Good morning, everyone, and welcome to this conference call for the fourth quarter and full year of 2019. Joining me today are Lars Höglund, Head of Investor Relations, and Annika Engler, Head of Group Accounting. Slide number five, please. Before going deeper into the numbers, I'd like to go back and remind you about the changes we began talking about when our CEO started her job 10 months ago. The way forward that we presented last year means that Handelsbanken becomes more focused on our core customers and offering to that they demand. This will support the profitable growth with increased efficiency in Handelsbanken. This also means even lower risk and also a capital release on capital.
That in itself enables the continued growth with our core customers, but it also adds to the buffering in Q2020, when capital requirements in general for Swedish banks are on an increasing path again. All these measures enable us to increase efficiency in the bank, altogether, we expect to lower our underlying cost base by around SEK 1.5 billion during the next two years.
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%, was flat adjusted for currency. Volume growth slowed down a bit also during Q4, 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 rates 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 fourth quarter. 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 Sweden for mortgages, but less severe than earlier in the year. U.K. had a stable margin in the quarter. Fees and 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 we received in Q3. Costs were up by 3% when adjusting for currency and one-offs in Q3. I'll get back to that. Finally, credit losses dropped further to one basis point for the quarter and four basis points for the full year. Slide number 25 shows the Net Interest 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 1.5 billion. The net effects of margins and funding costs deduct around SEK 1 billion and just over half of that relates to Sweden.
When short rates moved up sharply at the end of 2018 to surplus zero in early 2019, that had a negative funding cost impact on the swap rates used in the covered bonds funding. We talked about this already in early 2019. 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. That is really not the sole reason behind the negative net effect here. All in all, net negative impact of margins and funding costs in Sweden were just over SEK 500 million in 2019. Our markets outside Sweden have suffered more from general margin pressure on mortgages during the year.
Net Interest 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 NTI. Finally, of course, state fees fell some SEK 600 million and for 2020 we expect another drop because of lower resolution fund fees as it moves from nine basis points to five basis points in 2020. As well as the fact that we don't pay that fee on the U.K. volumes from now on. Back to slide number 11. You can see our capital position that has had a strong development. The Common Equity Tier 1 ratio was 18.5%, which is up from 17.4% in the third quarter and 16.8% a year ago.
We estimate that the Swedish FSA requirement was 16.8% at the end of 2019, which means that we, at this point, have a buffer of 2.7 percentage points to the Swedish FSA requirement and that we are at 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, we clearly see that capital requirements are on an increasing path for Swedish banks again. The Swedish FSA proposal on risk-weight 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-weights for commercial property lending will come into effect in late 2020, which will reduce our buffer to requirement by some 40 basis points. Higher countercyclical buffers primarily in Denmark and U.K. at the end of 2020 will add 20 basis points to the requirements. 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 developments, 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. Against this background, the board has proposed a dividend of SEK 5.50 per share for 2019, which is unchanged compared to 2018.
On slide number eight, we take a look at the quarterly costs. As usual in the fourth quarter, there was a seasonal increase of costs also in 2019. When looking back to the years before 2017, the increase in the fourth quarter of 2019 was about SEK 100 million 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 third quarter did not impact the fourth quarter costs. I will get back to that. What we have seen is rather a large cost focus in the entire bank, together with other efficiency measures going on that we have talked about before. Slide number nine. Here we 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 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 billion, all else equal. 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 home markets, a somewhat more focused product offering, as well as internal efficiency improvements. As I said, we haven't yet seen the impact on cost during the fourth quarter. We have, however, during 2019, taken decisions and actions within these measures that will start to impact the cost base now in early 2020. All in all, these measures so far will contribute some SEK 200 million in annualized cost reduction.
We have started to deliver on the reduction that we have talked about. During the fourth quarter, we used a bit more than SEK 60 million of the restructuring reserve, which totals to more than SEK 900 million. Back to credit quality and credit losses on slide number 12. One basis point was the lowest level of credit losses that we have had since the third quarter of 2007.
For the full year of 2019, it was four basis points. 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. 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. This slide is also very clear in a longer perspective.
It shows a very stable credit quality over a longer period of time, also when we compare it with other banks in our area. Slide number 13, please. Many banks right now, not only Handelsbanken, show very low credit losses. Within the bigger picture, I think this slide is interesting. It is compiled from the EBA transparency exercise that was published in late 2019. It shows the share of problem loans in European banks.
The left chart is the entire European sample, Handelsbanken has the lowest share, which may be difficult to see here. The scale distorts things a bit. If we focus on systemic banks in the right chart, it is easier to see. You can take different views on where we are in the credit cycle currently, but once the credit markets become more challenging, the strong credit quality that we have gives us a very good starting point.
On to slide number 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 90 times. Then, of course, we have our buffers on top of that requirement. We do not only have the strongest asset quality as the baseline shows, we also have the highest capitalization to cover that asset quality. Back to slide number 16, please, where we show our development in the Swedish business sliced 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 presence locally, as well as in different other channels rather than by price. 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 net lender, and the trend in the fourth quarter was positive.
The share of new lending was still a bit lower than our back book 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 least by our younger customers. mutual fund savings up to price. We have received a higher share of net inflows than the back book throughout the decade.
In 2019 where we were the largest player in terms of net inflows, the share again being twice the size of the back book share. At the same time, our customers increased their savings on Handelsbanken accounts even more. We did increase the 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. 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. With the stronger focus we now deploy into our core customer needs, it bodes well for a continued good business development. Moving on to slide number 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%, which shows an efficient operation. The credit loss we had in Sweden is one isolated situation with really no read-across 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 in the branches even further. That means better tools and released time. The digitalization 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.
On slide number 18, we look at the other Nordic home markets. Norway also had good development with a cost-income ratio around 35%. We expect increased focus on advisory with banking and continuous digitalization 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 with customer satisfaction and good development.
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. Other lines of the fee business also did well. Our customer base means that we have good potential to further grow the fee business in Denmark, which obviously will help us handling the very low rates as long as they remain.
Finally, Finland where the 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, in our growth markets, the Netherlands and U.K.
We continue to grow in the Netherlands, which is clear from the numbers. Operating profit increased by 7% in 2019 to exactly 300 million SEK. It is a small operation still, but with great potential. U.K. had a weaker growth in 2019 for different reasons. At the same time, what they achieved 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 with 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 new progress in the credit portfolio underlying operating profits for the year still increased by 5%.
The slide also shows the massive increase in profits in the U.K. over the last decade, which of course has been driven by the steady business growth. This bodes well for the U.K. business and the potential for further growth. Finally, slide number 20. When we summarize 2019, we can see that we are on the right track, but we certainly have more 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 a foundation for a continued profitable growth. The interaction between our local decision-makers in the branches and an even higher ambition to improve simplicity and availability through the different tools will be key here. A strong focus on sustainability is helping our business and customer satisfaction already. We will gear up even further here.
We are entering into 2020 with high hopes for further stable growth with a 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. A strong capitalization and an excellent asset quality is a really good starting point into the new decade. With that, I conclude my presentation and open up for questions. Thank you.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero on your telephone keypad now. Our first question comes from the line of Chris Hartey from Redburn. Please go ahead, your line is open.
Hi there. Morning, everyone. I've got a quick question on the Swedish mortgage market, please. You repriced your mortgages before Christmas, actually, 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 women and men on the ground are in the branch finding that? Are they struggling to keep customers? Are they having to offer big discounts?
Because you hiked your prices before Christmas, do you think we should expect to see a bit of a benefit in your Q1 NII numbers off the back of that? Second question, just thinking about your non-core divestments from a capital perspective. Are you able to give us a feel for how far you are through that process and how much more that we might see in the future? Thanks.
Hi, Chris, thank you. Starting with the question about mortgages and the repricing we did in late Q4, it's really early days. This is something that will be taken care of in our branch office network, as you also referred to. 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 too. It's too early to really tell about the impact from that. The fact that we did increase rates before year-end also means that we do not have the negative impact as we had a year ago when we made a move in January instead of October. It's a positive impact because we have the positive impact earlier on, consequence of that.
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 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 capital efficient and so on. That work is ongoing, but I don't foresee any massive changes going forward. I think that is as far as I'd like to go on that topic.
Okay. Thanks very much.
Thank you.
Our next question comes from the line of Sofie Peterzens from JPMorgan. Please go ahead.
Yeah. Hi, here is Sofie from JPMorgan. I had a question on your development cost. With the third quarter earnings, you guided that you expect development costs of around SEK 2.1 billion-SEK 2.2 billion for 2019, these costs came in at SEK 1.9 billion, SEK 300 million lower than expected, or what you previously guided for. Could you just explain and give a little bit more detail, what drove this SEK 200 million-SEK 300 million lower cost in development costs?
My second question will be on Oktogonen and how should we think about the contribution to Oktogonen in 2020? My third question would be on the banking package in Sweden. What are your expectations? I know you mentioned that capital requirements are going up. Has there been any indication from the Swedish regulator on what the banking package actually includes? Thank you.
Hi, Sofie. Thank you. Regarding development cost, we had guided for 2.1-2.2, and we haven't changed that guidance during the year. It has been very stable. We came in a bit lower than that, than expected. No dramatic changes behind that, I might say, because the deviance was quite small. That's what is to it, I think. Going forward, expectation is that the cost level be at the same level also for 2020. That's where we are on that topic. Nothing dramatic in that, I think. When it comes to Oktogonen, I think the best way to put it is that the way it has also been described by our CEO when she has received questions on this topic. That's to the background you know about.
It's us coming to the conclusion that the development we have been on for some years, over the last two years, with cost increasing much more rapidly than income is not sustainable in the long run, and we need to get out of that situation. Now we think that we found ourselves in a place where we should be. We are not still where we want to be.
Meaning that, yes, we have changed things, partly due to increased cost focus. Also, some of the efficiency measures we have previously announced are feeding through. That has impacted cost development, both I would say in Q3 to a certain extent and also in Q4. Those figures have not been impacted by the structural changes we have announced. We have started the journey, but we are still not where we want to be.
We are in a much better position today than we were a couple of quarters back in time. We are, of course, closer to that point, but I don't want to make any forecast for 2020, and we simply have to wait and see how we perform. We also quite clear that we have not proposed to make a provision for Q4, obviously. Finally, on the banking package. No, we have not received any guidance from the Swedish FSA on how this is going to be implemented. As you know the big question mark is which buffer requirements they will actually implement, and that is unknown to us still. We think we have to wait and see what that will lead to. No further guidance.
What we do know is, of course, we have also described in the report the impact from the CRE exposures in some capital requirements for them both in Sweden and Norway, as well as the countercyclical capital requirements that will be added in late 2020.
Sjögren here. If I may add a few points on the MREL side of things there. I think if you look at what the National Debt Office is saying and disclosing on the BRRD package, they keep the view they had before. For now, we are assuming similar kind of issuance need in terms of senior non-preferred as before. No changes there as of now. Again, we still don't know the final outcome. That's the assumption we have now.
Okay. Thank you. Just a quick clarification. When you mention that development costs are going to be at the same level going forward, I assume you mean they're going to be around SEK 1.9 billion in 2020.
SEK 1.9 billion? No, they are SEK 2.1 billion, was the outcome for the full year of 2019.
Okay. They were SEK 2.1 billion.
Yeah. SEK 2,069 million.
Okay. I remembered over.
No, no.
Sofie, you're probably looking at a slide where we have allocated part of the development cost into AML. If you look in the table on page five in the report, you will see the exact development cost.
Okay. Good. That's clear.
Okay. Thank you.
The next question comes from the line of Johan von Platen from DNB. Please go ahead.
Thank you. Just a few quick questions. On the cost side, you highlighted the lower than historical seasonality. Is there anything structural happening there? Looking into the seasonal pattern for the next couple of years, should we assume the 150 or the 250 that you're alluding to was the runway pre-2018? That's the first question.
The second question is just in terms of your comments around growth and reallocating capital. You're taking out some higher risk density exposures. How do you think about reinvesting that capital? I guess if you take out things with a higher risk density and add it to your core business, you need to add a lot more volumes to 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?
Maybe the answer is we should expect lower volume growth going forward. That's the second question. The third is the clarification on the resolution fee. Have you guided to what the impact this year expects for next year? Because I guess there are some changes in the basis with the Swedish mortgage floors that might limit the impact a bit.
Thank you, Johan von Platen. To start with the cost and potential structural impact related to the increase in Q4 compared to previous years. There is no structural changes we have made. It's a strong cost focus, meaning that you follow all the costs all through the year, of course, closely and make sure that everything doesn't end up in Q4.
That's part of it. 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 the change. It's a consequence of increased cost focus, I would say, and following this really closely. When it comes to the question about growth and reallocation of capital and resources in that regard. It's true.
Some of the corporate exposures that leave us have a higher risk density, meaning high risk exposure amount and risk rates on average than the lending that we enter into the books. Then it means that we have to do much more lending in order to compensate for that. Well, that would be the case if return on margins was much higher on the lending that we will lose.
I wouldn't say that it is the case to a significant extent. Part of this exercise has also been about really going through exposures we have to make sure that we do target business that is profitable enough. That's part of the exercise. I don't see that risk. When it comes to potential for future growth, lending growth has been slowing down a bit, especially during the second half of 2019. Could that change?
Yeah, we've seen some signs of an improvement in Sweden, I'd say. I think you also have to consider the situation in the U.K., which could be 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.
There we see a change. That will, at some point during 2020, come to an end. That bodes well for growth opportunities. I also think that is the case for some other home markets as well, that growth has been quite slow due to structural impact. That might change. Especially in the U.K. and Sweden, it's not dramatic, but it's looking good.
Finally on the resolution fee. It will go to five basis points as mentioned also. That means that it will be reduced, and then we don't have to pay for our U.K. exposures anymore due to the subsidization. The impact from the U.K. not being part of that is approximately SEK 150 million. The best estimate we can make is, I would say somewhere around between SEK 700 million and SEK 800 million of impact. That is an uncertain figure because the resolution authority, Swedish National Debt Office. They do a risk estimation and compare banks, and it's impossible to know in advance exactly how that plays out. There's a lot of uncertainty on that topic.
Thank you.
Okay. Thank you.
The next question comes from the line of Martin Hilti from Goldman Sachs. Please go ahead.
Yes, good morning. Just a follow-up on capital. Obviously, the very strong print on capital this quarter with the Core Tier 1 ratio being up 100 basis points. I understand the comments made on the capital headwinds this year, so the 40, and 20 basis points headwinds you called out. I was just wondering, leaving the dividend unchanged, does essentially mean that you don't expect to have any kind of offsets to those regulatory capital headwinds you envisage that year or it is essentially a measure of prudence that there could be some elements maybe in some of the BV2 requirements also which could help you offset them? The other thing is, I was just wondering, in terms of these 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?
Thank you.
Hi, Martin Hilti. Regarding the decision about the dividend and potential offsetting effects, no, we don't foresee any specific offsetting effects. We are once again on a path with increasing capital requirements, the ones mentioned in the call is of course the most important ones, also the outcome potentially of the EBA exercise.
We have to rebuild our IRB models for the complete say, we don't expect that to lead to a significant increase in capital requirements, 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 switch, I have to say, that will potentially to some degree balance out.
Nevertheless, we are on an increasing path when it comes to capital requirements again. When we have made a decision and the proposals on the dividend, that is one important reason for that. We want to be on the capital dividend, 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.
Thank you very much.
Thank you.
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. First of all, I wanted to ask you on just on the capital requirement, just clarification, if I understood you correctly, 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, and then you're going to have another 20 basis increase in the capital requirement because of the countercyclical buffer. Just to be sure I understood it correctly. This is my first question. The second question I have is on NII. Out of the 25 basis point increase in uncertain in Sweden, do you think Handelsbanken will be able to retain part of that, or do you think competition will eat the whole 25 basis point hike?
When you state that you have used so far SEK 66 million of restructuring cost out of the SEK 920 you booked there, what part of that you think you should be able to use in 2020 out of the residual SEK 870? Another thing I wanted to ask is on the pension, sorry, on capital, you stated that pension assets and liability is contributed, if I remember correctly, 30 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 of rates instead of the one at the end of 2019? Thank you.
Thank you, Riccardo Rovere. Yes, you're completely correct. You understood completely correct when it comes to the impact of CRE regulations both in Sweden and Norway and the 20 basis points for countercyclical buffers in Denmark and the U.K. Related to that net pension assets and the 30 basis point impact. I won't comment on the impact of changes in interest rates since year-end.
It's correct that we had 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. The rest, of course, is the profit generation and some other changes we have commented in the report. Net interest income and the 25 basis points repo rate change, and us also feeding 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 some competition in this area and 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 kept.
It's too early to really tell to what extent we can keep it. Finally, regarding the restructuring reserve and the SEK 66 million we took in Q4 for that, what will happen in 2020, we don't want to make any forecasts about that. I think you can say that when you look at the actions we take, a good part of that will actually feed through during 2020.
What takes longer time to go through with is the closure of our international operations, because that is naturally something that takes a bit more time.
Okay. You stated that a good part of the residual SEK 870 should be somehow used in 2020, right?
I don't want to comment on that and make any forecast about that particular issue. I think also when you try to assess that, what you could keep in mind is that two-thirds of the complete package will be dealt with and handled during 2020. That gives you some guidance. You also have to consider that what takes longer time is the closure of international operations. That is, of course, likely when it comes to guiding.
All right. Okay. Thanks.
Thanks. Thank you.
I remind you that if you want to ask a question, you will have to press zero on the telephone keypad. Our next question comes from the line of Jacob Kruse from DNB. Go ahead, your line is open.
Hi. Thank you. Two questions. Firstly, the Swedish FSA commented on the Basel IV calculations by the EBA in late December. They had calculated this 30% increase to 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? 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 first 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? Thank you.
Hi, Jacob Kruse. Regarding Swedish FSA Basel IV and the 30% increase, when we estimate the impact of Basel IV, which is really difficult to do because we don't have the full picture of how FSA will implement this. They have made a quite technical calculation based on some assumptions, as you know. When we make our best assessment and make a conservative assessment where the only things we do take out of the calculation is items that are typically only related to IRB methods.
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 today that is in line with what would be required as a consequence of Basel IV in 2027. 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. The big question mark is the impact of requirements. When it comes to U.K. and U.K. growth potential, no specific comment on any small sectors that we have in mind where we see particular growth. We seem to have to wait and see, I'd like to say.
I think when you look at The view we have on our U.K. operations is very positive. The signals we get from the business in the U.K. is that they have business opportunities, and they have been impacted in their activities by the very much internal work they have been put through during 2019. That will continue to a certain extent in 2020 as well, but the situation will improve a bit.
The uncertainty around Brexit is an unknown thing, how that will end, of course. Yeah. That's where we are, I think. The hard step through SS.
Just a follow-up from 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 kinds of trends driving this?
No. I would say that the number of branches in the U.K. is more. The reason why we stopped opening up so many new branches was that we did open many during a certain period. We felt that we reached a local presence in coverage in the U.K. 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.
That has impacted the complete operation in the U.K., I would say. 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 the view we have on our U.K. operations is it's still the same. The underlying business potential is still very good for us. That's what we see still.
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. That will improve operating efficiency, and we'll continue to invest in the future as well to improve that even further. It's not a reflection of the fact that we can grow much faster without opening up new branch offices due to digitalization, I would say.
Okay. Thank you very much.
Thank you.
The final question comes from the line of Andy Stevenson from Bank of America. Please go ahead.
Morning, everyone. Thanks for taking my questions. Just two on costs from me, please. Firstly, just to follow up on Johan von Plate 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. The second one is just a clarification, if you'll forgive me.
The cost guidance for the exit run rate of costs at the end of 2020 to be SEK 1 billion lower than the annualized level from the underlying Q3 level. Those are gross cost cut numbers, we all need to think about inflation on top. Your slide 10 does show that those costs should be lower in absolute terms as well. We need to decide on whether we assume you make an occupancy payment as well.
Have I got all of those building blocks correct? Thank you very much.
Thank you, Andy Stevenson. 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. There are certain reasons why you have this seasonality, but you want to keep it under control, of course. I think that is as much as you can say, because you never know exactly what will happen in future.
The intention is to keep it where it is and closer to where it has been also in the past. Regarding how to interpret the outcome of the structured changes we are making. Yes, we have defined an activity, a portfolio of things we are going through with. Gradually, we will reduce spending, number of employees, number of customers, cut out some systems potentially, and so on.
During 2020 the total amount that we have done will be SEK 1 billion. Meaning that when we enter into 2021 the cost level for that portfolio is SEK 1 billion less than it is today. Of course, on top of that the next figure will be something different because we do have some other parts of the business we do have some cost inflation and also other things that move in a different direction. I hope that answered your questions.
Yes. Thank you very much.
Okay. Is that all? Thank you very much for attending. Bye-bye.