Good morning everyone, welcome to this conference call for the first quarter 2019. Joining me today, I have Lars Höglund, Head of Investor Relations, Annika Engler, Head of Group Accounting. I want to start off with slide two, reiterations of some reflections and comments made recently by our new CEO. This picture illustrates that our business has some clear core areas, mortgages, property-related financing, and financing of SMEs, often family-owned, with or without property as collateral. We also have our asset management operation, including private banking. These businesses are run with a high efficiency, low risk, and high customer satisfaction, the relations are built and developed successfully in our branches. Apart from these core areas, there is, in the red part of the boxes, a much more complex business where we historically also have had high risk on our credit portfolio.
Customer satisfaction is also not standing out here. What our CEO expressed was an ambition that Handelsbanken should strive at becoming a more straightforward bank that should work towards becoming even better and more profitable in the businesses where we really have the preconditions for a very profitable growth. This also means that we will step away from businesses and hence products and services where the conditions are more challenging. What this will mean in practice, we will come back to later. Let's go to slide three and look at the numbers for the first quarter. When the Board has made a total assessment of the bank's performance in 2018, they have come to a conclusion and taken the discretionary decision that there will be no allocation to Oktogonen for 2018. The provisions done in 2018 have therefore been reversed in Q1.
The reversal of the SEK 827 million obviously affects the key numbers quite a bit. With that in mind, the operating profits increased by 18% to SEK 6.1 billion compared to last year. Adjusted for Oktogonen provisions, FX effects, as well as a positive one-off item last year relating to changed pension plans, the operating profit was more or less unchanged compared to last year. Net interest income increased by 5%, commissions by 2%, loan losses amounted to 5 basis points in Q1. During Q1, in particular towards the end of the quarter, the bank had a strong growth. We have had a total lending growth on quarter end basis that we have not seen for long. This is partly explained by a few short-term bridge financing deals, the underlying lending growth to corporates was also good.
The CET1 ratio amounted to 16.4%, which is 1.3 percentage points above the estimated FSA requirement at the end of the quarter and is within the target range of 1%-3% above the FSA requirement. Please go to slide five, which shows Q1 compared to Q4 2018. Net interest income increased by only 1% despite our strong volume growth, reduction of the resolution fund fee from January 1st, and the rate hike in Sweden in December last year. This is explained by the short lag between the matching of customer rates and funding costs. I'll get back to this later on in the presentation. Net fee and commission income fell by 4%, partly due to seasonality, also to the day count effects as Q1 had two days less than Q4.
Looking at the costs, we can see that adjusted for Oktogonen and currency effects, they dropped by 2% compared to Q4. There is an element of seasonality in the number, but one should also bear in mind the annual salary revision in most countries in January each year. For Q1 2019, no provision to Oktogonen has been made. Operating profit increased by 16%, but was more or less unchanged, adjusted for Oktogonen and one-off items also compared to last quarter. To slide and a closer look at the net interest income. Here we have split up the SEK 62 million increase in NII in the quarter into different parts. Firstly, business volumes increased and contributed with SEK 91 million to net interest income. The lowered resolution fund fee drove government fees down by SEK 135 million.
Two days less in Q1 reduced net interest income by SEK 75 million, and the weaker SEK currency increased net interest income by SEK 42 million. Out of the remaining SEK 131 million- NII effect, SEK 56 million is explained by the fact that the change in funding costs were temporarily larger than the positive impact from changed customer rates. This effect stems from the market-based funding, mainly covered bonds, where changed interest rates immediately impact funding costs. Three month STIBOR rates decreased during the late fall and then increased sharply in late December. At the same time, mortgage rates in Sweden were increased in January, that increase will gradually filter through also into Q2. There was a slight mismatch during Q1 that impacted NII.
Furthermore, the implementation of IFRS 16 led to a negative impact on the net interest income of SEK 18 million since we book interest expense on our commitments for rental contracts for properties. Please go to slide 26. On this picture, we have tried to illustrate the sequential net interest income drivers in even more detail and go back all the way to Q1 2017. It is clear that volume development is the key driver both for net interest income growth and NII stability. What you see to the far left in the blue bars is the sequential NII contribution from volume growth in home markets. The quarterly contribution has been rather stable around SEK 90 million- SEK 100 million per quarter and is a token of our successful and well-tested growth model.
The second part from the left, the one in red, shows the net of customer rates and the funding cost for the group. As we have mentioned earlier, the impact from this was -SEK 56 million in Q1. This part of net interest income is occasionally rather volatile in between quarters. One key explanation is the benchmark effect in our funding, which over time is more or less a zero-sum game. In terms of the positive development in 2017, it was partly driven by expensive legacy funding maturing. Due to a few years of very strong deposit inflows, there was a relatively low need to be as active as before in the funding markets. This turned around in 2018 when the bank became more active again in the funding markets.
As we have communicated in the past quarters, the bank chose to take a more conservative approach given the market volatility and extended the funding profile. This, combined with the fact that we pre-funded the EUR 1.5 billion Tier 2 bond that matured in the beginning of Q1 2019, led to a negative net interest income contribution in this bucket. The result of the liquidity portfolio. The result of the liquidity portfolio shows up both in the net interest income and the NFT lines, and the two parts usually offset each other. That was also the case in Q1 as the negative effect in the NII of SEK -33 million was more than compensated for in the NFT line.
When we look at the other parts stemming from day count, government fees, and currency effects, I don't think it's too much to comment on since you are all well aware of the dynamics, but there have obviously been some major moves lately. In the blue bar, you have the previously mentioned negative effect of SEK 18 million due to the implementation of IFRS 16. Finally, in terms of other NII effects, that is the sum of several small components not attributed to any of the other buckets. Please go back to page seven. As I've mentioned earlier, we have had a strong lending growth in the bank in Q1. On this slide, we illustrate this by showing the average lending volumes in the different home markets in local currency.
New customer inflow has been particularly strong in Sweden and the U.K., and the main growth comes in the corporate segment. Towards the end of the first quarter, we had some substantial increases in corporate volumes. Some of that was short-term bridge financing, so we don't expect a new level of growth to have been established. At the same time, the mortgage market growth in Sweden has slowed down a bit more in the first quarter. We have had a share of new lending somewhat below our market share, and competition remains high, especially in the big cities. Please go to slide eight. The net fee and commission income has shown a steady growth in the past years. As you see to the right in this graph, the main driver has been the asset management operation.
During the first quarter, the growth in asset management fees was somewhat lower year-on-year than we saw earlier. The main reason is a mixed change towards funds with lower fees. Also, the total volume of inflows in Swedish markets is somewhat lower compared to last year. Having said that, it is of course a business that we continue to focus on and want to develop further. Please continue to slide nine. Sweden is, of course, our biggest market in terms of asset management. When we look at the net inflows into mutual funds in Sweden, the trend seen over the past several years continues, with Handelsbanken taking roughly 23%-24% market share. Our digital advisory tool was developed further during fall with advice around pensions.
This has led to a substantial increase in the number of customer meetings dealing with pension and insurance advice, and we see that in our inflows too. Last year, we launched our digital savings guide, which has also been very well received by the customers. Already now, more than 10% of new savings in Swedish funds from the mobile app is generated through this new guide. Please turn to slide 10. On this slide, we see another very interesting explanation behind the strong development in net inflows. Our private banking operation in Sweden, which we perhaps have not made too big fuss about, has a model that is very appreciated by customers. It is run from a number of different locations in Sweden in connection to larger branches, and the customer inflow is strong. The statistics on this slide speak for itself.
The assets that customers entrust us are, of course, managed in different ways, not only in mutual funds, but also a fair share in discretionary asset management. In this field, we see strong potential for further development and growth. This is, of course, not only done in Sweden, but also in all our markets. In Norway, a private banking operation was initiated during 2018, and the start has been very promising. Please go to slide 12 and our growth markets. Here we illustrate the positive cost income jaws in U.K. and Netherlands. At the moment, the U.K. situation is a bit special due to the Brexit discussions. On the back of that, we are of course very happy to be where we are in the U.K. with our subsidiary up and running, very satisfied and good customers, and a position of strength to keep growing from.
In the U.K., costs connected to the subsidiarization work resulted in an unusually high cost growth last year. It is also worth noting that we continue to grow our income in the U.K. very well despite markets becoming tougher due to Brexit and fiercer competition, especially in the mortgage area. The fact that we can achieve this without opening new branches illustrates how well we can grow where we stand and through deepening our customer relationships. In the Netherlands, as you can see, the trend is even more positive. The acquisition of Optimix in 2016 boosted the income, and the bank continues to be very optimistic about the potential from deeper integration of Optimix with our branch operations. Please now go to slide 13. In the Q4 report, we stated that we expect the cost growth in 2019 to be meaningfully lower than the cost growth in 2018.
When comparing the costs in Q1 2019 with those in Q1 2018, they were up by just over 3%. Development costs are SEK 65 million lower. These costs are lumpy in nature and depending on several different ongoing development projects. In Q4, we told the market that our best assessment was for those costs to increase by around SEK 100 million- SEK 200 million for the full year of 2019 compared to 2018. That is still our expectation. In the U.K. and the Netherlands, the costs increased by SEK 47 million compared to Q4. We saw a fairly large increase, which to a large extent is related to staffing up in conjunction with the subsidiarization. One should not forget this is a growth area for us. As illustrated in the previous slide, we will also continue to invest in the U.K. in order to expand the cost income jaws.
Also in the U.K., our expectation is that the cost growth experienced last year will be lower this year. On to AML costs. This is a very important item not only for us, but obviously for all banks. Although these costs increased materially in 2018, we expect an increase also this year, but not as much as last year. Please go to slide 16. Today, the mortgage administration in our branches is fairly extensive and time-consuming, and customers are also to an increasing degree asking for more and easier digital tools for mortgage interaction with the bank. During the summer last year, we announced a plan to fully digitalize mortgage products over the coming years.
Since seven out of 10 customers, according to EPSI, still want a physical contact in conjunction with the mortgage, we will of course continue to be available physically close to the customers just like before. A full digital onboarding process is also planned to be available in the coming two years. We have come quite a bit in this process, and we are continuously rolling out improvements and features that not only facilitates and free up time for our employees, but also improve the digital services and tools for our customers. There is still some way to go until reaching the goal, but the project is running according to plan. On to slide 35, and let's talk about capital.
Earnings in Q1 contributed positively to the CET1 ratio by 0.6%, but due to the accounting rules, we deduct 66% in the form of anticipated dividends, which means a net contribution of earnings after anticipated dividends of 0.2%. In the quarter, we saw a very strong loan growth, as previously mentioned. Increased lending volumes had a negative effect on the CET1 ratio of 0.4%. 0.1% of this is explained by unusually high and temporary exposures to credit institutions. IFRS 16 led to an increase in risk exposure amount of 4 billion SEK, which had a negative impact on the CET1 ratio of 0.1%. Other parts such as currency effects, credit risk migration, and net effect of quality difference in in and outflows, as well as IAS 19 pension effects, were all neutral in the quarter.
The remaining effects were -0.1% in the quarter, which meant that the CET1 ratio dropped from 16.8% at the year-end to 16.4%. Back to slide 14. As you see to the left on this slide, we estimate the FSA requirement per Q1 to be 15.1% and the bank's CET1 ratio of 16.4%, which means that we are within our target range. The liquidity position remains strong. To summarize, the CEO has expressed a clear ambition that Handelsbanken should strive for becoming a more straightforward bank, a more profitable, focusing more on the businesses where we really have the preconditions for profitable growth. Q1 earnings included an Oktogonen reversal of the 2018 provisions, but adjusted for that earnings were stable. Net interest income increased by 1% compared to Q4, but was burdened by a lower net of margins and funding costs.
Part of these are likely to reverse going into Q2, all else equal. The bank continues to grow lending volumes in our home markets, as well as growing business in the asset management operation. Underlying costs increased by 3% compared to Q1 2018, which is well below the cost increase we saw in 2018. With a CET1 ratio of 16.4%, the bank is within its target range. With that, I conclude my presentation and open up for questions. Thank you.
Thank you. Ladies and gentlemen, if you have a question, please press zero one on your telephone keypad and you'll enter a queue. Our first question comes from the line of Chris Hartley from Redburn. Please go ahead.
Hi there. Yeah, it's Chris from Redburn. My first question was just thinking about the impact of price rises on your mortgage book. How are you finding translating list price rises into the prices actually paid by customers? If you've seen any changes in customer behavior, perhaps in terms of price sensitivity, increased churn, et cetera, and/or indeed any changes on the parts of your competitors. Second question was actually on Oktogonen. I appreciate the lack of payment in 2018 was a Board decision, but could you give us a little bit of color on why that's perhaps happened, please? Is there maybe a message being sent here to staff in terms of what reward worthy performance now looks like? If you've got any thoughts on how that might impact employee morale. Also, is there reasons for capping it in 2019?
I think you said SEK 850 million. Is that a permanent cap or something you're going to look at each year? Thanks.
Hi, Chris, and thank you for the questions. First of all, when it comes to the behavior of mortgage customers, I would say that competition has been fierce in this market for some time, as you know, and customers are active. I think that I can't say that the behavior has changed recently. It has been about the same for a long time, but the competition is there. If you look at some of the advertised average margins in the market, that is based on information which covers a very small part of the market. There is some volatility in that number. I wouldn't say that that represents a shift. When we now have increased rates as a consequence of the Swedish Central Bank hike in December, I think we cannot say that it has caused any change in consumer behavior.
When it comes to the Oktogonen decision made by our Board. I'd like to spend a bit on that to explain how it works. The bank has a corporate target, which is to have a higher return on equity than the average of our peers. That's the corporate goal. It also says that this should be achieved through having more satisfied customers than our competitors, and also through higher cost efficiency, low cost. Cost efficiency is a key element and a tool which we should use to reach this target. During the year, as you know, we normally make provisions for this based on the calculations we have and the development. In the end, a decision will be made by the Board, and that is being done when they can conclude the complete performance for the bank during the year.
That's a discrete decision the Board makes. This year's decision is based on the total assessment of the bank's development during 2018, taking into account also how we have been doing when it comes to cost efficiency and cost efficiency development. When we look at 2018, we had a situation where costs did increase by approximately 10% and income increased by 5%. That spending and the costs we had, we spent what we needed to, and there are good reasons behind that. When you make the total assessment, the conclusion is that the development was in the wrong direction. We have to improve our cost efficiency. That is the explanation to the decision. It's also important to underscore that the decision is a discrete decision made each year by the Board, and that is what happened. That's the explanation.
When it comes to morale, of course, the Oktogonen system, it remains in place. It's very important. It's a key part of our culture, the way the bank works. It is a very important component for the bank, and it will continue to be also going forward. When it comes to morale, I think it is quite clear to everybody that the cost efficiency development we've had in the bank during 2018 had a path that cannot continue. We will focus on changing that. Some of that work and the impact of that you have already seen, but we need to continue that work. I think in the long run, and that's also part of the system, that it's a really long-term system and a long-term approach to it, and that is something that everybody that works for the bank understands.
Regarding the SEK 850 million that you also mentioned, what it means is that for a very long time we've had a cap, it used to be related to the dividend. The problem with relating that to the dividend is that dividends increase as a consequence of the growth of the bank. Therefore, it has, over the years, been adjusted at several occasions. We have now changed that to instead decide about a level that represent the maximum potential allocation going forward.
Okay, excellent. Thank you. Can I just ask a tiny follow-up on the NII point? You mentioned, as we know, you've had an increase in funding costs in Q1, the benefit from increased product rates comes through the rest of the year. You couldn't be tempted to give us a sense of the shape and scale of that progress, could you?
Well, okay, I will try. I also think you have some slides that do shed some light on that. What it means is actually that we have a very short-term mismatch between funding and funding costs on the one hand side and on customer rates on the other side. What happened during, which I also said in my presentation, what happened in late 2018 was first a drop in short-term interest rates, then a sudden increase late in the year, in late December, which means that when the market-based funding we have, especially through covered bonds, that when we sort that down to three month money, we immediately have to pay the new high rate. We increased customer rates, that was something that was done in the whole Swedish market. That happened during January.
We have a quite large part of the lending we have in the mortgage area is three months oriented. 57% of the book is three month interest rates. Every month, a third of that portfolio will be actually rolled. That means that this impact is something that is significant, of course, during Q1, then it will remain to some degree, to a small degree, in the first month of the second quarter. We should be back to where we should be again.
Okay, lovely. Thank you very much.
Thank you.
The next question comes from the line of Matti Ahokas from Danske Bank. Please go ahead.
Yes. Good afternoon. I'd like to continue on the Oktogonen issue. Now that there seems to be this other variable, i.e., the cost side in this equation. If we assume that the cost growth in the coming quarters of the year is in line with the first quarter, should we expect that there will be an allocation to Oktogonen? I know it's difficult to state, but obviously this is a huge kind of variable in the cost equation, and it might be close to SEK 1 billion higher or lower than in the previous years. The second question is regarding the NII in Denmark and Norway, was down quite a lot. I guess the Norwegian NII is explained a bit by the NIBOR movements, but the Danish one was down quite a lot. Any light on that would be really appreciated. Thanks.
Thank you, Matti. Well, on the Oktogonen, what I think is important to underscore is that the cost side of things has not been added. It has always been an important part of how we define the corporate target. As I stated, it should be higher return on equity than our peers, and that should be reached through more satisfied customers and a higher degree of cost efficiency than our peers. When we look at 2018 alone, we can see that the development was not as we want it to be, and that's the reason behind the decision. The Board obviously make an assessment of the total performance when they make that decision. It is something that has been embedded in the system all the time.
It's not new, and I think that's important to underscore because this system is so important to us and how the bank works. It will remain when it comes to that. When it comes then to potential allocations further on this year. Well, yeah, if you look at the cost development in the first quarter compared to Q1 in 2018, obviously things are better because then we had a much higher cost increase than we have seen this quarter. Of course we have moved in the right direction. It's a bit too early to comment on. We have to wait and see. If we have reason related to our performance to make allocations and provisions then for Oktogonen, then we'll continue to do that, of course. This is at too early stage, I would say.
A comment on NII development in Denmark and Norway. The reason for the development in Denmark is related to margin pressure in the private side, I would say. That's something we see in some markets. We've seen it also consistently during 2018, that margins were declining slightly in the retail area. That goes for Denmark and the U.K. in particular, I would say. About the reason for the Norwegian change, I would pass over to Lars Höglund to see if you could shed some light.
It's basically similar picture as Denmark. It's margin pressure on the lending side in Norway, both on corporate and on household. Then of course in Norway you do have the lag impact. There have been announced rate hikes vis-à-vis the customer coming into effect in the second quarter, but they come with a lag, we haven't seen that in the first quarter yet. Margin pressure on the corporate and household side for lending in Norway.
Thank you. If I just may have a
Sorry, then of course, which goes for all markets, the day count effect if you look at quarter-on-quarter.
Is it possible that you would actually give an extra allocation on Oktogonen for Q1 2019 since it's apparently possible to take out? Is it possible to add on kind of retrospectively at the end of the year if the Board decides to do so?
I don't want to make any forecasts about that, honestly. We have just made a decision not to make another or a provision for Q1, that's where we are.
In theory, it's possible to reverse this in a year's time.
Of course, it is. This is based on the performance that a bank is doing. If that improves significantly, as in the past, that would also mean something to Oktogonen and provisions.
Great. Thanks.
The next question comes from the line of Johan Ekblom from UBS. Please go ahead.
Thank you. Just two questions. Can you comment a little bit about the growth in the U.K.? It's been decelerating for some time. To what extent is that the maturing of the network? To what extent is it concerns around Brexit? Is there anything else we kind of should read into that? Sorry to keep on coming back to Oktogonen, should we read into this that there is a discrepancy between what management thought was a reasonable allocation for last year and that the Board took a different view? If it's all about cost growth, why was an Oktogonen allocation made for 2017? I'm just trying to understand the decision-making process between management and the Board on a quarterly versus an annual basis.
Let's start with Hi, Johan, by the way, and thank you for the question. Regarding growth in the U.K. to begin with, what we have seen is, of course, that growth numbers have come down, and especially in the retail area. I think there is a mixed picture in a way, because the growth levels have been affected by the Brexit situation. I think that's fair to say. We see that as well. That is something that do impact lending demand. We have seen that, especially in the past, in the London area. That's one part of it. A second part of it is the very intense competition when it comes to retail mortgages. That also impacts. We can see that. That also impacts to some degree, or does impact growth numbers.
I also think that we feel that we do really have a good foundation for continued growth, and it's very easy for us to attract new customers, and we have a nice inflow. Business conditions are still good. I think that's sort of the broad picture. When it comes to Oktogonen again, why allocations during 2018? What we do is to look at the distance we have to the average of our peers, and that has been the basis for the calculations during 2018 of provisions for Oktogonen, and that is being done gradually during the year, quarter- by- quarter.
It has always been the case that a discrete decision is being made by the Board when they have the total picture and can take everything into account, including both how the bank has been doing, also how our peers have been doing and developing in different countries and so on. That is something that happens the following year. That is also what has happened now. When we made those allocations, or sorry, the provisions during 2018, we did it based on the facts we had then, with them we didn't have the full picture. We did when the year had finished, when we had all the numbers from all our peers and so on. With that in their hands, the Board has made a decision.
I don't see a split. Top management is fully behind this decision because we think it's really important that the bank remains cost-efficient. We are working hard to improve cost efficiency. As you know, we have been talking about that a lot in the past, with the efficiency programs and business development program we have. Now when we have added to that the increased focus on our key areas where we can really add something. That's the way we are going to deal with the situation. Certainly, we want to improve cost efficiency.
Just a final question on that. When we look at your performance relative to peers in terms of cost growth, should we be excluding all forms of profit share and variable comp?
I think I commented on this before in the previous question, but now we have made assessment for Q1, the future performance will actually decide what we do. I don't want to make any forecast. I think it's too early to do that.
Thank you.
Thank you.
The next question comes from the line of Riccardo Rovere from Mediobanca. Please go ahead.
Good morning to everybody. Three question, if I may. The first one relates to the increase in loan losses in Sweden, if there is anything you can say about that. I also noticed a fairly high increase in stage three loans at group level. In your commentary in your interim report, you say that the asset portfolio is stable. Just wondering whether you see any kind of deterioration in the portfolio, especially in Sweden, but across the group in total. The loan growth that we're seeing in this quarter has been particularly strong, and this has eroded a good part of the capital. Is what we have seen in Q1 something that you think can be replicated over the next few quarters for 2019? Sorry to get back one second to Oktogonen. I understand what is your position in 2019.
When we look at 2020 and 2021, let's say. How should we see this? Is it something that is going to, SEK 800 million, SEK 900 million that can appear and disappear any time? Is it something that in a theoretical world, in an ideal world, when the cost base, let's say, relax a little bit, is something that you want to pay? Is something you want to pay or something that you do not want to pay? Thanks.
Thank you, Riccardo. First of all, loan losses in Sweden, that is related to one single exposure, and that is also what explains the change in stage three loans. That is not something that represents a change in the credit quality in the portfolio as a whole. The credit portfolio and the quality of that is very strong, and it hasn't changed. When it comes to loan growth in the first quarter, what we have seen, I think it's also embedded in the report. When you look at the growth numbers and the average lending growth we've seen during Q1, volumes grew by, if you adjust for currency effects, by SEK 22 billion. That is approximately slightly below 1%. If you annualize it would be less than 4%. That is sort of the underlying growth level you can see.
On top of that, we had two things that contributed to lending growth and also had an impact on the CET1 ratio. The first part of that is a number of quite large lending transactions with corporate customers. What I think is important here is that a few of these are very temporary, and this is not a reflection in our mind of a changed level when it comes to lending increases in the corporate sector. Underlying credit growth in the corporate sector was the one I mentioned, more in the 4% area. We had these big deals that were temporary in character, at least a number of them. Secondly, we also had increased exposures against other credit institutions, and that's quite unusual, but it sometimes happens.
That is something that was also very temporary in nature and shouldn't be expected to be at a level. It's quite easy for you to see where we normally are. That was a temporary change. Finally back to Oktogonen. I think when it comes to 2020 and 2021, if the bank performs well and we are back on track, for sure we want to pay Oktogonen. That's the idea with the system, and that is really important. That has not changed. Our attitude to Oktogonen has not changed at all. It remains to have the same position in the bank as it did in the past, and that's also why we have also communicated how it's going to work going forward when it comes to the maximum amount and so on. No change in strategy when it comes to Oktogonen allocations going forward.
Okay. Thanks.
The next question comes from the line of Richard Smith from KBW. Please go ahead.
Good morning. Thank you for taking my question. I've just got two quick ones, please. Firstly, wondered if you could just give us an update on where you are in terms of your issuance plans for the year, particularly on the MREL side of things, and what your thinking is there at the moment. Then just, coming back to cost, just in terms of, it sounds like we've sort of done Oktogonen a fair amount here, but aside from Oktogonen in terms of phasing for the year, if you're looking at the AML investment continuing to increase year-on-year, it was up about sort of SEK 350 million last year, I think, and up another SEK 40 in the quarter. Just wondered how you thought that might progress for 2019 and how much you're planning to invest there, please. Thanks.
Thank you very much. About issuance of MREL instruments. We don't communicate exactly when we are going to issue an if and so on. What we have communicated in the past is that we see that we'll start issue in 2019. What remains a bit uncertain in the Swedish context is how the new CRD, the order, sorry, the banking package will be implemented into Swedish legislation and what that means to the MREL requirement for us. That is something we have to bear in mind. We don't know exactly how the proposal will be on the table in October. There is a bit of uncertainty in this regard. I think that is as far as I want to go now on that.
We are considering what to do and when to act, for sure we will, of course, in the future act, but we haven't decided. When it comes to cost related to AML, yes, you're right. We increased the spending, or rather the cost level, by SEK 348 million last year compared to 2017. We also expect that we'll increase spending on AML also in 2019, but not as much as we did in 2018. I think that's where we are.
Okay, great. Thank you.
Thank you.
The next question comes from the line of Jacob Kruse from Autonomous. Please go ahead.
Hi. Thank you. Jacob from Autonomous. I have two questions. One is on your convertible debt that is outstanding that converts, I think, between May and November. Are you expecting to see the staff convert that with Q2 and get that capital? Is it right that that's about SEK 100 million NII uplift for you, but then offset by the extra shares? Secondly, on the asset management side, the margin compression you talk about, is that just product switching or is there also margin compression on a like-for-like product-by-product basis? Thank you.
Hi, Jacob and thank you. Regarding the staff convertible, I don't know. It's up to the employees to start converting, so we can't really forecast that. What it means in terms of on NII effect is it is more or less a zero gain. When it comes to margin compression regarding mutual funds, that is related to switching. It's not margin compression. It's rather a sign of more people buying our multi-asset funds. That's the reason behind it.
Great. Okay. Thank you.
The next question comes from the line of Magnus Andersson from ABG. Please go ahead.
Yes. Hi. Just a follow-up on Oktogonen. Previously this was all very transparent, that if you were more profitable than the average of your peers and you did not lower the dividend, there was a provision to the staff. It was also the case that the incentives to the staff was aligned with that to shareholders through the links to the dividend sum and thereby to net profit. Now it's obviously the case that there is more of a Board decision on a discretionary basis and that the ROE requirement is a minimum requirement.
My question is on the dividend, since the maximum, the cap, the sum is no longer aligned to the dividend or the net profit actually in absolute terms, does it mean that you can lower the dividend and still pay out Oktogonen or does that still stand that the dividend has to be flat at worst for there to be an Oktogonen provision?
Hi, Magnus, and thank you. First of all, I think the system, as I stated before, the system remains as it has been in the past. What has been quite special for 2018 is that we had cost increases at a much higher speed than income did increase, even though we did spend on things we needed to. That is where we sort of ended the year, and that is the reason behind it. I think when you look back in history, that is a quite rare situation, actually. I would say that's the reason behind it. When it comes to relating the maximum amount to a fixed number instead of the dividend, technically it means yes.
Since we don't have that connection, it could technically mean that it would be possible to make an allocation even in a situation where we would lower the dividend. Technically, yes, but once again, that has always been the case. This is a discrete decision that is being made by the Board when they have the total performance assessment situation here.
Lars, here, if I may add, just to remind everyone, it's not the first time in history. It's always been a discretionary decision by the Board. In 2016, the Board also decided not to do any provisions to Oktogonen. It's not the first time in history.
It's the fourth time since 1973, so it's quite rare.
It is still a discretionary decision.
Yeah. Okay. Okay. Thank you.
Thank you.
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