Good afternoon, warmly welcome to this call. With me today on this call, I have Carl Cederschiöld, our CFO, and Lars Höglund, Head of Investor Relations. Let me start off by taking a step back a year, when we announced the first major step in our journey to become a more focused bank with a clear aim to become more efficient with higher profitability. The key message was an increased focus on core customers and the core products and services. We made the announcement of concentrating of our geographical presence outside our home markets to Luxembourg and New York, and launched efforts to rationalize central units. The program is moving ahead according to plan. Today, we are delighted to present the second major step on our journey, this time by addressing the Swedish operations with the aim of becoming an even more relevant bank for our customers.
In the past years, the customer behaviors have changed dramatically when it comes to the choice of interaction channel with a bank, moving quickly from preferring physical meetings to overseeing the majority of bank issues digitally. The pandemic has increased digital awareness and made this transition even further pronounced. At the same time, the demand for high quality is increasing when customers have a physical interaction at the branches. For example, asset management, private banking, and corporate customers seeking advice, a speaking partner, and/or relationships with the decision-maker. That was also highly visible now recently during the outbreak of the pandemic, and our response has been highly appreciated by the customers. We have been around for 150 years. During these years, we have constantly adapted to our client needs. We will not move ahead, but rather adjust.
We believe we have reached a tipping point where the majority of everyday services is being handled over the app or web. Therefore, the bank has now decided on some actions in our Swedish operations. First, we will speed up the efforts on the digital side. Today, I would argue that we are at least on par with the peers on the digital side. However, in order to make sure that we also in the future have a state-of-the-art digital product offering and services, we have decided to speed up the digital development by targeting an additional SEK 1 billion of IT investments. These will be spread out until end of 2022 and comes on top of the current level of IT spending in the bank. This aims to provide a fully digitalized mortgage product, but also to significantly improve our digital offering when it comes to the entire saving business.
We will strengthen our branches by adding further specialist competence locally and also a bigger mandate for credit granting and reinforcing the decentralized model. This should, in many cases, increase the availability of our core customers to get access to decision-makers and the demanded services. There will, for example, be 5x as many meeting places for private banking customers. Specialists working with our corporate offering will, to an increasing degree, move from regional and central departments to the branches, i.e., closer to the customers. The credit mandates will also be increased in the branches. In effect, we improve the service to our clients and the degree of decentralization, even though we reduce the number of branches. The organization will change from the current structure with five regional banks into a new county-based organization, which will dissolve bureaucratic structures and increase efficiency.
The consequence will be a reduction of number of branches from the current 380 to around 200 less, and around 1,000 employees are expected to become redundant. In sum, the branch network will become smaller, but with increased quality and availability for the core customers demanding a closer physical relation. Plus, of course, the bank will become more cost-efficient. This will be done with the same true low-risk profile as always in Handelsbanken. This will never be jeopardized upon. Let me finish off with some comments on expected financial effects. We now provided a fixed cost target of SEK 20 billion by end of 2022 on annualized basis. This number is excluding potential Oktogonen allocations and based on the current currency rates.
Just to be clear, the target means that by the end of 2022, the run rate should be SEK 20 billion, not the expected number for the full- year of 2022. This cost target includes the effects from previously announced initiatives, as well as the step-up in IT investment mentioned earlier. A restructuring reserve of around SEK 1.5 billion will be booked in Q4. The income effect of the initiatives is expected to be around minus SEK 1 billion if you compare the run rate by end of 2022 to the full- year of 2019.
We will give more details here later. However, the aim for us is to strengthen our ambition in core business. Mortgage lending is one area with a very low cost to income ratio and proven track record of low credit losses, a good mix for increased profit growth. Asset management is another one where we have a very strong track record, which we will increase our ambition in. This area has attractive cost-income and very high ROA. All in all, this aims at increasing earnings growth, reduce the cost-income ratio, and improve the ROA for the bank. As always, we are continuously scrutinizing our operations to make sure that we develop along with customer demands and behaviors. I strongly believe that this second step announced today is a big step forward on our journey of becoming a more focused bank and a profitable bank in the future.
I will stop here, and with that, I will open up for questions.
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 Antonio Reale from Morgan Stanley. Please go ahead.
Hi, good afternoon. Antonio here from Morgan Stanley. Thanks for taking the time. I've got a couple of questions from my side. The first one is on your cost target. You're targeting a fixed cost base of SEK 20 billion in 2022 with an additional revenue headwind of SEK 500 million, SEK 1 billion cumulative. How do you come up with the revenue attrition assumptions? What are you assuming in terms of whole market customer loss, market share, product mix, and how much is coming from the international branch closure? Related to that, what is the phasing of the cost savings and revenue attrition, please? How much do you expect in 2020, 2021, and 2022? I'm asking that given that some of these measures were already announced in Q3 of last year. Secondly, on the capital headwinds.
We've seen yesterday the announcement to move your U.K. business risk-related assets from advanced to standard models. We've seen the RWA flow for Swedish mortgages being confirmed earlier today, and we're still awaiting the commercial real estate floor by year-end. I guess this all makes sense in the context of harmonizing capital levels across Europe. How should we think about risk-related inflation versus the large capital buffers you're still required to run with? I'm thinking of the 3% systemic risk buffers or the Pillar 2 buffers. Do you think there is scope for the FSA to provide banks with some relief there to at least partially offset some of this Pillar 1 inflation? Thank you.
Okay, thank you for that question. Let me start with addressing the income effects. First of all, we will be transparent with the components of the income effects by Q3. We cannot be extremely transparent on that one yet. Having said that, what we can say is that the negative effects of SEK 1 billion is including both the actions taken last fall, but also the actions taken at this time. They shouldn't be seen as a net estimate for the top line of the bank, obviously. As Carina was alluding to, obviously this journey is an ambition to increase the emphasis on mortgage lending and asset management and also commercial real estate lending. We believe that the bank's product mix will evolve positively out of this reorganization. To the capital side.
It's Lars here. Hi, Antonio. You're addressing a few things on the capital side that are clearly increasing the RWA, as you say, and I think on the Swedish capital framework in general, we simply have to wait and see what interpretation Sweden will do from the European banking package. We don't know that yet. It seems that the proposal to the parliament will be somewhat delayed here. It's not even sure that it will be formally implemented at year-end as has been stated before. Regardless of timing, I think what we can expect is a new design of the Swedish capital framework once the banking package is introduced. We don't know what that will look like.
Clearly, I think it's fair to think along the line that we will have a buffer set up which probably more resembles the European one with a higher Pillar 1, then a Pillar 2 Requirement and a Pillar 2 Guidance. Again, we have to wait for that. I think for Handelsbanken, specifically the news around U.K. yesterday, as we wrote in the press release, we don't know obviously what the capital requirement on these volumes will be. We can see purely mathematically that with increased risk-weighted assets and part of the buffer requirements being expressed in absolute SEK billions, purely mathematically the 14.0% requirement we had at Q2 is set to go down somewhat. Again, we have to wait and see what the final requirement will be there.
Thank you.
The next question comes from the line of Rickard Strand from Nordea Markets. Please go ahead.
Hi. Rickard Strand here from Nordea Markets. Two questions from my side. Firstly, the restructuring provision in Q4 of SEK 1.5 billion. Could you say anything about the split between the staff cost and the provisions related to premises in that one? Secondly, the expected reduction of 1,000 FTEs in Sweden. Is all of those related to the Swedish banking operation or is it also some share related to group functions? Those are the two questions. Thanks.
I will have to make you disappointed that we will not be transparent with the division until Q3, the provisioning split.
Q4, you mean?
Sorry, Q4. The 1,000 FTEs is related to Sweden, yes, and the majority will come from the branch network, but there are some support functions as well within it. As Carina was saying as well, cutting down the regional banks and moving to another organization obviously affects a lot of support functions as well.
Okay, thanks.
The next question comes from the line of Riccardo Rovere from Mediobanca. Please go ahead.
Good afternoon to everybody. Just a quick one. When the downsizing of the branch network is going to be completed in, let's say, a year time or a little bit more, Handelsbanken will find itself with basically the same branches in Sweden than in U.K. Is the distribution model in other parts of the business, in other countries so different that you should not take similar actions also in other countries at some point? You would add 200 branches in the U.K., but the size of the operations over there is a fraction of the Swedish ones. Should we expect anything similar in other countries?
I think that first of all, as Carina was saying in her speech, was that we obviously try to adjust to our client needs, and in that sense, this should be seen as a reflection of us adapting to their needs and wishes for the future. There are obviously some changes in the digital behaviors of the natives of the various home markets we have. You shouldn't see this as a general recipe for the way we approach the various home countries. Having said that as well, in Sweden, we've had five regional banks. In Norway, Denmark, and Finland, and Netherlands, we obviously just have one head office. U.K. have a few regional banks. We will step by step move through all of these different home markets and make the correct analysis of it and adapt to that one.
Okay. Very clear. Thank you very much.
We are just talking about the Swedish operation as it is.
The next question comes from the line of Jacob Kruse from Autonomous Research. Please go ahead.
Thank you. Could I ask first off on the U.K. business, the increase the capital or the risk weight that you're exposed on a group level. If I look at the subsidiary account, you made about 8.5% ROE in the U.K. in 2019 with loan loss recoveries. Does this change your appetite for growth in that business? Does it change the strategic rationale for owning the U.K.? That was my first question. My second question was just on the cost savings and the branch reduction. Have you had any reaction so far from branch management or other parties in the bank that were not informed prior to the announcement? Thank you.
Perhaps I can start and then you can add to me, Carina. Well, obviously, as you're saying, we've been around for 150 years, and over that time, we've been trying to be present to our clients and improve in the way they want us to. Obviously, as you're saying, yes, U.K., this effect of the Swedish Financial Supervisory Authority's decision obviously affects the ROE over a short time period. We still believe that we are in a good marketplace there. We have roughly 1% of the market share or a bit less, and we believe our potential market share there is 5%. Obviously we will work with our U.K. operation, this effect of the Swedish FSA decision doesn't affect us that much.
Just your question about any reactions from the branches. To be honest, yes, there has been quite a few. I think it's too early to say that the general reaction is either this or that. To be honest, it's quite positive actually, because the branches has definitely been living in this environment for quite some time, actually, and seen the changes in the customer behavior. I think for most of them, it's quite logical, and when we talk about increasing even more, make the branches decentralized.
has been very positive and give them even more mandate and to do business the way they want to. Far, positive reactions, I would say.
Okay, thank you. Could I just follow up on the first question? If you're saying you could target a fivefold increase in market share, I guess a fivefold increase in capital. What are the levers that you're pulling to make that not be ROE dilutive? Because surely you can't be deploying new capital at the sub average ROE.
Hi, Jacob, it's Lars here. We've talked about this 5% market share, not as a forecast, but more as an illustration to the huge potential we see in the U.K. market. Just to clarify that. Obviously, as Carl is saying, we work also with the U.K. Obviously, they've had some cost headwinds over the last few years for known reasons. The subsidiarization, et cetera, has given them a higher cost base, a higher cost-income ratio. Of course, it's important that the U.K. operation can grow in a profitable way to add to ROE. Again, what is needed and what we have talked about many times before is, for example, a more modern IT infrastructure in part of the business. Today in the U.K. branches, they spend a lot of time doing manual admin.
Not only because of IT, it's also a U.K. phenomenon, but clearly, gradual upgrading of the IT system in the U.K. will make the branches more efficient and thereby laying the ground for more profitable growth in the operation.
Okay, thank you. Just that IT investment is part of the SEK 1 billion that you're spending, or is that different?
The SEK 1 billion that we announced this morning is not covering that scope. What we are doing gradually in the U.K. is part of our ongoing IT development spend.
Okay, thank you.
The next question comes from the line of Robin Rane from Kepler Cheuvreux. Please go ahead.
Hi, and good afternoon. Most of my questions have been asked. To follow- up on the capital. I guess since you made this subsidiarization of the U.K. business, you have been in dialogue with the different authorities, including the Swedish FSA. Did this come as a surprise for you that they retracted on how you treat the U.K. business, or is this something that you have been seeing coming this? Also on the dividend, you announced today that you won't have an extraordinary shareholder meeting to discuss the dividend payout of 2019. Would you say that the intention of the board is to pay out this as soon as possible? Given that, I think the bank has capacity to pay out this, what are your thoughts about the dividend in next year?
Yeah. Hi, Robin. Maybe if I start on your first question, and then Carl will take your second question. Basically, we never comment on the discussions we have with authorities in general. The Swedish FSA took this decision yesterday, and we obviously wanted to communicate that straight away. In general, the FSAs of the world take a lot of these decisions. Most of them have a very, very small impact. Could be some small changes in methodology, small changes in model. That is part of the supervisory business. Now this decision had a different impact. Other than that, I won't comment on the discussions we have with the authorities.
Regarding the dividend, yes, obviously, the decision has been taken by the board now not to invite an extra shareholder meeting during the autumn. That means that we won't pay any dividend during 2020, and we will most likely try to pull back then the amount of, or the value of the dividend to the capital base during Q3. When it comes to what the board will decide or the shareholder meeting actually will decide during the springtime, it's up to them. We don't know that, and we will have to wait to see that. We will be in a good situation, most likely on a capital level.
Okay. Thank you very much.
Just as a reminder, if you do wish to ask a question, please press zero one on your telephone keypad now. The next question comes from the line of Chris Hartley from Redburn. Please go ahead.
Hi there, guys. Just got a sort of slightly broader question about the kind of ongoing strategic review that we're, I guess, a year into now. It sort of feels like you've done the broader non-core markets. You've done Sweden now. I think in response to Riccardo's question, you mentioned you're still working your way through some of the other geographies. Do you have a timeline on that? Are we talking a major geography per year here, or are we likely to hear about some of those, the U.K. or Netherlands, over the next few months or even weeks, say? Thanks.
No, you're not likely to see anything in the coming weeks. Joking aside. No, obviously, we constantly review our business, and we want to become an even more further focused bank. It's not that we have outlined that we will come with new arrangements every year or so. We will go through step- by- step, but no major issues coming as we see it.
Okay. To slightly rephrase that, then, have you had a deep look at your U.K. business and Netherlands business yet?
We have had a deep look at it, and we're reviewing that constantly. Yes.
Okay. Thanks.
The next question comes from the line of Maria Semikhatova from Citigroup. Please go ahead.
Hi, Handelsbanken. Thank you for your time. Just a couple of questions. First of all, on Oktogonen contribution, do I understand correctly that you won't be making contribution from now on? Maybe you can provide more details on the new compensation scheme. How many employees will be covered, or what could be the key performance metrics? Second, just a clarifying question. You mentioned that the SEK 1 billion revenue loss that you're expecting, this includes the previous measures that you announced last year, and I believe that you before mentioned around SEK 500 million revenue loss. Do I understand correctly that this new Swedish restructuring implies around SEK 500 million loss of income according to your forecast?
Hi, Maria. Let me start with the first one. Then I hand over to Lars. Oktogonen, the only change we will do is that we see that as variable salary now. The possible distribution, which is obviously a board decision, will not be made to the Oktogonen. It will be made as cash payments to the employees. Apart from that one, nothing has changed. We still have the same company targets, and we measure the possible contribution to Oktogonen in the same fashion.
Hi, Maria. I'll go for the second one here on revenue. In Q3 last year, we announced some measures, and we said the revenue impact would be some SEK 500 million, and that was very much related to the geographical changes we did. Definitely parts of that has already filtered through, you can say, in our P&L. Now it's another additional give or take SEK 500 million. Building the total up to SEK 1 billion from 2019 till the end of 2022. We will get back to you, as we have said, with more details around where this comes from. I think much more importantly, back to Carina's initial speech, the whole idea behind this initiative we are announcing today is, of course, to lay an even stronger foundation to do even more business in our core areas with our core customers.
In that sense, the net impact should be clearly revenue enhancing. The SEK 500 million is on top of the old SEK 500 million, so to speak.
I appreciate your comment. Just maybe a small clarifying question. Since you've disclosed actually how much of the cost savings you addressed already since the Q4 of 2019, I believe it's SEK 550. Is there a corresponding number for the revenue loss? You mentioned that the large part filtered through, but maybe you can give us a number.
No, we haven't given that number actually. Given the nature of the business that we started winding down already last year, quite a bit of that was rather short term in nature. Quite a bit of that dropped off. You saw, for example, already in Q4, we had some reduction in exposures in volumes in the bank related to that. Of course, then the revenues also drop in line with that. We haven't given that follow-up on that number.
Okay. Thank you.
The last question is a follow-up question from the line of Jacob Kruse from Autonomous Research. Please go ahead.
Thank you. Just on your comments around the other side of the equation, the potential to reduce capital charges. I can see the part where you have a two-and-a-half maturity factor, which I guess partly relates to U.K. exposure going away. What other areas do you realistically hope to see change as a result of moving quantities to the standard approach? Thank you.
Hi again, Jacob. As I said part of the buffer requirements as they look today still in the Swedish framework, part of them are expressed as a percentage of risk-weighted assets, and part of them are expressed to the bank in absolute numbers. If we assume that those numbers will not change just because we changed the model here, purely mathematically, it means that when you increase risk-weighted assets, that part of the ratio will drop somewhat. That's more mathematically. Of course, when you think about it, we have now on group level from January 1st, we have the standardized way of measuring the U.K. volumes, which by nature gives a much higher risk weight density.
Of course, the big question which we don't know at this stage, but the big question is what kind of capital requirement will be applied on those volumes with a higher risk weight density? Will it be the Swedish capital requirements or will it be something else? That's the biggest question mark, and we don't know that yet.
Okay. Thank you.
As there are no further questions, I'll hand it back to the speakers for closing remarks.
Okay. No further questions. Thank you very much for taking your time, and I hope that we have been able to give you a bit more flavor of the questions that you've had. Again, we will get back to you in Q3 with definitely more details coming through in the future. Thank you very much.
Thank you.
Thank you.