Good morning, everyone, and welcome to this conference call for the Q3 2019. Joining me today, I have Lars Hoglund, Head of Investor Relations and Annika Engler, Head of Group Accounting. Let's start on Slide number 5. Handelsbanken has for decades run a successful business based on local presence, long term relationships and strong local decision making power. This model is particularly well suited for customers, both private and corporate, with strong cash flows and that want to have a long term relationship with our bank.
Like the bank, these customers strive for a stable financial position over time and low risk. The corporate customers where this model works best are property companies, tenant owned associations and other owner managed companies, smaller and larger. The strategic review that we initiated earlier this year clearly tells us that this is where we shall focus our future efforts and make sure we provide an offering which is state of the art and complete for these customers. Here, we will deploy more resources and strengthen our position further. The review that has been carried out since Q2 covers 3 different areas.
That is our geographical presence outside of our home markets, the product offering and internal rationalization. As a consequence, we will concentrate our geographical offering to our 6 home markets, plus Luxembourg and New York. We are closing down the operations in Asia, and we also intend to do the same in Germany. Earlier, we have announced the closure of Poland and the Baltic countries. We will reduce the product offering, removing products and services that we deem not to support the core business and the core customers.
These measures will reduce complexity, reduce underlying costs and also reduce the need for future investments. This contributes to the rationalization of central units, the work that has already been initiated. All in all, we estimate that these actions will reduce the annual costs, all else equal, by approximately SEK 1,500,000,000. By year end 2020, we will be at a level that is SEK 1,000,000,000 lower on an annual basis and the rest, the reduction of the underlying costs, will come within another year so that we have a full impact in 2022. We estimate an income loss due to these changes of SEK 500,000,000.
The ambition is, however, that this will be countered by increased growth opportunities in our core areas. In order to facilitate this, a SEK 900,000,000 provision has been made in Q3. The reserve will be used for closing down operations outside of the home markets, other costs associated with the streamlining as well as redundancies in central units. We thereby create a bank which is in a good position to grow the business further and also to do it in a cost efficient manner, the way Handelsbanken should be. On to Slide 26 and the result for the quarter, which was up by 5% adjusted for currency effects and one offs.
Net interest income was largely unchanged. Volume growth continued to add net interest income as well as a day count effect, while the net effect from margins and funding costs was negative. The negative net effect was attributed to Sweden, while the other home markets showed a slight positive effect. There was a slight drop in the mortgage margin in Sweden, but the net negative of margins and funding costs, minus SEK 92,000,000, was not all attributed to mortgages. Some of it was due to somewhat lower margins in the corporate book, and a small part was also due to the issuance of the 1st senior non preferred bond we did during the quarter.
In general, we see the mortgage margin drop as undramatic, and we don't expect any big changes going forward. In general, we have continued to see lending growth in all our home markets. It's fair to say that growth has slowed down somewhat gradually this year, which is what we normally see in this late phase of the credit cycle. Fees and commissions increased by 1%. We saw a continued strong net inflow in the savings Net payments increased by 9%, partly explained by annual kickbacks from card companies.
Costs were down by 2% adjusted for currency effects and restructuring costs. Credit losses amounted to 3 basis points compared to the 7 basis points in Q2 and again largely explained by a single exposure in Sweden. Credit quality remained stable. On Slide 13, we can see the continued good development of business, again driven by the savings business. On to Slide 33, please.
The cost in the quarter, excluding reserves, decreased by 1.8%. This is encouraging, but I will not yet label this as a trend shift since costs tend to drop in Q3 seasonally. Last year was an exception though with flat costs in Q3. So at least we are back to a more normal development here. We have not yet, of course, seen any impact from the measures we have just announced.
As for the 1st 6 months, no allocation to Oktogonen was made. AML related costs continued to add to the overall cost picture and development cost decreased slightly. Please go to Slide 37, and let me summarize the cost situation where 2019 is the sum of the last four quarters. As I mentioned earlier, the measures we take will reduce the annual cost by SEK 1,500,000,000. To a large extent, this will be shown in other costs.
SEK 1,000,000,000 of that will materialize during 2020 so that we enter 2021 with a running cost level SEK 1,000,000,000 lower. In 2019, we are doubling the spending on AML, taking that to an expected level of SEK 1,200,000,000 for the full year. This is the cost related to financial crime prevention units on top of all the work carried out in the branches. We expect AML costs to remain at the same level next year. Development costs are also expected to be flat next year despite the fact that we have increased the business related development substantially this year.
In the UK, we have clearly established a higher cost level with the subsidiary. The big increase in fixed costs here is behind us, but we will continue to invest in the UK also to improve efficiency and, of course, expect the business growth that will continue, which is also true in the Netherlands. But all in all, I would say that the more focused and less complex bank enable us to achieve an improved cost efficiency and get back to positive jaws again within a not too distant future. Please go to Slide 36. This picture shows how our spending on IT development is split.
The shift I talked about in the previous quarter continues. The part of the development costs related to regulatory compliance decreases and the part associated to business development increases. This means that we have a greater flexibility in deciding the level of total development investments, and it becomes easier for us to send income development with the level of these investments. We reiterate our estimate that total development costs for 2019 will be SEK 2,100,000,000 to SEK 2,200,000,000, which means that a ramp up in Q4 can be expected since the cost year to date was SEK 1,500,000,000, which is unchanged compared to last year. On to Slide 7, please.
Here you can see that our capital situation is good with a CET1 ratio of 17.4%, which means that we are 1.7 percentage points above the estimated requirement from the FSA. We are thus within our target range. The FSA requirement has increased from 15.1% in Q2 to 15.7% in Q3, which mainly is explained by the increased countercyclical buffer requirements and an additional requirement in Pillar 2. Then we know that the capital requirements are still on an increasing path. Firstly, the countercyclical buffer requirements will increase again later this year and early next.
And then secondly, the regulators in both Sweden and Norway have flagged for higher capital requirements on commercial property lending. It is still too early to have a view on the effects from that. Lastly, we have some still unknown effects from the EBA technical standards that are to be implemented in 2022. When it comes to the Basel IV impact, it is still too early to assess since that will depend entirely on where the Swedish buffer requirements in a Basel IV context will end up. As always, the bank strives at having capital to assure compliance and the ability to grow, not least now when we are focusing stronger into our various core customer groups with even higher ambitions.
Please go to Slide 8. And let me elaborate about some of our core areas, starting with mortgages. Our Swedish market share is about 22%. Competition is fierce in this market. And even if we were the largest player in terms of net new lending, January to August 2019, it was lower than our back book.
As I mentioned, we have seen some margin pressure lately, but not dramatic. As we have said for a long time, margins go up and down. And having been stable for a long time, a slight drop was expected. We have strong ambitions in this market, and we will focus on being active in local markets, increase our visibility in different channels with our offering, to improve response time and to integrate mortgages in our advisory tools. Large part of the business development in Sweden is devoted to the mortgage product, which will improve efficiency in our branches and make it more user friendly for our customers.
We have experienced an increased demand for advisory meetings in the mortgage process, especially driven by young adults and first time buyers. Green mortgages will also be launched soon. Please go to Slide number 10. Our business model is very well appreciated by property companies and by other owner managed companies, smaller and larger. Here, we show the development of lending to these types of companies.
And as you can see, there has been a major trend also in Sweden with capital markets financing aside from bilateral lending. The growth has been strong this decade, both in the category of slightly smaller companies and certainly in property management companies. We will further build on our strong position in this segment regardless of how customers want to access funding. Needless to say, our markets operation is important in this respect, and we will provide a top class offering when it comes to related services, research, risk management, corporate finance, business, etcetera. Sustainability topics are also of highest importance to these customers, and we will incorporate that in our advisory services even further.
Within the property sector, the transition to sustainable buildings is, of course, a major trend that opens up a lot of opportunities. The next core area is savings. Please go to Slide 11. The strong inflow into our Swedish mutual funds continues. And during the 1st 9 months of 2019, our market share of net inflows was 23%.
We have consistently been above 20% in the past decade, which is actually also the market share we have in the Swedish mortgage markets. Occupational savings continues to improve. That savings product fits well into our advisory driven business model. Regarding corporate customers, often SMEs, our close relations are central. And today, we have both tools that are easy to use and good solutions at hand, both in the Internet bank and in the corporate app.
For private customers, it's also today much easier to get a good overview and the good pension advice, either locally, remotely or digitally on the web or in the app. Also outside Sweden, our savings business continues to perform well with net inflows of SEK 4,500,000,000 in the last 12 months. Another part of the savings offering is Private Banking. Please go to Slide 12. We see large potential to continue to strengthen our Private Banking offering in Sweden and elsewhere.
Again, this is an area that fits well in our business model. In the UK, we are considered to be a leading private bank even if we do not use that label. And the ambition is to steer the rest of the group in that direction as well. Please go to Slide 18. I will now dig into our 3 biggest home markets.
As you know, we have 6 home markets, and we are definitely very happy with all of them. Let's have a look at our biggest home market, Sweden. Starting here in 2010, we have seen income outgrowing costs, and the costincome ratio is well below 35%. Revenues outgrew cost also for the 1st 9 months this year. And as you can see, we are at a growth rate now, which is pretty much in line with the average growth rate this decade.
The core business areas that I talked about are relevant in all our home markets. But of course, Sweden is the market where we really claim that we are and should be leading in terms of market position aiming our core customer groups. In all other home markets, we are more or less a niche player but still focusing on the same customer groups. The branch network in Sweden is undergoing a major transition that we've talked about before to become fitted for customer meetings and advisory services. Please go to Slide 16.
Our operation in Norway is impressive, a healthy growth with income growth exceeding cost inflation. The costincome ratio is 33%, in line with operations in Sweden. The digitalization process has come long in Norway. In 2019, twothree of the new private customers are digitally onboarded. The mortgage process is highly digital.
We will shortly, as one of the first banks in Norway, launch a new dashboard for corporate customers, which will add a lot of functionality to the customers and enable branches to be even more proactive in their advice. This has created a lot of extra time at the branches, which is evident in efficiency measures. The private banking offering has also been improved, and we now have private banking expertise present in all Norwegian branches. Credit quality is good, and our credit losses were small even during the crisis in the oil and off shore industry. We are selective when choosing our customers as always.
Please go to Slide 22 and the U. K. The credit growth has been stable even if lending to households has leveled off due to strong competition from ring fenced local banks. Credit growth to corporates has also cooled down a bit, but was still up by 8% year on year. Operating profit in local currency adjusted for the one off last year increased by 3% during the 1st three quarters.
This was despite the building up of U. K. Headquarter and the large development cost taken in the AML area. I think this indicates the underlying strength of our U. K.
Business. But it also shows the future great potential in our U. K. Operations. When cost inflation normalizes, we have good starting points for continued growth.
Within our IT development scope, we will gradually ramp up investments in the U. K. To improve operating efficiency in the branch network. The most important starting point is already there, satisfied customers. Please go to Slide 5 again and let me summarize the presentation.
We have taken an important step towards becoming a more focused and less complex bank. We will increase our focus on our core areas customers. Our 3 initiatives: the review of our geographical presence outside of our home markets, review of our offering and internal rationalization are estimated to reduce annual cost by SEK 1,500,000,000, all else equal. Approximately SEK 1,000,000,000 of the reduction of the annual cost base will be in place at year end 2020 and the rest within another year. In order to facilitate this, SEK 900,000,000 provision has been made in Q3.
Our capital situation is good with the CET1 ratio of 17.4%, which is 1.7 percentage points above the estimated requirement from the FSA. This means that we are within our target range and that we are in a good position considering the increased capital requirements expected in 2020 the following years. With that, I conclude my presentation, and I now open up for questions. Thank you.
Thank you. Our first question comes from the line of Niklas Magrits from DNB. Please go ahead. Your line is open.
Thank you. So first a question on the cost savings. I was wondering if how we should think about the gross savings versus the net savings. Should we expect costs to be lower in absolute terms as well? Or do you expect underlying cost inflation to offset the gross cost savings of SEK 1,500,000,000?
Niklas. Okay. So the SEK 1,500,000,000 in reduced cost is all else equal. So that is a gross figure. We also state that SEK 1,000,000,000 will be the impact from the end of 2020.
So when we move into 2021, we have a lower cost level, all of that is equal, of €1,000,000,000 Of course, there might be some cost inflation limited ones, but that's also why we have been giving guidance regarding some of the major cost areas or the areas that have been driving costs during the last years to give you a better chance to forecast that. So meaning that, for instance, AML related cost is expected to be SEK 1,200,000,000 this year and at the same level next year. The same goes for development cost, which is estimated to end between €2,100,000,000 2,200,000,000 in 2019. We expect that to remain at the same level next year. And then finally, the cost buildup we have seen in U.
K. During the last years related to the subsidiarization and also AML related efforts in U. K. That is the buildup is now mainly behind us. Okay.
And then a follow-up on that. Could you give some further insight in where you expect the revenue loss to stem from? Let's identify that at EUR 500,000,000?
Yes. So when you look at what we have done, I mean, that consists of 3 different parts, the exercise and sort of the package we have now gone through. And the first one is the geographical presence outside of the home markets. And then it is a review of the product offering. And the majority of that expected income loss will actually stem from Handelsbanken International.
So that's the major part of it.
Okay. And then a question on the mortgage market. You write in the report that there's a potential for increased market share in Swedish mortgage lending over time. Should we interpret that as you see the potential for structural high market share than your 22% share of the stock? Or more that you see potential for a catch up towards your back book market share in terms of new lending?
So we don't want to make any forecast about or don't have any specified targets of a specific level. What we our line of thinking is that we are really strong in this market, and we have many of the tools at hand. And we this is also a very important market to us. It's not only because it's an important source of income in itself, it's also still in the Scandinavian area, a product that is also central to establish customer relationships and also to get other business. And that's why it's so important to us.
So but what we communicate and aim at is to improve our market share, not through price war, rather through using all the different tools we have at hand. So price is certainly important. It is. And we are relevant and have to be relevant price wise already. But we also can do that through increased activity and presence in different channels and so on, which I will cover
in the next direction. But when you refer to the increased market share, does that refer to the market share on the front book of the new lending or the back book or both?
Well, firstly, it is on new lending on the front book, of course. So that's the way to move the picture.
Okay. And then a final question from me. I was wondering if you could clarify your dividend goal or dividend ambition. I think in earlier annual reports, you've written that you have an ambition to or aim to increase ordinary dividend, but that phrase was taken out of the 2018 annual report. I wonder if there was any reason behind that or if you could clarify what is your ambition actually?
So our ambition is the same when it comes to assessing dividends and dividend potential. And of course, we start in the end that we want to be compliant and have a good safety margin and also to be able to grow. That's where we start. But I also think that it is important in these times of increasing capital requirements to keep that in mind. So it's against that backdrop as we make the assessment of dividends going forward.
But we haven't changed the policy in that regard, as I mentioned.
Okay. Thank you.
Thank you.
And the next question comes from the line of Johan Ekblom from UBS. Please go ahead.
Thank you. Can I just come back to the cost savings? And I guess the big thought there is, I think last time you announced a gross cost saving number, as far as I can recall, there wasn't really any follow-up kind of how the cost savings progressed over time. So how do you intend on report on the progress of these cost measures? And how can we kind of follow your delivery over time?
Hi, Johan. Thank you. Well, our intention is to be transparent about this. So what we have done now is to clearly define sort of a package or an action. And it is very detailed internally.
And what we intend to do is to be transparent about how that is progressing going forward so that you can follow what happens quite easily. And that's also I mean, if you look on Slide 37 in the pack, the SEK 1,500,000,000 I mean, that's the part of the bar that you would expect to start to diminish over time, and we are going to communicate about that. So you can follow what happens.
And I guess related to that, I mean, you're saying most of this is coming either in central functions or in Handelsbanken International. But at the same time, you're looking to mitigate the revenue headwinds through growth. How should we think about the cost income differential between the areas that are getting exited and the areas you're looking to grow? I mean is this a case of closing businesses with 100% cost income and growing at Swedish Banking type cost income ratio? Or how should we think about the differential there?
So we haven't sort of set the fixed threshold that will make sort of the distinction. But clearly, what we have been addressing now is the fact that we find ourselves in a time where it just has become more and more expensive to run banking operations in each country. And then you need to have a meaningful business to on top of that. So and that potential hasn't been there in many other countries outside of our home markets. So it and then, of course, that means that we the units we are now have decided now to and intend to close down have had even negative cost income ratios or quite poor ones.
But then when we make that assessment, so of course, that is something that is important. And over time, we intend to come back to positive jaws and to gradually improve cost income ratio and also return on equity. That's the intention, but we haven't specified a specific threshold. When we make that assessment, it's also important for us to understand the long term potential of the different businesses around and how they support what is our core business and core customer segments. So that would also sort of feed into the picture when we make that decision.
Thank you. And just finally, in terms of capital impact, I mean, should we expect any significant RWA reduction relating to these measures? Or is that kind of offset by growth elsewhere? And then I guess related to that, I think you kind of singled out what you view as core competences. And I guess some chunk of the large corporate business falls outside of that.
Is that an area where we should expect RWAs to shrink and maybe be reallocated elsewhere?
There will be a certain RWA impact from closing down the unexpected international countries in Asia. And also, if we follow through with the intention, of course, to do the same in Germany. So there will be an impact, but it is not huge. Regarding those corporate business, yes, it could also be a certain impact. And what we expect then is to continue to grow in the core segments we or core markets we have.
And the next question comes from the line of Sofia Petesen from JPMorgan. Please go ahead.
Yes. Hi. Yuri Stafia from JPMorgan. So I was wondering with the restructuring costs, you're now taking €900,000,000 of restructuring costs. Could you just confirm that this is it?
Or will we see additional restructuring costs going forward?
This is I mean, now we have defined exactly what we want to do, and this is the restructuring cost that is related to that. Of course, we will continue to improve the bank and to do more, but this is what we have in mind at this point when it comes to restructuring results.
So we shouldn't expect any additional restructuring costs over the next 2 years?
This is what we have at hand now and the intention we have today.
Okay. And in terms of the Oktogonen contribution, how should we think about that going forward? When what are the kind of or when do you think you will start to contribute again to
Oktogonen? So we can just conclude that we still haven't had the prerequisites for making an allocation to Oktogonen. And the thinking behind that, as I also have mentioned before, is that we have seen over the last years a trend where costs have been increasing faster than income. And we in order to create sustainable value creation, we have to sort of leave that track and get back on track again to put positive jaws. So we haven't we do not have the circumstances we want to see today.
And then we have to come back when we find ourselves in that position when we can make it.
Okay. And in terms of the EUR 1,000,000,000 AML costs that you're seeing this year, EUR 1,200,000,000, What do these relate to? Is it new IT systems? Or is it any investigations? Or could you just give a
It does not relate to any investigations. Having said that, we are always, as all banks, continuously being supervised by regulators in the countries where we are present. But what it is, is actually several different things. So first of all, it is about building infrastructure that supports management of financial crime related risks. So that is to build KYC systems, monitoring systems, etcetera, etcetera.
So that's one part of it. And then to a certain degree, it is also to go through and collect and digitally store also KYC information. And do you have to put this in context? Because I think it's quite fair to say that the rules have been the same in this area for some years, so it's not new. But it's also fair to say that regulatory expectations, not only in the Scandinavian area but also in other countries, has increased a lot.
So in reality, expectations are much higher. And that is what we are dealing with, and that's why we have increased spending so much. So it's a way of carrying out good risk management in this area.
Okay. And my final question would be net interest income in Finland. It was actually extremely strong, up 10% quarter on quarter. Does it include any one offs? And how should we think about that net interest income going forward?
Yes. That's a one off of SEK 9,000,000, but apart from that is business as usual.
Okay. Thank you.
And the next question comes from the line of Antonio Riel from Morgan Stanley. Please go ahead.
Hi, thank you. I've actually got 2 follow ups, 2 questions that have already been asked. The first one is on the Octagon comment you made earlier. Can we then tie any provisions going forward to October and to a return for the group to pause the operational, Jose? Is that the right understanding?
I actually don't want to make any forecasts about this. I mean Oktogonen is an important system to us, an incentive system. And we are, of course, looking forward to the day when we can make new allocations to that system again. But today, we don't have the prerequisites for doing that. And the reason behind it is the ones I have explained.
So that's the thinking we have. And now we have assessed that this is not the point to change the strategy we've had during this But that is as far as I'm ready to go at this point. But I think I've given you guidance to make conclusions out of that.
Sure. Thanks. And the second follow-up is really around the on capital. I'm just trying to understand what levers you may have to maintain capital levels that are well within the your management buffer going forward. I'm just thinking about some of the possible execution risks that inevitably may come with any restructuring plans and keen to hear how you're thinking about the trade off between growth and capital distribution going forward should you need to rebuild the capital?
Thank you.
I think we are within our target range, meaning that we have a certain degree of freedom to act, obviously, from the actions we have now are now taking. It will also mean to a certain degree that risk exposure amount could be impacted, meaning that we might reduce some exposures. But generally, we feel that we have a capital situation, which makes it possible for us to also continue to grow in the core areas where we are active. And we haven't sort of changed our view and ability in that regard. So I think we can manage that in a good way.
And also to we also have room to handle some increases in capital requirements going forward related to countercyclical buffer requirements and CRE exposures in Sweden and Norway.
Thank you.
And the next question comes from the line of Adrian Cighi from RBC. Please go ahead.
Hi, there. Two follow-up questions from my side, please. On NII and on costs. On NII, you mentioned the €92,000,000 headwind on margins in Sweden is split between mortgages, corporates and the senior non preferred issuance. Can you clarify how you see these maybe developing across the buckets in 2020, particularly as you need to ramp up the issuance of senior non preferred?
And then another one on NII, you have another quarter of liquidity portfolio impact, which is quite meaningful on a year on year basis at almost €300,000,000 Do you see this developing further into 2020 as well? And then on costs, thank you for providing the sort of 2020 budgets for AML and development costs, but should we consider this as an ongoing cost or base going forward? Or is this sort of a peak of a few years that is expected to go down? Or do you not have that sort of visibility? Thank you.
Thank you. So about the mortgage or NII impact of 90 2,000,000 Part of that was related to mortgages, so not all of it, as you mentioned. And I don't want to make any forecast going into 2020 about this, but I could reflect on the development we have seen over the last 2 years. And I what I can conclude is that there has been an underlying expectation about the margin decline in this market for a long time. And now when we had a small impact, it wasn't didn't come as a surprise.
I mean competition is also fierce in this market, but we are also relevant and are already pricing at the level where the market finds itself. And that's something you can see when you look at the average margins that we have and our peers have. So it has, at least in the past, been the case that even though there has been expectations about margin drops, that really happened that way at least. So you can't exclude the likelihood, but it has been more stable than maybe expected. And so I think you could combine that with the fact that we have quite intense competition when you make the assessment.
And I also think that the reason behind this is that price is certainly one of the important factors in this market, but it's not an only factor. There are also the services surrounding this and the capabilities that end market presence and activity also mean something to this. So I think that is what you should bring into the assessment. And then when it comes to the need for Xenon preferred issuance, well, yes, we issued the first bond in during Q3. We haven't still we still haven't received the Swedish proposal for Swedish legislation about this.
So the estimate we have this far is that we need to issue over the coming years SEK 90 1,000,000,000. But that could be reduced depending on the outcome in the proposed legislation. And then it could be a much lower volume. And we don't really need we don't really know that. So it's hard to assess.
But now we have taken the first step, and we have plenty of time to grow into this. So we have no rush in doing this. Then when it comes to the liquidity portfolio, I think I'll pass over to Lars Hoglund.
Yes. Hi. So the liquidity portfolio dropped, as you mentioned, I mean, it is primarily as a result of old bonds with high yields maturing. And but it's offsetting the NFT. So it's really you have to take a view on where the interest rate level is going to see what will happen going forward.
But again, on the bottom line, it's not an impact. It's offset by gains in the NFT.
Okay. Thank you.
And then finally, your question about the AML cost and how to think about that going forward. And what we have guided is that we expect the level to be the same as 2019 during 2020, but we don't go any further in time when giving guidance.
Thank you very much.
Thank you.
And the next question comes from the line of Riccardo Rovere from Mediobanca. Please go ahead.
Good morning to everybody and thanks for taking my question. Just a couple of follow ups from me too. First of all, again, is on the cost savings related to abandoning certain markets. Just to be 100% sure I understood it correctly, the €1,500,000,000 you're leaving Asia and Germany? And just before, does it repeat also the Baltic zone cancer that is in Poland?
This is my first follow-up. The second, again, to
get back on the one second on the
revenue associated with shutting down these businesses. I see that it is a comment from Bloomberg say, income is expected to decrease concurrently by SEK 6,000,000,000 to SEK 4,500,000,000 and they say once measures are carried out, does it mean these businesses were run with 150 percent cost to income ratio or the EUR 0,500,000,000 revenue that you could lose is a number of positive mitigating actions, mitigating factor. And then can we get back one second to the €90,000,000,000 second just mentioned regarding senior non preferred, is that fair to assume Office, including the Thanks.
Okay. Thank you, Riccardo. I will try to answer your questions. So regarding the cost savings of SEK 1,500,000,000, the part of it, which is approximately, I would say, 1 third is related to Handelsbank and international countries, and that does include also Poland and the Baltic countries and also the Asian countries and also Germany. And when it comes to the potential income loss, that mainly also stems from us leaving these countries.
And you could when you look at these countries and the income and cost levels we've had, you will realize that some of them have been loss making and cost income ratios have been really poor. But then the rest of the one the remaining $1,000,000,000 is not related to those countries and more related to some products that we will see supporting and also internal rationalization. So that the cost sorry, the income impact from that is less is much more limited. And then when it comes to senior nonpreferred, yes, what I was referring to the liability proportion principle, we don't know if that will apply or not until we have the proposal for Swedish legislation. And that impacts the need for senior nonpreferred issuance going forward.
So that is an uncertain element we have. The SEK 90,000,000,000 I mentioned, that is if you the amount we would face if we would if that principle would be kept, And then we have plenty of time to go into that. So it's nothing that we see as difficult or critical.
So the SEK 90,000,000,000 is with the liability proportion system principle, sorry. Plus, assuming that the whole MREL requirement has to be covered by with subordinated liabilities and excluding any senior allowance, correct?
Over time, yes, when it's being fully implemented, yes. That's the intention. But that is also where we have the uncertainty because we don't know and are not sure that, that will actually be the final outcome when the Swedish legislation is going to be passed.
And just to get back one second on this. When do you expect the TRRB to be incorporated in the Swedish legislation? Going to be 2020, you think?
It's last year again. So we expect to get some more clarity, first of all, in mid December this year regarding how to implement it. And then, of course, the legal process will take its time. So it's
too early to say exactly when it
will be implemented, but at least we will have, we believe, more clarity mid December this year.
Okay. Thanks a lot. Thanks a lot. Thank you. And the next question comes from
the line of Jacob Kruse from Autonomous. Please go ahead.
Hi, thank you. I had a couple of questions. First, on the restructuring program. So you say a third is this reduction of other units. And then you talk about stopping certain services that you consider noncore.
So would it be possible to just give a little bit more clarity on what kind of services that relates to? And then my second question on the restructuring area was just your underlying growth last the last 12 months that you gave, I think it's on Slide 35, was about 3.8% ex the AML and some currency, etcetera. So when I look 2 years out at your gross cost savings,
is that
3.8% underlying cost creep a starting point? Or is that too high? Should I look at inflation? Or how should I think about that underlying cost growth? And then I guess my last question, just on the capital side.
You are using now a 1.2% discount rate for your pension liabilities. SCB said 0.75 percent today. I think Swedbank was 1.06 Do you think you're going to have to cut this? And how do you think about that in the context of your capital build up going forward? Thank you.
Thank you, Jacob. Regarding the restructuring reserve and noncore services and what that might contain, we will not disclose any very specific details about exactly which services that we'll seize and taking out the offering or where we'll stop investing more in development and so on. So the way we want to approach this instead and to guide you is rather to start in the other end, which is actually to tell which customer groups that we want to service and the areas in which we will service them. And for these groups, we want to have a complete offering, so we want to develop a complete set of services that these customers want. But then outside of these customer groups, we do have other customers and services that they ask for that we will cease supporting.
But that is something we are going gradually to deal with and take care of in an orderly manner to treat the business and also our income in a good way. So we are not going to be very specific about that. And then when it comes to the underlying cost growth, and you referred to picture 35 in the pack. And there, you can see clearly that the cost increases we have seen well, first, you have an FX effect, of course, that impacts, which we can't do much about. But then it is also the financial crime prevention part, which is $142,000,000 So that's really a big chunk in this area.
And that change, you are not going to see next year because we are going we expect to be flattish on that kind of cost. And the same goes for development cost, which has been quite stable this period, but we expect it to in the past, it has been an important cost driver. And then we have also spoken about how to view our U. K. Operations and we the big cost increase part of their development when it comes to the head office buildup and also deal with Financial Crime Prevention Management, that is also, to a large extent, done.
I think that gives you sort of a good foundation for assessing our future cost inflation and what level you could expect it to end up with that. And then finally, on capital. Yes, we discount factor we use for discounting our pension liabilities and to value those is actually 1.4%. And when we do this, we have to we should do that based on the interest rate on high class corporate bonds. And in the past, we haven't had any denominated in SEK.
So we have used covered bonds, Swedish covered bonds, mainly in that index that we have in order to produce the discount curve. Now more bonds have been issued and some by really high quality companies in Sweden and also any denominated in SEK. And also that fulfill the requirements we have on liquidity. And when we then have added these to that index that we used to estimate this, we come to 1.4. And this has been reviewed by both, of course, our risk control and auditors and so on.
So I don't expect it to change method wise.
And the next question comes from the line of Richard Smith from KBW. Please go ahead.
Yes, morning. Most of mine have been answered, but just one very quick one. Just on given the amount of digitization work that you're undertaking at the moment, I wondered if you could just give us a sense of how we should think about intangible asset progression from here. It looks like sort of there was about another €100,000,000 to €200,000,000 increase quarter on quarter. Is that still a reasonable run rate for us think about going forward?
Thanks. Yes. That's the I think the best estimation is actually that we'll continue develop at approximately the same pace next year as we have been doing this year. We have also guided that the cost development cost level is expected to be flat compared to this year, also next year. And that gives you some guidance.
And then the level could vary a bit depending on which kinds of products we are running, but that's a fair assumption. Okay. Thanks very much. Thank you.
And the last question comes from the line of Chris Hartley from Redburn. Please go ahead.
Hi there, guys. Just a very quick last one. I was hoping to ask about the 1600 FTE efficiency savings that you talked about, sort of back end of last year, I think it was. Just want to double check that that is still additional to everything else that's going on. And also, do you think we'll sort of see any impact of that in those absolute expense numbers that we have on Slide 37?
Or is this more going to be kind of used up in slightly cheaper revenue growth? Thanks.
Hi, Chris. Yes, about the 1600, that is still so how to think about these two activities that are ongoing now is the 1600,000,000 that is about improving processes and sort of running the bank as it is. Measures we have announced today, that is structural activities, structural changes we are going through. And the overlap between the two is very limited. And regarding the 1600, that is going according to plan.
So it has delivered approximately during the last year since it started, approximately 400 FT feet feet feet feet feet feet feet feet feet feet feet feet feet feet Es in terms of time saved. And then a fair part of that has materialized in number of employees employed in the branch network in Sweden and the underground and even home markets in particular. But that has also been overshadowed by the fact we have recruited more people at the country level to build up the Financial Crime Prevention Management part of the business. So that sort of hides that impact. So that program and development is running according to plan and will continue to do so.
Great. Okay. Thanks.
And just one last question from the line of Robin Rhee from Kepler Cheuvreux. Please go ahead.
Yes. Hi, it's Robin from Kepler Cheuvreux. Thank you for taking the question. Just one last question. How do you think about negative household deposits in markets with negative rates in general and then in Denmark in particular?
And on that note, how large share of household deposits do you have that is larger than the about EUR 100,000 covered by the deposit guarantee scheme? Hi, Robin. So regarding negative rates on household deposits, we have no plans to introduce that at this point in Denmark. And now we have to wait and see how things develop, but we have no plans to do that in Denmark. Then when it comes to what falls outside of the positive guarantee scheme in Denmark, I will pass on to Lars Hedren.
Yes.
And that's a number we haven't disclosed at all. So I will pass on that completely.
All right.
Thank you very much. Okay. Thank you.
There are no further questions.
Okay. So if there is nothing else, then thank you very much for listening in. Bye bye.