Good morning, everyone, and welcome to this conference call for the 4th quarter and full year 2019. Joining me today are Lars Hoglund, Head of Investor Relations and Annika Enger, Head of Group Accounting. Slide number 5, please. Before going deeper into the numbers, I'd like to go back and remind you about the changes we've begun talking about when our CEO started her job 10 months ago. The way forward that we presented last year means that the bank becomes more focused on our core customers and offering to that they demand.
This will support the profitable growth with increased efficiency in the bank. This also means even lower risk and also debt to release on capital. That in itself enables a continued growth with our core customers, but it also adds to the buffer in 2020 when capital requirements in general for Swedish banks are on an increasing pathogen. All these measures enable us to increase efficiency in the bank. And altogether, we expect to lower our underlying cost base by around SEK1.5 billion during the next few years.
Then on to Slide 24, where we show the results for the quarter, which increased by 2% adjusted for currency effects and one offs. Net interest income increased by 1% but was flat adjusted for currency. Volume growth slowed down a bit also during Q4, but we have also reduced some exposures in line with our more focused strategy. The contribution from increased volumes was offset by a negative net impact from margins and funding costs. We did see an increase in the short trades during Q4 in Sweden, impacting the funding costs in the covered bonds.
The competition in the Swedish market remains hard, but no changes really in the Q4. We have announced a 25 basis points hike for the first effect in January this year. And as always, competition decides how much of that will filter through to the customers in the end. As mentioned before, we also had a lag effect in Norway from the rate hike earlier in the fall due to the notice period we have against customers. Q1 this year should be free from those Norwegian lag effects.
We experienced some margin pressure also outside screening for mortgages, but less severe than earlier in the year. U. K. Had a stable margin in the quarter. Easing commissions were up by 2%.
We saw continued strong savings business, but also card business with an increase of 7% when adjusted for the kickbacks previously in Q3. Costs were up by 3% when adjusting for currency and one offs in Q3. I'll get back to that. And finally, credit losses cut further to 1 basis points for the quarter and 4 basis points for the full year. Slide 25 shows the net income development year on year.
I'd like to add a few comments to that. Here, you can see the strong volume impact, more than SEK 1,500,000,000. The net effect of margins and funding costs deduct around SEK 1,000,000,000 and just over half of that relates to Sweden. When short trades moved up sharply at the end of 2018 to surpass 0 in early 2019, that had a negative funding cost impact on the short rates used in the covered PAM funding. We talked about this already in early 2019.
So when we look at year on year development, there is a substantial negative effect here. In 2019, there has also been some pressure on the mortgage rates in Sweden as we described in Q3. But that is really not so reason behind the negative net effect here. So all in all, net negative impact of margins on funding costs in Sweden were just over CHF 500,000,000 in 2019. All markets outside Sweden have suffered more from general margin pressure on mortgages during the year.
Also, net income was negatively affected by IFRS 16 to some extent and also items related to the liquidity portfolio, but that part was more than offset in NFT. And finally, of course, state fees fell some SEK 600,000,000. And for 2020, we expect another drop because of lower resolution fund fees as it moves from 9 basis points to 5 basis points in 2020 as well as the fact that we don't pay that fee on the U. K. Volumes from now on.
Turning to Slide 11. You can see our capital position that has had a strong development. The common equity Tier one ratio was 18.5%, which is up from 17 point 4% in the 3rd quarter 16.8% a year ago. We estimate that the Swedish FSA requirement was 15.8% at the end of 2019, which means that we, at this point, have a buffer of 2.7 percentage points to the Swedish FCA requirement and that we are 1.7 percentage points into our target range. Improvement since Q3 is explained by the fact that we have reduced some exposures with high risk weights in line with what I described earlier.
Other factors are profit generation and improvements in net pension assets. Just as we have highlighted several quarters now, you clearly see that capital requirements are on an increasing path for Swedish banks again. The Swedish FSA proposal on brick white floors for lending to commercial real estate will add some 40 basis points to the Pillar 2 requirement when introduced during fall this year. In Norway, high risk rates for commercial property lending will come into effect in late 2020, which will reduce our buffer to requirement by some 40 basis points. And high account cyclical buffers primarily in Denmark and U.
K. At the end of 2020 will add 20 basis points to the requirement. Later on, we will also have a certain impact from the ongoing modeling review related to EBA requirements. Now when we enter into 2020, some uncertainty remains regarding macro and market development at the same time as we have good growth opportunities. To conclude, we have a good capital position.
We are facing increasing capital requirements in the coming years, and we see good continued growth opportunities. Since this background, the Board has proposed a dividend of 5.50 percent per share for 2019, which is unchanged compared to 2018. On Slide number 8, we take a look at the quarterly costs. As usual in the Q4, there was a seasonal increase of costs also in 2019. But when looking back to the years before 2017, the increase in the Q4 of 2019 was about SEK100 1,000,000 less than it used to be a few years back despite the fact that the total cost base is now larger.
The measures that we have announced in the Q3 did not impact the Q4 costs, and I will get back to that. What we have seen is rather a large cost increase in the entire bank, together with other efficiency measures going on that we have talked about before. On to Slide number 9. Here, we'll look at the full year cost development compared to 2018. We saw an underlying increase of just over 5%,
which
is lower than 8% we saw in 2018. In 2019, the cost increase was mainly explained by AML costs as well as pension costs. Apart from these two items, the cost development was modest. Looking into 2020, we expect both development cost and AML cost to be at the same level as in 2019. We don't expect pension costs to increase as strongly as they did in 2019.
At the end of 2020, we will have achieved a reduction in underlying annual cost base of SEK 1,000,000,000, all else equal. So to summarize, we are on the right track with costs but, of course, still not where we want to be. Slide number 10, please, where we go back to the measures we presented in Q3.
These include geographical
concentration outside our markets, a somewhat more focused product offering as well as internal efficiency improvements. As I said, we haven't yet seen the impact on costs during the Q4. We have, however, during 2019, taken decisions and actions within these measures that will start to impact the cost base now in early 20 20. All in all, these measures so far will contribute some SEK 200,000,000 in annualized cost reduction. So we have started to deliver on the reduction that we have thought about.
During the Q4, we used a bit more than SEK 60,000,000 of the restructuring reserve, which totals to more than SEK 900,000,000. Now back to credit quality and credit losses on Slide 12. One basis point was the lowest level of credit losses that we have had since the Q3 of 2017. For the full year of 2019, it was 4 basis points, and it basically reflected one exposure in Sweden. In our home markets outside Sweden, we mostly had net recoveries for 2019.
This is a proof of our strong focus on credit quality. We also know how crucial this is. Large credit losses are among the most expensive things a bank can encounter. We need to be humble also when it comes to credit losses, but naturally, we are pleased to see the credit quality being so strong. Increased focus in the bank, as I talked about, means that we leave exposures in the fringes of our core areas.
That has a slightly higher level of risk, which means a further reduction of risk levels in the bank. But this slide is also very clear in a longer Slide number 13, please. Many banks right now, not only Handelsbanken, show very low credit losses. In the bigger picture, I think this slide is interesting. It's compiled from the EBA transparency exercise, which was published in late 2019.
It shows the share of program loans in European banks. The left chart is the entire European sample, and Handelsbanken has the lowest share, which may be difficult to see here. The scale is worth things a bit. But if we focus on 6 hundred banks in the right chart, it's easier to see. You can take different views on where we are in the credit side concurrently.
But once the credit markets become more challenging, the credit quality that we have gives us a very good starting point. And on to Slide 34, please. What you see here is our capital requirement in relation to our average annual credit losses since 2000. What the picture shows is the very substantial buffers that our capital requirement entails. The requirement we have covers an annual average credit loss 90x.
And then, of course, we have our buffers on top of that requirement. So we do not only have the strongest asset quality as the eBay slide shows, we also have the highest capitalization to cover that asset quality. Back to Slide 16, please, where we show our development in the Swedish business sized in a few different ways. The mortgage market up in the left corner. We have been clear that this is an area where we aim to become even stronger.
Our experience is that the inflow of new business is explained by our level of activity and prices locally as well as in different other channels rather than by price. And of course, we have to be relevant price wise, and we also do price in accordance with the market. We will focus on increasing our activity, improving visibility and further developing our digital offering. During 2019, we were the largest Nest vendor, and the trend in the Q4 was positive. However, the share of new lending was still a bit lower than our active share.
We did increase our activity and visibility during fall. And in November, we launched our green mortgages. This product is in strong demand, not leased by our younger customers. Mutual fund savings up to the right, where we have received a higher share of net inflows than the back book throughout the decade. Also in 2019, where we were the largest player in terms of net inflows, the share again being priced the size of the backfill share.
At the same time, our customers increased those savings on Handelsbanken accounts even more. We did increase household deposit market share from 18.1% to 18.4%, which is quite a rare magnitude of increase in this market. 24% of total net inflows ended up in Handelsbanken accounts. And finally, our other property lending, including housing associations, continued to grow steadily. Since 2016, we have seen an annual growth rate of 6%.
All in all, I think this shows how well our business model is working. And with the strongest focus we now deploy into our core customer needs, it bodes well for a continued good business development. Moving on to Slide 17. When we summarize 2019 for our Swedish operations, it clearly shows the excellent job that our branches have done again in doing more business with satisfied customers. The cost income ratio has gradually improved over the last 10 years and is now 34.4% and shows an efficient operation.
The credit loss we have in Sweden is one isolated situation with really no real cost to the broader economy. The changes we are doing in the bank now are, among other things, aiming at improving the conditions for our teams and the branches even further. That means better tools and release time. The utilization of the mortgage process is proceeding as planned. We will introduce AI solutions in further processes in the branches, and we will also give the branches tools where they can easier monitor customer activity.
The advisory tool will be extended to also include the mortgage business. So Slide 18, we look at the other Nordic home markets. Norway also had a development with a cost to income ratio around 35%. We expect increased focus on advisory, good banking and continuous utilization to show up further in the business going forward. Denmark, as we know, is a tougher market now with the rates environment and competition.
We have an excellent underlying business by customer satisfaction and the development. So competition is something we do handle well. During 2019, the focus on asset management in Denmark contributed to a strong development of our fee income. Underlines of the fee business also did well. Our customer base means that we have good potential to grow the fee business in Denmark, which obviously will help us handling very low rates as long as they remain.
And finally, Finland, where good momentum has returned, as can be seen here. Hard work and more focused offering, including strong focus on core customers, are behind that. We have a cost impact in Finland now due to the change of the core banking system that will continue a few years. That will, however, further improve both the customer service and efficiency over time. On Slide number 19, please, and our growth markets, the Netherlands and UK.
We continue to grow in the Netherlands, which is clear from the numbers. Operating profit increased by 7% in 2019 19 to exactly SEK300 1,000,000. It is a small operation, so but with great potential. UK had a weaker growth in 2019 for different reasons. At the same time, such a during the last year shows the power and quality of our U.
K. Business. We have set up a subsidiary and have become a British bank at a higher cost level as a result. We have spent a lot on AML measures, which has also taken a lot of time in the branches and costs have been elevated. Still, customer satisfaction is very high, and thanks to net progress in the credit portfolio, underlying operating profit for the year still increased by 5%.
The slide also shows a massive increase in profits in the UK over the last decade, which, of course, has been driven by the steady business growth. So this goes well for the U. K. Business and the potential for further growth. And for me, Slide number 20.
When we summarize 2019, we can see that we are on the right track, but we certainly have more to work to do to get to where we want to be cost wise. By focusing the bank more distinctly to the core customers and their needs, we create the foundation for continued profitable growth. The interaction between our local decision makers in the branches and an even higher ambition to improve simplicity and availability through additional tools is key here. A strong focus on sustainability is helping our business and customer satisfaction already, but we will gear up even further here. We are entering into 2020 with high hopes for further stable growth with the sustained low risk in the business.
At the same time, the measures we are taking will change the cost trend that we have seen over the last few years. Strong capitalization and an excellent asset quality really good starting point into the new decade. With that, I conclude my presentation and open up for questions. Thank you.
Thank you. Our first question comes from the line of Chris Harvey from Redburn.
I've got a quick question on the Swedish mortgage market, please. So you repriced your mortgages before Christmas, which is a bit more aggressively than your peers. I was just wondering, now we've had a month of that, can you give us a sense of how the sort of women and men on the ground are in branch of the finding cuts? Are you sort of struggling to keep customers? Are they having to offer big discounts?
And just because you hiked your prices before Christmas,
do you think you should expect to see
a bit of benefit in your Q1 NII numbers off the back of that? And then second question, just talk about your noncore divestments from a capital perspective. Can you give us a feel for how far you are through that process and how much we might how much more of that we might see in the future?
Okay. So thank you. So starting with the question about mortgages and the repricing we did in Q4, late Q4. But it's really early days. This is something that will be taken care of in our branch office network as you also referred to.
And we have no signals of any sort of dramatic impact from that. It's something that is now ongoing, and we are having discussions in the branches with our customers. So but it's too early to really tell about the impact from that. But the fact that we did increase rates before year end also means that we do not have the sort of the negative impact as we had a year ago when we made the move in January instead of December. So it's a positive impact because we have the positive impact earlier on, consequence of that.
And then regarding where we are on the non core business, I would say that this is something that feeds through gradually and it's not a massive exercise. It's something that happens in here and there as a consequence of the increased focus and increased awareness about, I would also say, producing a good return and to be customer efficient and so on. So that work is ongoing, but I don't foresee any massive changes going forward. So but I think that is as far as I'd like to go on that topic.
Our next question comes from the line of Sophie Kasujas from JPMorgan. Please go ahead. Yes. Hi. Here is Sophie from JPMorgan.
So I had a question on your development costs. With the Q3 earnings, you guided that you expect development costs of around €2,100,000,000 to €2,200,000,000 for 2019. But these costs came in at €1,900,000,000 so to €300,000,000 lower than expected or what you previously guided for. Could you just explain and give a little bit more detail what drove this kind of EUR 200,000,000 lever cost in development costs? And then my second question would be on Oktogonen.
How should we think about the contribution to Oktogonen in 2020? And then my third question would be on the banking package in Sweden. What are your expectations? I know you mentioned that the sales requirements are going up. Has there been any indication from the Swedish regulator on what the banking actually includes?
Hi, Sofia, and thank you. So regarding development costs, we had guided for SEK 2,100,000 to SEK 2,200,000,000 and we haven't changed that guidance during the year. It has been very stable. Now we came in a bit lower than that than expected. No dramatic changes behind that, I might say, because the dividends was quite small.
So that's what it's to it, I think. And then going forward, expectation is that the cost level will be at the same level also for 2020. So that's where we are on that topic. So no nothing dramatic in that, I think. And
when it comes
to Costa Conan, I think the best way to put it is that the way it has also been described by our CEO, and she has received questions on this topic. And that's to I mean, the background you know about. It's us coming to a conclusion that the development we have been on for some years over the last few years with costs increasing much more rapidly than income is not sustainable in the long run. And we need to get out of that situation. And now we think that we found ourselves in a place where we should be, but we are not still where we want to be.
Meaning that, yes, we have changed things, partly due to increased cost focus and also some of the efficiency measures we have previously announced are feeding through. So that has impacted cost development, both, I would say, in Q3 to a certain extent and also in Q4. But those figures have not been impacted by the structural changes we have announced. So we have started the journey, but we are still not where we want to be as we are in a much better position today than we were a couple of quarters back in time. So we are, of course, closer to that point.
But we I don't want to make any forecast for 2020, and we seem to have to wait and see how we perform. But we also quite clear that we have not proposed to make a provision for Q4, obviously. And then finally, on the banking package. No, we have not received any guidance from the Swedish FFA on how this is going to be implemented. And as you know, I mean, the big question, Mark, is which buffer requirements they will actually implement, and that is unknown to us still.
So we think we have to wait and see what that will lead to. So no further guidance. But what we do know is, of course, what we have also described in the report, the impact from the CRE exposures in the requirements for them both in Sweden and Norway as well as the country's cyclical requirements that will be added in late 2020.
And Stefan here, if I may add a few points on the Emerald side of things there. So I think if you look at what the National Debt Office is saying and is closing on the back end package, they keep the view they had before. So for now, we are assuming similar kind of issuance need in terms of senior non preferred as before. So no changes there as of now. But again, we still look for the final outcome.
That's the assumption we have now.
Okay. And just a quick just clarification. So when you mentioned that development costs are going to be at the same level going forward, I assume you'll be there going to be around SEK 1,900,000,000 in 2020.
SEK 1,900,000,000, no, they are 2,100,000,000 was the outcome in for the full year of 2019.
Okay. So they were SEK 2,100,000,000?
Yes. SEK 2,000,000,000, 69,000,000. Okay.
I'll just give it over.
No, no. So if you look
at the slide where we have allocated part of the development cost into AML stand. But if you look in the table on Slide 5 Page 5 in the report, you will see the exact development cost.
And the next question comes from the line of Johan Jef Jung from UBS.
Just two quick questions. On the cost side, I mean, you highlighted the lower than historical seasonality. Is there anything structural happening there? Or looking into kind of the seasonal pattern for the next couple of years, should we assume kind of $150,000,000 or the $250,000,000 that you alluded to was kind of the run rate pre 2018? That's the first question.
And then the second question is just in terms of your comments around growth and reallocating capital. So you're taking out some higher risk density exposures. How do you think about reinvesting that capital? So I guess if you take out things with a high risk density and add it to your core business, you need to add a lot more volumes to kind of compensate for that. How can you do that in an environment where volume growth appears to be stable to slowing without compromising on your risk profile?
Or should we or maybe the answer is we should expect lower volume growth going forward. So that's the second question. And then just third, just a clarification. On the resolution fee, have you guided to what the impact is you expect next year? So I guess there's some changes in the basis with the Swedish mortgage floors that might limit the impact a bit.
Hi, good, Johan. So it starts with the cost and potential structural impact related to the increase in Q4 compared to previous years. No, there is no structural changes we have made. I mean, it's a strong cost focus team that you follow all the costs all through the year, of course, closely and make sure that everything doesn't end up in Q4. So that's part of it.
But it's cost focus. And if you look at the items where we have had increases during previous years compared to this year. You can see that it's actually staff cost and purchase services that really represent a change. And it's not I mean, that it's a consequence of increased cost focus, I would say, and following this really closely. Then when it comes to the question about growth and reallocation of capital and resources in that regard.
Yes, it's true. So some of the corporate exposures that leave us at the high risk density, meaning high risk exposure amount and risk weights on average than the lending that we enter into the books. So and then if that means that we have to do much more lending in order to compensate for that, well, that would be the case if return on equity and margins was much higher on the lending that we could lose. But I wouldn't say that is the case to a significant extent. It's part of that part of this exercise has also been about really going through exposures we have to make sure that we don't that we do target business that is profitable enough.
So that's part of the exercise. So I don't see that risk. And when it comes to potential for future growth, I lending growth has been slowing down a bit, especially during the second half of twenty nineteen. That changed. Yes, we've seen some signs of improvements in Sweden, I'd say.
And then I think you also have to consider the situation in the UK, which could be, I mean, the uncertainty from Brexit and also the fact that we have been spending a lot of time related to AML process improvements that has occupied a lot of people within our branch office network, meaning that they have spent time doing that to a higher extent and less time doing business with customers. And there, we see a change. So that will, at some point during 2020, come to an end. So and that bodes well for growth opportunities. And I also think that is the case for some other home markets as well that growth has been quite slow due to structural impact.
So and that's why change. But especially in the U. K. And Sweden, it seems to be it's not dramatic, but it's looking good. And then finally, on the resolution fee.
So well, yes, it will be going to 5 basis points, as mentioned also. As well. And that means that it will be reduced, and then we don't have to pay for the our UK exposures anymore due to the subsidiarization. The impact from the U. K.
Not being part of that is approximately SEK 150,000,000. So we the best estimate we can make is, I mean, I would say somewhere around between SEK 700,000,000 and SEK800,000,000 of impact. But that is an uncertain figure because it's the resolution authority, Swedish National Debt Office, that is, they do a risk estimation and compare bank. And it's impossible to know in advance exactly how that plays out. So there's no uncertainty on that topic.
Thank you.
Okay. Thank you.
The next question comes from the line of Martin Ullrich from Goldman Sachs. Please go ahead.
Yes, good morning. Just a follow-up on capital. Obviously, the very strong trend on capital this quarter was the quality one ratio being up 100 basis points. And I understand the comments made on the capital headwinds this year, so the forty-forty and twenty basis points headwinds you called out. I was just wondering, so leaving the dividend unchanged, does essentially mean that you don't expect
to have any kind of
offsets in those regulatory capital headwinds? You envisage that the or it is essentially a measure of prudence that there could be some elements maybe in some of the P2 requirements or so, which could help you offset? And the other thing is, I was just wondering in terms of this capital headwinds, is there any change you envisage in terms of the loan book or the composition of the loan book in order to mitigate those impacts further?
Thanks, Martin. So regarding the decision about the dividend potential set offs or offsetting effects, no, we don't foresee any specific offsetting effects. It's we are once again on a path with increasing capital requirements. And the ones mentioned in the call is, of course, the most important ones and also the outcome potentially of the EBA exercise. So we have to rebuild our R and D models for the complete, let's say.
And we don't expect that to lead to a significant increase in capital requirements, but it could certainly lead to some degree of increases. What you should also keep in mind when you look at that is that the introduction of capital requirements or floors for CRE exposures is also a way to front load this from the Swedish FSA. So that will potentially, to a certain degree, balance out. But nevertheless, we are on an increasing path when it comes to capital requirements again. So and then when we have made a decision and the proposal on the dividend, that is one important reason for that.
And then we want to be on the customer spend, and we want to be able to grow when we have the opportunity to do so. And that is also a reason to keep capital levels where they are. Those are the reasons, I think.
Our next question comes from the line of Riccardo Rovere from Mediobanca. Please go ahead.
Yes. Good morning to everybody. Thanks for taking my question. 1st of all, I wanted to ask you on just on the capital requirement, just clarification if I understood it
correctly, John, don't want to
get numbers wrong. You stated that commercial real estate risk with floors will add 40 basis in Sweden, 40 basis in Norway, I think you're going to have another 20 basis increase in the capital requirements because of the countercyclical buffer. Just to be sure I understood increase in the rate in December in Sweden, do you think Anders Panjik will be able to retain part of that? Or do you think competition will eat the whole 25 basis point hike? And then when you go to when you say that Patrick, you have used so far €66,000,000 maybe, €1,000,000 of restructuring cost out of the €900,000,000 you cooked.
What part of that you think you should be able to use in 2020 out of the residual €870,000,000 Then another thing I wanted to ask is on the pension sorry, on capital, you stated that pension assets and liabilities contributed, if I remember correctly, basis points in the quarter. Rates have moved down again. Equity markets are a bit bumpy. Do you have an idea of what could be the impact if we used current level rates instead of the one at the end of 2019? Thanks.
Thank you, Ricardo. So yes, you're completely correct. You're understood completely correct when it comes to the impact of CRE regulations, both in Sweden and Norway and 20 basis points for countercyclical buffers in Denmark and the UK. And then related to that debt pension assets and the 30 basis points impact, now I want to comment on the impact of changes in interest rates since year end. So but it's correct that we have a positive impact, and that's due to changes in net pension assets that has been favorable for us.
So that's one part of it. And then the rest, of course, is the profit generation and some other changes we have commented in the report. And then net interest income and the 25 basis points repo rate change and us also feeding us through external pricing and to what extent we expect to keep that. It's really up to the business to work on that. And of course, we will try to keep it.
But it's really hard to assess in advance. We have seen during the year quite a bit of competition in this area. It has been at the same level approximately during the year, I would say, meaning also that when you look back at what happened a year ago, part of that has been lost, but part of that has been shut. But it's too early to really tell what's going to keep it. And finally, regarding the restructuring reserve and the SEK 66,000,000 we took in Q4 for that.
What will happen in 2020, we don't want to make any forecast about that. But I think you can say that when you look at the actions we take, a large part of that will actually feed you during 2020. But what takes longer time to go through with is the closure of our international operations because that is not truly something that takes a bit more time.
Okay. But you stated that good part of the residual, NOK 8.70 should be somehow used in 2020, right?
I don't want to comment on that and make any quick thoughts about that particular issue. But I think also you could when you try to assess that, what you could keep in mind is that twothree of the complete package will be dealt with and handled during 2020. And that gives you some guidance. But then you also have to consider that what takes on the time is the closure of international operations. That is, of course, a nice go when it comes to
to
Our next question comes from the line of Jacob Kus from Autonomous.
Two questions. Firstly, the Swedish FSA commented on the Basel IV calculations for the EDA in late December. So they had calculated a 30% increase risk weighted assets for Swedish banks. I know there's a number of discussion points regarding potential mitigation here. But could you say how you, in your own calculation, compare to that 30% benchmark for the sector as a whole?
And then just secondly, on the U. K. You made some comments, but just in terms of the U. K. Lending demand post the election for the 1st part of the year, Could you give us a flavor there what you're seeing, in particular, I guess, in the corporate and SME sectors?
Jacob, So regarding Swedish FFO's reforms, the expense increase, We when we estimate the impact of Basel IV, which is really difficult to do because we don't have the context of how FSA will implement this. They have made a quite technical calculation based on some assumptions as you know. But when we make our best assessment and make a conservative assessment where we the only things we do take out of the calculation is items that are typically only related to IRB methods. And then estimate that all the buffer requirements will continue to apply going forward. We still come to the conclusion that we have a level of capitalization, say, that is in line or could be required as a consequence of Basel IV in 2027.
But a lot of uncertainty around that, especially when it comes to the buffer requirement. It's easier, of course, to estimate the risk exposure amount calculation using the standardized methods. But it's the big question mark is the impact of requirements. Then when it comes to U. K.
And U. K. Growth potential, no specific comments on any sort of sectors that we have in mind where we see the sector growth. We just have to wait and see, I'd like to say. But I think when you look at I mean, the view we have on our U.
K. Operations is very positive. The signals we get from the business in the UK is that they have business opportunities, and they have been impacted in their activities by the very much internal work they have been accrued during 2019. That will continue to a certain extent in 2020 as well, but its situation will improve a bit. And then the uncertainty around Brexit is that's an unknown thing.
How that will end, of course, but that's where we are, I think. It's a hard thing to assess.
And just a follow-up on that. You haven't really opened up any new branches in the U. K. For quite a few quarters now. Does that in any way reflect your uncertainty around Brexit?
Or is this more digital and those kind of trends
driving this?
No. I would say that the number of branches in the UK is more and the reason why we stopped opening up so many new branches was that we did open many for during a certain period. And we felt that we reached a presence, local presence in coverage in the UK. That was enough. And we wanted to consolidate that situation.
Then we have been very occupied with subsidiarization and also AML process improvements during the last few years. And I and that has impacted the complete operation in the U. K, I would say. And during such a period, it hasn't been tempting to opening up new branches. I wouldn't exclude that we'll do it in the future because I mean the view we have on our U.
K. Operations is still the same. The underlying business potentially is still very good for us. So that's what we see still. And it's not a reflection of increased level of digitalization.
What we do in our U. K. Operations is to invest in IT support and systems and so on, So that will improve operating efficiency. And we'll continue to invest in the future as well to improve that even further. But it's not a reflection of the fact that we can go much faster without opening up new branch offices due to digitalization, I would say.
And the final question comes from the line of Andy Stimpson of Bank of America.
Just 2 on costs for me, please. Firstly, just a follow-up on Johan's question on the seasonality. I just want to check
whether we should assume
that the seasonality does reestablish itself for 2020 and onwards or not. And then the second one is just a clarification, if you'll forgive me. The cost guidance is for the exit run rate of costs at the end of 2020 to be €1,000,000,000 lower than the annualized level from the underlying 3Q level. And those are gross cost cut numbers, and then we all need to think about inflation on top. But then your Slide 10 does show that those costs should be lower in absolute terms as well.
And then we need to decide on whether we assume you make an octogonan payment up as well. Have I got all of those books correct? Thank you very much.
Thank you, Andy. Well, first of all, when it comes to cost seasonality,
I think
what we do is to keep a very high level of cost focus, and that helps. And there are certain reasons why you have this seasonality, but you want to keep it under control, of course. And I think that is as much as you can say because you never know exactly what will happen in Q4. But the intention is to keep it where it is and closer to where it has been also in the past. And regarding how to interpret the outcome of the structural changes we are making, yes, we are it's we are estimating we have defined an activity, a portfolio of things we are going through with.
And gradually, we will reduce spending, number of employees, number of customers, cut out some systems potentially and so on. And during 2020, the total amount that we have done will be SEK 1,000,000,000 meaning that when we enter into 2021, the cost level for that portfolio is SEK1 billion less than it is today. And so then, of course, on top of that, the net figure will be something different because we do have some in other parts of the business, we do have some cost inflation and also other things that move in a different direction. I hope that answers your questions.
Yes. Thank you very much.
Okay. Is that all? So thank you very much for attending. Bye.