So good morning, everyone, and warm welcome to this call for the Q1 of 2021. Together with me today, I have our CFO, Karl Soderfoord our Head of Group Financial Strategy and Investor Relations, Lars Hoglund and Head of Accounting, Anja Ingle. I will start by giving you an update on the overall strategic progression of the bank, and then Karl will walk you through the key financial topics for the quarter followed by a Q and A. As usual, Lars will most likely jump in as well. Despite the prevailing uncertainties relating to the pandemic, the bank recorded its best Q1 so far.
Apart from the corporate borrowing, demand being in a bit of a standstill year on year, but sequentially up 2%. The business momentum was strong. On the mortgage side, we have continued to be the biggest player in the Swedish market when it comes to net inflow. And the same goes from mutual fund savings in Sweden, where we took 40% of the net inflows in the market in Q1. The costs are under control.
Underlying costs, excluding Oktogonen and development costs show a strong trend down. The progress in the cost initiatives runs according to plan. SEK 1,000,000,000 Swedish crown is agreed and decided to be executed, most of it in 2021. We are increasing our development costs and these are investment to build the bank for the future. And as I said, other costs are down.
The asset quality remains very strong with a net reversal in the quarter despite a continued conservative management overlay approach to COVID sensitive exposures. The capital position is also strong with a CET1 ratio of 6 0.3% points above the FSA minimum at 3.3 percentage points above the upper end of our target range. This provides a good opportunity for growth among other things. Most of our employees have been working from home also in Q1, but we have still managed to be very productive in executing on initiatives communicated last autumn. In Sweden, the transformation of the branch operations are progressing according to plan.
The operation in Sweden continues to deliver growth with high efficiency and good profitability, and our customers remain satisfied. The work to set up a new customer service function with improved smooth availability and extended mandate is also progressing well. Basically, all our other home markets show a more positive development in Q1 and in some of them a really good start of the year. In the U. K, the work to replace 5 regional banks to 4 districts and the formation of a new unit that will focus on further development of the digital customer offering and proactive support to the branches is also ongoing.
So in sum, we have a strong quarter behind us and we are moving steadily on our path to reach our ambitions of higher profitability, lower cost and more satisfied customers. All in all, this should mean a strong foundation for shareholder situation in terms of earnings per share growth and stable dividend growth. I'll stop here. And with that, I will leave over to you Carl.
Thank you, Carina. I will touch upon a few selected topics and then we are happy to discuss all the questions we have in details in conjunction with the Q and A. So let's start with net interest income. Compared to Q4 and please go to Slide 8. As you can see, the quarter was fairly uneventful when it comes to the overall margin development.
But we were happy to see that the sequential volume contribution again was positive of the 2 quarters of negative net contribution to NII, when the soft corporate loan demand more than offset the stable growth on the mortgage side. The mortgage volumes have grown very steadily throughout the pandemic, while the corporate volumes were very volatile until Q4 last year. Now the corporate demand is in a wait and see situation, but at the same time, we hear a lot of positive noise around activities in our branches once we have come a bit furthering in opening up society around our home markets. We had a negative contribution from day count And finally, the scale down of our international operation outside our home markets is contributing slightly negatively, Which is in line with expectations. If you go to slide 9, you also get an illustration of the progress of scaling down the corporate portfolio outside of our home markets.
As you can see, we have come quite far in reducing those exposures. What is also positive On the business volume is what you see on Slide 10, which shows the development of deposits. The trend has been very positive for several years. And since 2018, the average annual growth rate has been 8% on household 12% on corporate deposits. If we move over to the fee and commission, we can see on Slide 11 Q1 reached a new all time high quarterly figure.
Fees and commission now make up 26% of our revenues. Not too long ago, the share was just Slover 20. On the next slide 12, you can see a rough split of the commission components of which savings related commissions today account for roughly The very strong net inflows together of course with recovered stock markets drove savings related commissions up 22% compared to last year. In the past decade, we have continuously had a market share of the net inflows on mutual funds in Sweden of around 20% to 30% compared to the backtalk market share of around 12%. In Q1, the market share was 40% of net inflows and it goes without saying that this will continue to be a key growth area for us.
The payment fees have on the other hand seen a decline due to lower card fees during the pandemic, breaking an up until then positive trend. The sum of the remaining commissions, I. E. Loan and deposit fees, guarantees, securities commissions, etcetera, Have shown a relatively stable development during the year. Note though that the scale down of our known home market business means that especially the guarantees fees are trending down, all according to the plan we communicated a year and a half ago.
If we move over to costs on Slide 14, In order to illustrate the underlying trends, we've broken down the quarterly cost in the first component of development cost and the second one, the other cost. And we've adjusted everything for 1 of the Oktogonen provisions. Total underlying expenses continue to drop And we're down 1% compared to last year. Note though that this includes an increase of development cost by 38%. Total development spend increases 4%, in line with our plan.
So you can conclude that we have capitalized less and expensed the higher share of our IT development It is quite clear in this picture that we turned a corner in Q1 last year with a shift in the cost trend. And if we move on to slide 15 And the trends on a 12 month rolling basis, the picture of the changed trend becomes even clearer. We have started to gradually reap the benefits from the initiatives launched in the past one and a half years, while at the same time scaling up IT investments. Over 2021 and 2022, we will make additional targeted IT development investments equivalent to a total of SEK 1,000,000,000, which should come on top of our ordinary IT development of around SEK 2,500,000,000 per year. Hence, it is fair to assume that the green bars will be somewhat elevated over the next 7 quarters or so when we make these targeted investments.
Until the end of Q1, around SEK 90,000,000 or SEK 1,000,000,000 had been exercised, of which around SEK 20,000,000 being capitalized. As we alluded to in Q4, it is probably fair to assume that these temporary increases in IT Development to a large extent will offset the positive effects filtering through from the other initiatives during 2021, with a material net positive effect on the total cost line rather showing up in 2022. And for a few update and comments on the progress on the initiatives, please go to slide 17. All in all, we have more than 100 initiatives ongoing, all contributing to the cost reduction. We follow all these initiatives closely and of course also have timelines for each of them.
Some of them like the branch operations in Sweden and U. K. Are large, but many of them are considerably smaller. However, summing them up is what will take us to the SEK 20,000,000,000 cost level. If factoring in underlying inflation, the total initiatives required to reach the cost target amount to more than SEK 3,000,000,000 over 2.5 years.
Up until end of Q1, around SEK 1,000,000,000 or roughly 30% of the initiatives have been addressed and agreed upon with the affected parties. Only parts of these have so far shown up in the reported cost though, but will of course do so gradually in the coming quarters. Reported costs have been reduced by around SEK 200,000,000 since last summer on the back of execution on the initiatives. In terms of the restructuring reserves, we have so far used about SEK 1,000,000,000 of the total amount of SEK 2,300,000,000. Now let's move over to the credit losses on slide 18.
We saw net reversals in the first SEK8 1,000,000 and a credit loss ratio of 1 basis point. And just to clarify, when booking 1 basis point credit loss ratio, While making net reversals, credit losses are based on are based off on and soft balance items, while the credit loss ratio is based on lending to the public on the balance sheet. You find the formulas behind this in the fact book. So clearly, the asset quality remains very, very strong despite the pandemic. In Q1, There were, as always, fine tunings of the IFRS 9 macro and COVID overlay assumptions, which you find on Slide 38.
One can note that we've increased the stress somewhat on the hotel company exposures, but generally there were no major moves this quarter. Let me finish off on capital and please go to Slide 19. The CET1 ratio decreased marginally from 20.3 to 20.2, put in the bank 6.3 points above the expected FSA requirement per Q1 of 13.9 This also means 3.3 points percentage points above the upper end of our target range, which is 1 to 3 percentage points above the FSA requirement. In the CET1 capital, we have deducted 40% dividend accrue from the earnings in line with previous guidance. In the quarter, there were no major changes 2 items in the capital ratio components really sticking out.
In terms of near term regulatory changes to the capital requirement. It is mainly the CRE floor in Norway, which remains a question mark. We still have no information about when and how such a floor could impact the requirements. But as we've said before, a worst case scenario would mean an increased requirement in the area of 30 to 40 basis response. At the same time could be while at the same time it could be significantly less.
Many of you are likely to ask again about the capital plan after September when the current dividend recommendations by the FSA will expire. Still the only answer we can provide at this stage is the following. First, it is far too early to guess what the FSA's view will be as we approach September. Second, the dividend decision and capital distribution is at the end of the Board decision, which is based on an overall assessment, Which of course can change over time depending on the business outlook and opportunities and regulatory outlooks. So for now, all we can refer to is that the bank's long term capital target range of 1 to 3 percentage points above the SREP under normal circumstances.
Obviously, we are not in normal circumstances yet, But we will, of course, come back and address the capital situation in the coming quarters. In any case, our capitalization is very strong and that's a really good place to be in terms of enabling us with flexibility to really support our customers and aim for growth in the bank. So to sum up, A very stable NII with continued strong mortgage lending, neutral corporate lending, fairly neutral margin and funding effects success in the savings business that is the driver. Continued good progress on the work to streamline and strengthen the branch operations and the offering to our customers. The cost progress runs according to plan and the bank remains firmly committed to the cost target of SEK 20,000,000,000 by End of 2022.
Asset quality remains very strong despite the pandemic and the capital position is also very strong. So with that, let's open up for questions. Thank you.
Thank our first question comes from the line
of Magnus Andersson from ABG. Please go ahead.
Yes. Hello. First my first
question is on costs really and your headcount development. You touched up on it, but just to try to understand what's happening here. You've Used almost half your restructuring reserve and we hardly see any impact at all in your headcount development in your home markets. You are in your report alluding to some in the UK, Which will have a positive impact or make headcount go down. And related to that, Just if it's still relevant to Slide 23 you had in Q4, where you showed we should expect kind of an flat underlying cost year on year 2021 at around SEK 21,600,000,000 and that we get the whole decline in 2022, which I think Would imply that we should see lower costs in the second half of this year than in the first half.
Speaker. Okay. Thank you, Magnus. Let's start with trying to address some of the topics here. First of all, yes, you're alluding to the FTE CE development.
And there's a few components worth to highlight here. As you're saying, we used up SEK 1,000,000,000 of the SEK 2,300,000,000 in restructuring reserves. And obviously, what we during last year, We offered staff a going into retirement a bit earlier and that's concluded in Q3, Q4. But the staff will obviously move lead the bank gradually over 2021. So we have used restructuring costs for that purpose, but the staff haven't left the bank yet.
And then second of that one, it is also that we've obviously switched out of consultants and into permanent staff instead. So that's a reduction in cost, but actually some component which is increasing the number of FTEs employed by the bank. So that's at least two perspective. And then you are correct on that we guided on flat development on costs during 2021. And we should see the gradual or the bigger parts of the decrease during 2022.
And the specific measures In the U. K, I can add there, which we all see that the performance is still very lackluster, very low profitability despite net recoveries on the loan loss line, etcetera. I mean, how are you going to improve your ROE there?
No. It's obviously true that we've been struggling in U. K. For some years now. And we've been keep reiterating and we do that once again that first of all, we needed to PLC ourselves when Brexit came.
So that's taking up a lot of our time and efforts. Then we spent a lot of time as well on AML components, And we are totally in line with the U. K. Regulators there and we move according to plan. And thirdly, obviously, right now U.
Our moving to a country organization and they're trimming their branch networks. So what we see underlying in business development is actually Fairly positive. Obviously, U. K. Has been a very closed down perspective.
But right now, we see fairly strong momentum in both deposits and the asset management perspective. And we are looking fairly positive on the outlook going forward when it comes to lending as well Wendy COVID and the lockdown debates. Having said that, obviously, it is clear that we run an in UK standards, we run a very sufficient bank. If you compare us in cost to income ratio, etcetera, with peers, we are competitive there. But on the other hand, obviously, we run with a higher capitalization level at the time being.
So we keep on moving on this restructuring. We keep on working and bringing it back and we still see a really good market possibility in the long term.
Okay. Thank you.
And the next question comes from the line of Antonio Reali from Morgan Stanley. Please go ahead.
Hi, good morning, and thanks for the presentation. I've got two questions and one clarification, please. Our 2 questions. The first one is on U. K.
NII. If I look at U. K. Mortgage approvals, They've been at decade highs in the last 6 months and pricing almost doubled versus a year ago. So my question is how come You've not been able to grow your NII.
Do you think we've reached the trough point when it comes to NII this quarter? That's my first question. Second question is on the level of fees coming from asset management. You've spelled out very clearly that we've reached new record high levels in terms of AUMs and very strong retail fund inflows. And I realize it's always difficult to sort of predict Market, but you've been gaining lots of market shares for a few years now in Sweden.
How should we think about the outlook for fees here for the rest of the year? And then lastly, just one clarification on the cost. So you said that the EUR 1,000,000,000 IT investments will be mostly offset by the cost savings, suggesting all else equal, there should be no changes to the absolute underlying cost levels compared to last year. How should we think about Oktogonen for the year? Should we just expect a similar quarterly contribution?
Any comments you can share? Welcome. Thank you.
So hi, Antonio, it's Lars here. I will start off with the first question. No, I mean, you're right in the observation, of course, that margins in the UK market have improved lately. And we have seen those signs as well. Having said that, as you have seen, we haven't really come to the growth trajectory in our business volumes there yet on the lending side, as Karl was alluding to.
But definitely, we our We see the underlying improvement in the margins there. And then I hand over back to Karl. Yes.
And then if we speak a bit about fees in Asset Management. Obviously, we have had very strong inflows and a really good volume development. But then it comes down into margins as well. And playing the margin game correctly in the asset management It's a multidimensional perspective. On the one side, we believe that we will be margin pressure More or less in each bracket, whether you're looking at products or client segments or geographies.
But on the other hand, you can see that if you tilt your product mix and if you are well positioned In equity funds, in sustainability funds, in solution funds. And if you're well positioned to take margin share in retail markets, in the other home markets, Then you are actually fairly well positioned to increase your average margins. And that's exactly what's actually happened during the last year that Even though we see margin pressure in each and every bracket, we've actually we've had stable or actually attached increased margins when it comes to the overall perspective. And then coming down to cost lastly, yes, you're correct in interpreting that We believe that the increase in IT cost will more or less offset the decrease in the underlying cost level During 2021. So they will more or less cancel each other out, we believe.
And if we are on move to SEK 20,000,000,000 and if we keep this strong momentum of the bank, we believe we're in a good situation to have higher return on equity with our peers And that would imply an octagon and provisioning. And then obviously, we need the board's full support in the strategy we're running. But we believe we were positioned for that.
And just maybe to highlight again once again on Oktogonen that the SEK 20,000,000,000 target is before any potential allocation to Octagon. Thanks.
Thank you.
And the
next question comes from the line of Robin Raines from Kepler Cheuvreux. Please go ahead.
Our Yes. Hi, good morning and thanks for the presentation. Have you what has been the reception Swedish customers on the closure of branches in Sweden so far. And how do you think about the market share of the growth in particular in mortgages, which is below your natural market share and at the same time as you close the branches.
Yes. Thank you. I'll take that question. When you look at the Swedish branch network and the transformation we're doing there, I think that as I said during the press conference, I feel very confident that when we do this, we do this in line with the customer and we can still see that the customer satisfaction and how they look into us are still on the very high level. So I think when we do this, we do it very carefully among together with the employees and definitely to keep the business ongoing.
So from that perspective, ours it's not very much noise, but again, I feel that we are taking care of those or the customers really, really well. So, so far so good, if I may say so. It's a very small noise actually.
So I
think that we have been able to provide good option and good alternatives from that perspective. When it comes to the mortgage business, I think that we have good position as it is today. But again, we are not developing that business in line with our back book. The intention and the ambition is definitely to move ahead along with that. So some of the development, the IT spending we do is definitely in the mortgage business, I.
E, when it comes to digitalization and to provide an offer both to local and to the digital channels. So our ambition is still very high here. So we are spending resources and time and spending to support that business even looking forward.
All right. Thank you. All right. And then on the capital, I know that the distribution question is, of Board decision and so on. But I guess you are SEK 30,000,000,000 to SEK 40,000,000,000 above the lower range of your targeted buffer.
And I mean, what The circumstances now is not normal, but what could happen to that you would need all this capital actually?
No, but I think the way we see it is that the Swedish FSA will need to come out And stop the recommendation about the restrictions on dividends. And obviously, we want to it's not unlikely that we get some guidance as well on infers of countercyclical buffers. And until we see and until we understand the infra to a normal situation. I think it's very tough to guide on the capital strategy going forward. But of course, as we keep reiterating is that under normal circumstances we won't run within the buffers.
So it's just to get clearances And a few on the unknowns and then we can move forward. All
right. Would it be an option for you to consider growth Through acquisitions employing this capital.
I mean, it's not that we view it that we have an extra amount of money to play around with. We will always try to build the business we can as good as possible. And obviously, that mainly we've been interesting in organic growth, but obviously, it doesn't to rule out structural growth. But it's not that we see it as that anything has changed in that conditions. We will always run the bank with a really good capital situation and we will try to do that going forward.
Okay. Thank you very much.
And the next question comes from the line of Adrian Cighi from Credit Suisse. Please go ahead.
Our Hi, there. Thank you very much for taking my questions. Two questions from my side as well. On capital, a follow-up, You mentioned the potential headwinds from the Norwegian CRE, but can you give us any thoughts on the expected headwinds from the ongoing model review by the Swedish FSA, even in terms of color, if not quantum. And secondly, in terms of revenue from the ongoing restructuring plan.
Can you give us any update where we are versus
the initial estimates, please? Thank you.
Thank you for these questions. Well, first of all, obviously, we are having a model review of the IRB models in Swedish from the Swedish FSA. And these are delivered now during the first half of this year and they will be reviewed. Our We have no view on the or we can't guide you on the consequences of that one. But obviously, it's not dramatic in that situation.
When it comes to the revenue attrition, we have guided on that a total of a negative SEK 1,000,000,000 in the past and that's and the first half of that one should was attached to the moving back from the international market. And in this report, we've just shown that Most likely, we've seen the majority of that income effect. So the first half of the SEK 1,000,000,000 is probably in the books already. And then on the other half, we don't have any other information to give at the time being. Thank you very much.
No negative consequences on that either. It's just that we will have to wait and see.
Thank you very much.
And the next question comes from the line of Sophie Petersons from JPMorgan. Please go ahead.
Yes. Hi. Here is Sophie from JPMorgan. So I was wondering our on the Swedish banking tax, it seems that it went all pretty quiet. Do you have any state on if the banking tax is still going ahead and how what the potential impact for Handelsbanken is potential from the beginning of next year.
Then my second question would be that when I look on your CARF NPL or Stage 3. Stage 3 went up a little bit quarter on quarter and coverage went down to 30% from 32% staff end of the Q4. What level of coverage do you think is sufficient for Handelsbanken. Do you think the 30% NPL coverage will go down even further? Or you think this is basically as low as it gets?
Ours. And then my final question would be, if you could just on the UK, how should we think about the UK costs going forward. Previously, you mentioned that you need to make quite big IT investments in the UK. Our these costs included in the SEK 1,000,000,000 IT spend and the SEK 1,000,000,000 IT spend that you have, how much is basically in the UK. Thank you.
Thanks, Sophie. It's Lars here. I will start off with the 2 first questions. So on the Swedish banking tax, I mean, nothing new there really. I mean, we believe it's still up for sort of judgment on the EU level, whether that will be possible or not.
What we have said, if it's decided, if it's approved, you can basically view the impact on our P and L as in the similar range as the current Resolution Fund fee. And having said that, the way that fee is constructed still is that once we have reached a certain level of the funds, so to speak, that fee should drop off and become much, much smaller. So you might have a year or 2 with a double impact, but then once the Resolution Fund fee then hopefully drops off, We will sort of be back at the current level of impact. But again, no decisions in the Parliament yet on the banking tax. Then your question on Stage 3 volumes, yes, they went up a little bit in the quarter, as you say, but The provisions were down somewhat.
And this is really because of the nature of the exposures that Went into Stage 3. I mean, you can have exposures going into that stage, but where you still deem that you We'll make no losses and typically that's because of the collateral you have on those exposures. And if you look carefully in the table, which I know you have already done, you can see that Some of it is related to property lending, and that typically means we have collateral with very low LTVs. So that's sort of the general explanation. And then we don't guide or have any view really our On the level of provision on Stage 3, that will vary our From quarter to quarter, as you have seen, again, depending on the nature of the exposures and the collateral.
And then I think Karl is ready to take number 3.
Yes. And then on the U. K. Question around the IT investments and whether or not that's a part of the extra SEK 1,000,000,000. No, the IT investments in U.
K, they will be a part of SEK 2,500,000,000 ish of the yearly spend in IT. Our the extra €1,000,000,000 we focused on rather changing and improving the digital meeting places with clients and so on. And in that part, yes, a part of the SEK 1,000,000,000 might be allocated to U. K, but not coming to a core banking system change in U. K.
And then if I may just remind you of our house rules, try to limit your questions to 2 per person. If we have time at the end, we can catch up with more questions. Or otherwise, you're always welcome to call us this afternoon.
Thank you.
And the next question comes from the line of Rijeka Khan from Nordea. Please go ahead.
Yes, thank you. Starting off with a high level question. Given the sort of tough competition on Swedish mortgages your current restructuring program in Sweden and closure of branches. What do you see as most challenging so far and also going forward In terms of sort of keeping your current customer base and mortgage customers or attracting new ones?
Thank you. I can take that and start with that. Yes, I think that's I mean, we have started the transformation, the restructuring, earlier this quarter and we can see that we can still keep up with the mortgage business pretty well, I would say. But of course, when we look ahead, I still think that we can provide a really good offer through the that we will have locally, but at the same time, as I said, that we are increasing the speed to make sure that we do have a digital solution when it comes to the mortgage business overall. So and again, and we will have a customer service in place to provide our offer through telephone and proactivity through that in those places where we in sort of leaving for the moment.
So I think that we have been thought that very carefully through to make sure that we still can be very local deal can be very transparent and visible in the markets that we do have a lot of customers. So I think from that perspective, I feel quite confident that we can keep up and even increase.
Okay, thanks. And then in terms of IT spending and capitalization. You're right in the report that it's fluctuating between the quarters, etcetera. But I'm thinking sort of Going forward, is it fair to assume that the investments you will do ahead will have a lower capitalization rate, I. E.
Meaning that you will gradually reduce the capital IT assets that you have on your balance sheet
our In the coming years. Thanks for that question, Riccard. I think it's too early to tell obviously. Our capitalization level will be dependent etcetera, which we will keep for many, many years. Obviously, we will put more on the balance sheet.
But if the IT investments are more in meeting places and digital advancements towards the clients, I think it's fair to assume a lower stabilization level. But that's we will have to see that going forward. So it's not a strategic decision. It's rather consequence of the thing we invest in development.
Okay. Thank you.
And the next question comes from the line of Jens Heline from Carnegie. Please go ahead.
Thank you. First question on Oktogonen. If I
just look
at The reservation for now in Q1 and annualized that we end up at the SEK 850,000,000 cap for the year. Is the bank already that profitable compared to peers? And if so, is that then including what the other banks were doing in terms of loan loss provisions during 2020.
Thanks for that question, Jens. I think rather the component and the way we the decision process for reserving or not is fairly actually it's fairly mechanical actually. We just compare visavis the past and then the real decision of accruing or not will be done at the end of the year by the Board. So we so based on the figures we've already seen for last year, the mechanics tell us to reserve. And Since we have had a constructive discussion with the board around their view today at the bank, our momentum in restructuring as well.
This is the best thing we could do, but the decision will be made at the end of the year.
And you're absolutely right, Jens. Our Sorry, you're absolutely right in that when we compare our ROE with the ROE or the peers, if they have made big loan loss provisions, That will impact their ROE, and we think that makes all the sounds in the world. If you have lower loan losses, that has a value.
No, absolutely. I think actually when I was looking forward, if they then happen to have large reversals Underlying, you're not going to be worse than them, but they will still report sort of elevated ROEs. But I guess it will be a mechanical process then as well?
True. Correct.
Okay. Thank you. Then just a second question on you talked about a positive noise from corporate credit demand, I something we've been looking for a while. And my question is based on your conversations with your customers, I How much buffer do you think that these companies need to the COVID-nineteen pandemic to start investing and borrowing? Would they need quarters or years?
What do you think?
I think it's a very good question. I think that when we talk to our customers today, I think that what we saw throughout the 2020, we all knew what happened when they started to buffer a lot of liquidity and have a lot of drawdown in all the banks and in us in Handelsbanken as well, and we could see that definitely decreased throughout in the end of 2020. But when we talk to the customer, I think that they as well as we wait to the society to open up again and to make sure that that we'll start moving forward. And from that perspective, when we look at all our home markets actually, we can see that there are a lot of discussions in the pipelines. And from that, we take a lot of positive impulse to see that the demand will definitely increase as soon as we get away from this pandemic, so to speak.
So I feel 7 and I think that the when we talk to the CEO of Enora or Home Market, they do have the same feeling, so to speak, in the stomach when they talk to the customers.
And many times we talk about the government support as a negative factor if they are going to be removed. I think there's a positive factor there around as well. When government support are being withdrawn, companies need to finance themselves independently. And that when that happens and being removed, that increases the demand most likely. When lockdowns are abating and when things move back to normal, we believe, 1st of all, we from a restructuring perspective are in a better situation to actually support and offer our corporate clients a really good advice.
And second, they're in need of more money Informal. Yes.
And I can just add to that and say that, I mean, this is not just a large corporate. I think that as well we can see the same wait and see, so to speak, when it comes to the SME companies as well. But again, I think from the dialogue that we have with those customers, I feel that there are the wait and see period, everyone hope that to be over because they need to do make investments and so on. So, yeah.
Okay. Thank you very much. Very comprehensive answer. Thank you.
And the next question comes from the line of Nick Davies from Exane. Please go ahead.
Good morning, everyone. Two questions, please. The first one, can I ask you to talk about the possible long term impact of all this deposit growth you're seeing, which again was quite sharp This quarter? Just thinking about possible opportunities here either on the household side to convert to mutual funds Or perhaps on the corporate side to charge more deep negative rates, possibly to issue less debt. Are there any kind of those opportunities which you think are Compelling.
And the second question, which I think I asked for the Q2 in a row, is about Swedish house prices. And I understand the structural dynamics of the markets and it's not a bubble question. But now that home prices are growing 20% year on year, the question really is one about your role In that kind of a market and how you think that level of price growth can be decelerated whether You have a role to play in that. Thank you.
Well, let me start in trying to address and most likely some other ones. So we'll jump in here as well. Our First of all, the long term impact of the deposit growth. I think it's fair to say that when you look at the banking sectors in general, obviously, most our huge inflows into deposits. And that's obviously a telling story of the nature of our economies In the world we live in, where there are tons of cash available and needed to be parked somewhere because the world is in lockdown.
So obviously, we don't foresee this as a long term trend carrying on forever. Having said that, obviously, we tend to be a bit better positioned in these sensors and We are accumulating a bit higher ratios of that than many of our peers being a really stable bank. Obviously, as you're saying, on the household side and the retail side, these can be converted obviously to 2 parts. Savings is one obvious choice obviously, moving them into rather fund savings. And most likely, that's been part of the answer to the success recently.
Second of all, obviously, we are a bank which have a bit higher ratio than the peers in capital market financing. And obviously, we can use quite a lot of the deposits as well to decrease our financing cost as well. So 2 good components for us. Then going to the Swedish house prices, as you say, obviously, we might have a structural imbalance in Sweden, which deans to keep on having the demand out there. But yes, we've seen hefty price increases.
Ours. And you can reason around you can debate around the reasoning of that one being people Adapting to the COVID and want bigger spaces to live in and want another house to live in and they believe that they're going to work more from home, etcetera. But putting them aside, I think it's really important to stress that we don't change our behavior much in this development. We keep on having our strict way our strict view of our credit approval process. Ours.
We want people who are very well capitalized who are able to pay their costs. We want a strong collateral. So I think for us it's not we like our clients. We want to be able to supported demand, but we don't change our behavior in
it. Okay. Thank you.
And the next question comes from the line of Andreas Haakonsson from Danske Bank. Please go ahead.
Yes. Good morning, everyone. On the NII, I'm looking in the bridge on Page 27 in your fact book or in the presentation rather. You said that the net effect on margins and funding costs in Sweden was minus 18%. Then I look at you have actually Reduced your funding quite significant.
I think you had a redemption of some SEK 75,000,000,000 in the quarter, And you have the only issue a part of that. So there should have been quite some tailwind from funding. So could you tell us that number, the our How much is margin pressure and how much is funding costs, if possible?
I think Andreas, we have to come back on that with a more detailed answer actually. But I mean, in general, yes, the volume of outstanding funding It's impacted by the redemption we had of 1 of the large benchmark cover bond loans in Sweden in the quarter. And that obviously entails some short term impacts on that number when we have these redemptions. Our But we'll have to come back with a more detailed answer.
But big picture, I mean, you had SEK 19,000,000 Of the lending volume contribution and minus EUR 18,000,000 of this net number, would it be fair to believe that if I exclude the funding, You would have a negative delta between volumes and margins in the quarter?
As we say In the segment Sweden, we have a rounded one basis point drop, if you want, of margin in the mortgage Marketing in Sweden. So that is obviously
Sure. But there's other product. And we can take that later on. Our The second question, on your SREP, someone else asked a question similar and I just want to come back to it. Could you give us a best estimate?
Should I think that a normalized SREP adding back your buffers is around 16% our With Norwegian impact and so on. And then I should add 100 to 300 bps and then compare that to the 20% and say that you have roughly 100 bps above your How do you feel about that?
I think you're reasoning quite a lot around what we want answers from the Swedish FSA around. But what we can say is you're correct in that we want to be 1 to 3 percentage point above the SREP. And the SREP, obviously, going forward, most likely will include countercyclical buffers. But we don't know how quick they will be imposed. We don't know the levels they will come back to.
But what we can say is That pre corona, they were at 1.9 percentage points to us. So if you're making that math, obviously, 13.9 Plus 1.9 is 15.8 and we want to be 1 percentage points to 3 percentage points above that. But that's a lot of assumptions in itself. And that's the reason why we're waiting for the Swedish from clarification from the Swedish FSA.
But would it be fair to believe given that you have quite a conservative Around if and when the countercyclical buffer will come back, they're rather going to say that it's not the normal environment, sort of 1, 2, 3 doesn't apply or is that the wrong way of looking at it.
I think it's fair to say that we have a conservative board and we want to run the bank in the safest of fashion. Ours. And but that's not the same to we cannot go in advance of these kind of conclusions. And I think you're making far too many assumptions in that conclusion. But yes, we have a conservative Board.
That's our job, you know. But Thanks very much
for that.
And the next question comes from the line of Matsuy Niedel from SEB. Please go ahead.
Yes, good morning. Thank you or good morning, I don't know. But two questions, if I may. Private banking volumes up 42% year over year. Could you shed some light on that?
Is that primarily related to asset management growth? Or Could you comment on, I mean, the number of client developments, so to say, have you added a lot of private banking clients or changed definition Of being a private banking client, etcetera. And the second more U. K. Model approval, is there anything there ours That has progressed really.
Thanks.
Thank you, Mats. I can start with the question when it comes to the Private Banking business. I mean, we are running the private banking in the same way we have done for quite some time actually. So when you look at the increase on the new volumes, it also includes a lot of new customers as well. I don't have the right the exact figure on that, but that is how we can say that we definitely increase the Private Banking business and the volumes into our asset management.
So that is definitely a combination of old customers and new customers in this.
Our And we've said obviously that we're moving from a business model where we had private banking available at 5 places in Sweden And we're moving to the county structure in Sweden where we will have private banking available in 20 to 25 places. And we come some way in that development actually. So we are improving our geographical footprint in footprint in private banking as well, which will obviously increase our competitive edge. Then going to U. Our I read that question as a fairly broad question.
And sorry, was it a question around the IRB model? Yes. Okay. Sorry. Obviously, we as we said before, We are capitalizing our U.
K. Exposure now from the Swedish FSA's demand. And the consequence of that one is that we are measuring our risk weighted amounts by a standardized model and then we're capitalizing ourselves with the Swedish buffers. And that's obviously a very non competitive position we're in right now. And it's fair to assume that over time the U.
K. PRA and Swedish FSA will most likely need to converge their methods. When that happens, it's far too early to tell. But obviously, we are in the most conservative position right now. And that obviously hurts our Return on equity.
So we're putting a lot of focus in improving our efficiency and doing everything we can in order to produce our as good return on equity as possible. But then obviously, it comes down to as well the capitalization level. And we are in the process of applying for IRB method in U. K. But it's far too early.
But no
progress during the quarter, so to say.
No, no, no, no, no progress team. Sorry for long
No, no, no, no, that's fine. Fine. Very good. Thank you.
And the next question comes from the line of Martin Leitgeb from Goldman Sachs. Please go ahead.
Yes, good morning. My first question is just to follow-up on some of the comments on mortgages in Sweden. And I was just wondering, so the combination Of continued strong deposit inflow, rather subdued corporate lending growth at present. How do you think is mortgage pricing evolving in Sweden? Do you see it broadly stable, gradually edging lower?
Is there a continued downward pressure? And the point I'm trying to get is how should we think about NII progression in 2021? So it's the combination of volume growth likely to be offset to some degree by margin pressure? The second question, I was just wondering on the 40% dividend accrual, just looking obviously at the comments earlier on capital at the 20% Compares already giving a lot of headroom even if one were to factory index the countercyclical buffer. Do you What is the reason to keeping the payout ratio at 40% at present?
And is there scope to potentially this year, next year reverting back to some of the higher accrual levels? Thank you.
Well, let me start and then Lars, you can jump in as well. When it comes to mortgages, obviously, we don't have our what we believe is the correct margins going forward. But obviously, we can see that the market we've seen quite strong trends towards digitalization in the past and we believe this will prolong, they will carry on. We are putting a lot of emphasis in that perspective ourselves. We'd obviously seen margin pressure coming from the new players who rather construct mortgage funds ours then using their balance sheet.
That will most likely prolong, but they can't grow in forever because Then the Swedish FSA will most likely have a view on that one. And then obviously, we've also seen that the banking package adoption from the Swedish FSA has actually increased the capital demand a bit more on the smaller players. So all in all, we can see that the margin pressure might been a bit bigger actually a year ago or so then it is at current. But that's it's a bit back to Andrea's question as well. What comes from the financing component and what comes from the top line price decline paid.
So a tricky question to ask, but we like the market. We think we are competitive at the position we're in right now. Then when it comes down to the 40% dividend accrual, Obviously, the key component in all of this is that we want to run the bank at 1 to 3 percentage points above the regulatory demand. If it proves over time that we build capital if we're just paying a 40% dividend. Then obviously, we're in a good situation and then we will make more cash available to be divided out to the shareholders.
But these things will have these things will be clarified over time. And so 1 to 3 percentage point is the constant one in this equation.
Thank you. And are you able to say anything on NII progression, how we should think of NII progression in 2021?
No, I mean, we never guide on the revenues. As you know, what we keep saying is that over time, when you think about MII progression in our bank. It's about later around 0. Then of course, it can jump up and down as we've seen, but over time, it's all about volume development.
Thank you very much.
And the next question comes from the line of Riccardo Rovere from Mediobanca. Please go ahead.
Good morning. Good morning to everybody. Quick questions, if I may. When I look at your disclosure with regard to credit risk our IRB. I see I noticed that the under the advanced approach, the risk weight on corporate goes down by roughly 1 percentage point in only 3 months.
And I was wondering what is driving that. I'm not saying you should have gone up, But seen down, considering that the continent has remained more or less shut is a bit surprising to me. This is the first question. And the second question I have with regard to your cost target, EUR 20,000,000,000, it is without Ottergone and fine. Does that include any action that you're taking in the U.
K? And is it including some kind of cost like travels, marketing and these kind of things to get back to normal by the end of 2022. And then forgive me for that, a quick one for Carina. Right at the beginning of the presentation, when you were talking about capital, you stated this gives opportunity for growth among other things, this is written, this is the word you mentioned. What does it mean among other things, if you could clarify a little bit that?
Thank you.
Our I can start and then I guess Lars and then Karl will continue. Yes, what I meant is that we are in a very good position when it comes to the capital situation we have. It gives us and it gives the board opportunities definitely, and as Karl said, we will get back to that. But we have aspiration for growth. And when we look at that and when I said that, it's mainly about organic growth in all our home where we are.
So that is what I meant. We do we are in a very good position. We are in a good spot in looking moving forward in that perspective.
And to your question around the cost target, no, we haven't. Obviously, We will adapt to the situation post the COVID crisis and we really like to get back to that situation. Our If we most obviously traveling cost will go up for instance. So we haven't made any assumptions of what the correct level on that is we run a fairly dynamic bank now, who we believe which we believe is adaptable to the circumstances. So obviously, we run initiatives, but restricting traveling is not one of them.
And then Ricardo, last year on your question on the corporate risk weight down in the quarter as you say in advance. And yes, you're right. And I mean, you have seen that trend for quite a few quarters. And the reason is really that, As we talked about, we continue to gradually improve the quality of our portfolio towards lower and lower risk exposure. So that is clearly reflected in the risk weight.
So nothing special this quarter, so to speak.
And obviously, scaling out of the international markets is it's not the majority of our business, but that's one component, which should all else equal improve the credit quality of the portfolio.
Our Okay. Just a second.
I'm not sure I understood it correctly. On the cost, The EUR 20,000,000,000 includes some sort of normalization of traveling. Do I get it right?
Correct. Okay. Thanks.
And the next question comes from the line of Maria Samikatova from Citibank. Please go ahead.
Yes, hello. Thank you for the presentation. Just a couple of questions on the cost side. First of all, is there any update on the potential sale that you mentioned of card acquiring operation and Exeter and subsidiary? And what would be the impact on your SEK 20,000,000,000 cost target in case you decide not to proceed with the sale?
And secondly, on headcount in the Swedish operations, just wanted to clarify, as a result of restructuring, you changed some of the allocation of head sound across divisions. So in Sweden, there was roughly 2 70 employees reassigned to other segments. So when you previously guided that the restructuring of branches in Sweden would result in 1,000 fewer FTEs, did you include this reassignment with effectively net reduction of around SEK 700,000,000 at the group level?
Okay. Thanks for these questions, Maria. First of all, on the payment side, we don't have any other information to give at the present being. We will get back on the information in due time on that perspective. Then when it comes to the FTE estimate in the FTE reduction.
We don't have any reason to guide on anything else than 1,000 FT feet feet feet feet feet feet feet feet feet feet Es. It is true that we organization wise has changed the way we work and we moved some of the functions from obviously cutting down from 5 regional banks to 1 country operation. We've said to you that we will centralize and to bring on the efficiency in a few of the functional areas. So and that has caused a change of FTEs as a consequence, But no reason to change the 1,000 Feet component due to that.
Understood. And just maybe A quick follow-up. You mentioned that you were replacing effectively consultants with your own headcount. Has that been already done or you expect kind of further increase from this.
I think it's fair to say that that will be an ongoing job and task. But yes, Definitely, it has been done already to some extent.
And then just on to clarify on the card acquiring operations. So you do not disclose the contribution of this to your cost target, but can you confirm that the sale is included in the SEK 20,000,000,000 target by 2022?
A review of the payment business, we can confirm that's included in the SEK 20,000,000,000 cost target, but we can't comment any more than that.
Understood. Thank you so much.
And I will now hand it back for any closing remarks.
Questions and well, have a real nice day and hear from you again. Thank you. Bye bye. Thank you.
Thank you.