especially high demand levels we've seen actually in the past now. It's a really good situation to be in then. If we see as well U.K. moving from contraction to expansion, that's obviously gonna be something as well being good to be well capitalized under. Yes, you're most likely correct that we're dropping two branches this quarter. I actually don't have the figure in my head. As you say, you shouldn't expect us to close more branches.
I think that is important to just add again, I think that is a decision as well for the management team in all our home markets as well. What we have done, with the reduction of the branches is to make sure that we are positioned in those markets where we can have a really good business. I think that's what you should read into this. I mean, Sweden is a really good example for that.
Okay, thanks. Sorry, just going back to the excess capital question. Are you gonna give us a timeframe of when you're gonna come back in terms of communicating to us when you're gonna get back to your target range?
Yeah, I mean, obviously, when we close the Danish deal, definitely then we get even more capital. You should expect us to get back then and talk about it.
Perfect. Thanks very much.
The next question comes from the line of Rickard Anderkrans from Redburn. Please go ahead.
Hi, and good morning. First off, question on costs. You previously talked about the SEK 3 billion of gross cost savings that you have targeted. If you could give us an update where you are on those, how much is still in the making and what could be left, so to say? Also follow up on that one, you previously also talked about the SEK 1 billion of elevated IT spending over 2021 and 2022. We're now in the second half of 2022. If you could give any flavor into what you expect there, in the coming years as well.
Sure. Let me start, and then Carina might fill in as well. I think the overall message which we've been saying is that we thought the bank was running a bit inefficiently a few years ago, so we needed to adjust that, and we did some hefty plans actually, which then the consequence of that one was to provision around SEK 3 billion or more. We've come quite far in that one. We've come a bit more than SEK 2 billion in that one, and the remaining parts is still the reviewing of the exit business, and it's also some parts in the Swedish overall operation.
What we've also guided on then is that now when we come quite far in the turnaround of the bank, we really like the positioning we have. We do believe we're in a firm situation both in Sweden, Norway, UK, and Netherlands, and we really wanna strengthen our perspective there. That's the reason why we've been highlighting that we'd rather steer ourselves on cost-to-income levels. We think it's less relevant to talk about all the gross components nowadays in the P&L. Rather, you should see ourselves targeting strengthening our positioning in all of these home markets and also work on the efficiency parts. We obviously spent an extra SEK 1 billion for 2021 and 2022. We will obviously come back when we have further guidance to give on that one.
View us as steering towards cost to income, and we want to create even more efficiency in the bank as we run it today, but also invest for the future.
Okay, thank you. A question on Swedish commercial real estate where you grew SEK 10 billion in the quarter it looks like. Just want to hear if you could say anything about the limitations in terms of your risk appetite framework here, if there's plenty of headroom ahead or if there are any limitations there that makes you sort of cautious to participate in any future volume growth there.
As I said earlier on, I've noticed that one of our peers are guiding to strict limits in the exposure in various components. We like good clients with strong cash flows. We like strong owners. We like positions where you can actually find low vacancies. We like to do securitized lending, and we like to do loan-to-value. That's the credit policy we run. We don't steer ourselves on a portfolio composition or so, we don't have any kind of fixed ceilings.
Okay, thank you.
The next question comes from the line of Sofie Peterzens from JP Morgan. Please go ahead.
Yeah. Hi, here is Sofie from JP Morgan. In terms of your loan loss provisions, they continue to be very low in basis points. I was just wondering how do you kind of think about the Stage 3 coverage, which seems to kind of be trending, continue to trend downwards and is now below 24%. I also noticed that the actual losses continue to be much bigger than the net credit losses booked in the quarter, and we have seen this trend now for a few quarters.
I mean, at what point do you think you need to kind of increase your provisions and how much kind of these overlay provisions do you still have that you can basically take advantage of to kind of to unwind to cover actual credit losses? That would be my first question. My second question would be around the Swedish FSA IRB overhaul. If you could kind of give any impacts that you expect, are there any reclassifications of the portfolios that you're expecting? And kind of your thoughts about when we should expect the impact and what magnitude? That would be my questions. Thanks.
Yes. Thanks, Sofie, for the questions. First of all, obviously the loan loss. As you say, obviously we have a really low net Stage 3 perspective. I think you need to read this in the context of first of all, we've been talking quite a long time around the restructuring of the bank is pointing to a better asset quality. We've been working out quite a lot of what we saw earlier on as exposures with a bit of higher credit risk in. I think we have a structural trend towards a better asset quality. Obviously the net credit losses, they have a component of first of all obviously the Stage 3 components, but they also have the components of write-offs and recoveries.
Every quarter we see both a few and we've grown used to now, and I think I need to say knock on wood, but we've grown used to for quite some quarters now to see very low actual credit losses. Obviously then the write-offs and the recoveries are actually to higher absolute numbers, and we like that. I think it is extremely hard to guide on anything. I don't think we see anything today which are pointing to higher actual credit losses. As Carina was saying, obviously the macro climate, we will most likely have a risk of decreasing even further. We do obviously increase the add-ons to some extent as well. Please, Peter, add something if you want to.
No, I'm just referring to your question about the coverage ratio in Stage 3. Obviously there are exposures moving in and out of Stage 3, and depending on the collateral structure of that lending, the coverage ratio varies over time.
To your second question, the IRB overhaul. Yes, we don't have any guidance to give you there. We're still waiting on the Swedish FSA and we're working with that one. The consequence of that one, we don't see any major consequences from it.
You think IRB overhaul will have a very limited impact on Handelsbanken?
Agree.
Okay. That's very clear. Thank you.
The next question comes from the line of Riccardo Rovere from Mediobanca. Please go ahead.
Good morning, everybody, and thanks for taking my questions. I have a couple, if I may. On development expenses, they keep, let's say all trending a little bit higher or at least remaining stable. Are we anywhere close to the peak of these expenses or those are supposed to continue more or less as they are for the foreseeable future? The second question I have is, again on credit losses, if I may. Before you stated that you see some strains in the real estate market, but on the other hand. Yes, I pointed out the LTVs in residential mortgages and in commercial real estate as being in the 50% region, actually a touch lower, if I remember correctly.
Considering this, do you think we should, the market should be concerned about real estate market for you? Because a 50% LTV would basically imply you would need a drop, a collapse in real estate market before denting into your asset quality. Could you share? Would you agree with that? Thanks.
Well, first of all, on the development expense, as you said, yes, we've obviously during the last year and this year we're obviously in a trend of increased development spending quite a lot. That is moving according to plan, and that's what we've been guiding on. Going forward then obviously the consequence on development spend, going forward and into 2023, we will need to get back on because obviously as we say, we want to invest in strengthening the positions in the marketplaces we are in. We like the situation we're in. We will get back to that one on other quarters. When it comes to the credit losses, yes, as you say, we have a slide. I think it's slide 28, perhaps. Yes, it's slide 28.
As you say, we show the LTV there on the commercial real estate and the residential real estate in all of our markets. As you say, they are 50% and a very low component is above 75%. Yes, I keep coming back to that, the credit policy we have. I mean, we like good clients with strong cash flows. We like strong owners. We like securitized lending, and we like low LTV. And that's many pillars of security. First of all, if they can't pay their bills, then the owners in many times actually do enter the picture. That was the consequence when we moved through the pandemic.
Obviously, if that doesn't hold either, we've in very few times, if any, lost real money and made real credit losses, when we actually took the collateral in hand. Yes, I agree with you. First of all, the market levels need to drop hugely in order for the collateral to be lower value vis-à-vis the loan. On the other hand, we have ended up in the past, obviously, with situations where we have took the collateral in place packages as a company also and sold it off and regained all the exposure, or a bit more actually.
Okay. Thanks. Thanks, Carl. If I may follow up on another topic. On capital return, at some point you will be given regulatory approval for the sale of the Danish operations. To tell the market something about capital return, will you wait to have completed, including regulatory approvals, also the Finnish one? Or may eventually give us a better idea only with Danish one?
The way we will treat it is that when we have the cash in the bank for a component, we will be transparent the way we use the cash. We will not speculate on the outcome of Finland before we have any clear thing there. Obviously, I understand you want the clarity around when parts of the component of the capital base, but I actually do think we're in such an uncertain times as well when it comes to the marketplace. We don't find it complicated that we will most likely close obviously the Danish business in the fourth quarter, coming back then with a transparent view how to use the proceeds. If we're in a situation today, yes, of course, we're very well capitalized.
Who knows the demand side for bilateral lending for the next six months in a market where the capital markets are really constrained, actually there. We're in a good situation, but we will come back as soon as we can.
Thanks. Very fair answer. Thank you.
Just to make you aware, due to time limits, please limit your questions to one at a time. We have a question from the line of Jacob Kruse from Autonomous Research. Please go ahead.
Hi, thank you. Just a quick one on the sale of the Danish business. You still didn't take all of the corporate books. I just wondered how has that been treated in Q2? Do you have a flow back of corporate lending into the core, from discontinued? Or is it just accounted as it used to be? Do we get any kind of shift in Q3 or Q4? Thank you.
No, they are still accounted for as being up for sale, that component. No, that will work out over time, the way we'll handle it between us and Jyske.
How much NII do you think that shifts from discontinued into continuing?
We will have to get back on that one. We don't know. I don't know the answer to that question.
Okay. Thank you.
The next question comes from the line of Robin Rane from Kepler Cheuvreux. Please go ahead.
Yes, good morning. On the NTF losses there, and you showed the slide. Let me see. The slide 35. The gain on the NII there, with the counterpart of the loss on the NTF line, will the NII part of that normalize as well, you think, over the next couple of quarters?
Yes. I mean, what will normalize on that picture is most likely the blue line. If rates move up in an absolute term, obviously the positive side on the NII will increase with that one, so the gray bar will move up. The financing cost of it will also move up in an absolute term, so the pink bars will increase in scale as well. The blue line should revert towards being slightly negative.
Okay. The absolute figure of NII this quarter, was that somehow elevated by this, would you say?
No. No.
Okay. All right. Thank you.
The next question comes from the line of Jens Hallén from Carnegie. Please go ahead.
Thank you. Yeah, it's just a follow-up on the commercial real estate book. I know you provide a lot of data and collateral seems ample, but one thing I wonder if you could share with us is some kind of liquidity stress for your largest customers. I mean, at what point does debt servicing become a strain? Do you factor in bond market closures when stressing these exposures? How do you view that on the risk side? Not under the credit risk, but as a liquidity risk for the commercial?
First of all, I think two ways, and I don't know if I'm gonna answer your question completely now, but let's try it out first. First of all, obviously, we run a bank who plays extremely conservative when it comes to the liquidity. We have in absolute terms, we have SEK 1,000 billion in liquidity reserves, and that's apart from non-encumbered assets. We really like that. We think there's a risk of liquidity continuing being strained in the market. We will definitely play it extremely conservative here.
When it comes to the usage of RCF for guarantees or that, we obviously saw huge volatility in that in the first quarter, second quarter on the pandemic, the first and second quarter of 2020. We don't at all see the magnitude of that as today. We don't see any volatile component actually in the drawdowns or liquidity from the CRE. We can't talk from a market in general perspective there. I can only talk from a Handelsbanken perspective there. Sorry, did we drop you here or do you hear me still?
Jens dropped unfortunately, so maybe he'll dial back in. In the meantime, we can just maybe go to the next question, which is from the line of Shrey Srivastava from Citigroup. Please go ahead.
Yes, hello. Thank you. Just a quick question on, as well, commercial real estate in Sweden. I see that your Stage 2 loans increased by SEK 3.8 billion over the quarter. It seems to be a residential property companies in Sweden. Just maybe if you could provide a bit more color on your criteria when you reclassify to Stage 2, if there's anything you can say what caused this migration in the quarter. Thank you.
No, I mean, Stage 1 and Stage 2, first of all, they're model driven, and obviously that could. I think we need to look into this and might get back to you. Obviously when we change the add-on as well for the geopolitical risk, that might have a consequence here. We will look into your. Please have a call with the IR people and we'll see if we can help you. I can't answer that question right now at least.
Okay. Sure. I will follow up. Thank you.
We just have one follow-up from Andreas Håkansson from Danske Bank. Please go ahead.
Yes. Hi. Just back to commercial real estate since there's been so much discussion around it, and you talk about the LTV that you have of 50% and the risks related to it. In most of those CRE companies you would have a lot of equity, hybrid bonds, and then the bank debt. Could you tell us where in the capital structure would you sit and what would have to happen before we start to eat into the banks? Can you tell us a little bit about your positioning within that?
Well, Peter, please assist me in this one. I mean this is quite a. Let me answer this question like this. I think at the present you have more history in the markets than I do, so you can perhaps correct me, Andreas. I do think the difference between the financing cost and the bond market now vis-à-vis the borrowing cost from the bank system is most likely at very historical highs. You can't compare them because they're a bit apples to pears, because if we lend to a real estate company, we do it collateralized. It both comes with a cost to the cash flows, so the stamp duty in some sense, and also obviously they need to post collateral.
That will be a constraint on their rating perspective on the bond programs. When it comes to the capital structure, I guess, we need to wipe out, obviously you wipe out equity, you wipe out the hybrids, you go down the senior, and then we have senior secured. I guess that's correct, but I'm looking at my companions here to assist me. That's the way I reason it.
If you go back to the early nineties, which was before all our time, I mean, then there were no bonds or hybrids, anything before. Weren't then the banks doing all the lending up to LTVs that were significantly above or is that a big difference now to then, or how should we view it?
No, I think, first of all, I really need to disclose that I wasn't here then. I think there's been a lot written about this, obviously. I do think you have a point, and I've seen it in the media as well, people highlighting this, that obviously at that time being, when you opened up the banking sphere, when you de-monopolized the business model, obviously, the banks were chasing growth. Obviously they were lending to very high LTV levels, sometimes actually higher than 100%. I think that we've grown a lot. First of all, the bank has grown used to. We don't like to go bust. Second of all, obviously, the regulators have gotten used to a banking system which is so large now vis-a-vis the Swedish GDP and the society.
They need to regulate it quite tough. That's the reason, obviously, that we have both much, much lower LTV, but also much higher capital level and everything in place. I don't think you can compare the situation today at all with the ninety crisis.
Okay. Thanks very much for that.
We just have one more question coming in from Piers Brown from HSBC. Please go ahead.
Yeah, good morning, everybody. Sorry for belaboring the point, but just on property again. I mean, can you tell us just at a basic level, when you do your business planning, what property price assumptions are you using for Sweden? I mean, do you assume moderate decline from here? Do you assume prices remain flat? And if you could share with us, you know, when you think about downside scenarios, tail risks, I know some of your peers published their ICAAP stress test assumptions, but could you tell us when you do stress testing, what are the downside scenarios you are looking at for property prices in the domestic market? Thanks.
We flick through the pages here. You'll find information about the scenarios in the reporting. If you don't find it, just reach out, and we'll guide you to it. The reason for that one is obviously that, first of all, obviously, when we input this in the stress model of the ECLs, obviously. Both the base case and the upside and the downturn. Then we obviously calculate the ECLs. As we've been saying throughout the pandemic, we get fairly little correlation between macro factors and the outcome of the ECL. The reason for that one is that we've gone through a lot of cycles with very low correlation to the credit losses. That's the reason why we do the add-ons. Also that's the reason that you might actually ask that in your question, that when we plan for our business going forward.
Obviously, the way we value then the housing and the collateral and everything, that's a huge component in our decision around the credit decision. Latest information, you find it on page 34 in the report, all of these assumptions.
Okay, that's helpful. Just, I mean, I'm just thinking back to last year. We obviously had the EBA stress tests, which were done on, I think, 40% drawdown in Swedish commercial property prices. I think in that test, you showed a three-year impairment rate of about 200 basis points. I mean, is that just? Should we just completely ignore that? Or do you think it's just not relevant to the current context?
I think all of the external stress tests done on the bank do have a very high degree of top-down perspective. I can see the reason why they need to do this kind of analysis. We obviously have been running a business model and really do run a business model where we try to have very little dependency between macro factors and credit losses. You will have to. I'm not gonna judge their outcome of that one, but we see very little rationality in that when we do our internal modeling.
Okay, that's very helpful. Thanks a lot.
I'll hand the call back to the speakers. Okay, if that is the end of all the questions, I thank you very much for participating during this telephone conference and have a great summer. Thank you for today.
Thank you all.