Good afternoon, and warmly welcome to this call. With me today on this call, I have Karl Sverdrupull, our CFO and 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 our core customers and the core products and services, And we made the announcement of concentrating of our geographical presence outside our home markets to Luxembourg, New York and launched efforts to rationalize central units. The program is moving ahead according to plan. Today, we are delighted to present the 2nd 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 the bank, moving quickly from preferring physical meetings 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 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 €1,000,000,000 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. 2nd, we will strengthen our branches by adding further specialist competence locally and also a bigger mandate for credit granting, enforcing 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, And 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. So in effect, we improve the service to our clients and the degree of decentralization even though we reduce the number of branches.
Thirdly, the organization will change from the current structure with 5 regional banks into a new county based organization, which will dissolve bureaucratic structures and increase efficiency. The consequence will be a reduction from the current 380 to around 200 less, and around 1,000 employees are expected to become redundant. So in sum, the branch network will become smaller, but with increased quality and availability for the core customer, 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 €20,000,000,000 by end of 2020 on annualized basis. This number is excluding potential Oktogonen allocations and based on the current currency rates. And just to be clear, the target means that by the end of 2022, the run rate should be SEK 20,000,000,000 not the expected number for the full year of 2022.
This cost target includes the effects from previously announced initiatives as well as a step up in IT investment mentioned earlier. A restructuring reserve of around SEK 1,500,000,000 will be booked in Q4. The income effect of the initiatives is expected to be around minus €1,000,000,000 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.
And 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 I will with that, I will open up for questions.
Thank you. Our first question comes from the line of Antonio Reali 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. So the first one is on your cost target.
I mean, you're targeting a fixed cost base of SEK 20,000,000,000 in 2022 with an additional revenue headwind of €500,000,000 So €1,000,000,000 Cumulative. How do you come up with the revenue attrition assumptions? So what are you assuming in terms of home market customer loss, market share, product mix? And how much is coming from the international branch closure? And related to that, what is the phasing of the cost savings and revenue attrition, please?
So 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. And secondly, on the capital headwinds. So we've seen yesterday the announcements to move your UK business with credit assets from advanced to standard models. We've seen the orderly 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 sort of harmonizing capital levels across Europe. But how should we think about risk weighted asset inflation versus the large capital buffers you're still required to run with? I'm thinking of the sort of 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. So we cannot be extremely transparent on that one yet. Having said that, what we can say is that the negative effects of SEK1 1,000,000,000 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. And as Carina was alluding to, obviously, we this journey is an ambition to increase the emphasis on mortgage lending and asset management and also commercial real estate lending. So we believe that we should the bank's product mix will evolve positively out of this reorganization. And then to the capital side.
Yes. It's Lars here. Hi, Antonio. So yes, I mean 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 interpretations Sweden will do from the European banking package.
We don't know that yet. It seems that the proposal to the government or to the parliament will be somewhat delayed here. So it's not even sure that it will be formally implemented at year end as has been stated before. But having said that, regardless of timing, I think what we can expect is a new design of the Swedish capital framework once the banking package is introduced. And we don't know what that will look like.
But clearly, I think it's fair to think along the line that we will have a buffer setup, which probably more resembles the European one with a higher Pillar 1, but then a Pillar 2 required and a Pillar 2 guidance. But 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 1,000,000,000 of kroner, purely mathematically, the 14.0 percent requirement we had in Q2 is set to go down somewhat. But again, we have to wait and see the final requirement will be there.
Thank you.
And the next question comes from the line of Richard Heinze from Nordea Markets. Please go ahead.
Hi, Richard Schand here from Nordea Markets. Two questions from my side. Firstly, the restructuring provision in Q4 of SEK 1,500,000,000 Could you say anything about the split between the staff cost and provisions related to premises in that one? And secondly, the expected reduction of 1,000 FT feet feet feet feet feet feet feet feet feet feet feet Es in Sweden, is all of those related to 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, even. Sorry, Q4. The 1,000 FT feet feet feet feet feet feet feet feet feet feet feet feet feet Feet Feet there are some support functions as well within it. And 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.
And 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 the UK. Should we is the distribution model in other part of the business in other countries so different that you should not take similar actions also in other countries at some point because you would add 200 branches in the UK, but the size of the operations over there is a fraction of the Swedish ones.
So should we expect anything similar in other countries?
I think that, first of all, as Karina was saying when 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. And there could obviously be there are obviously some changes in the digital behaviors of the natives of the various home markets we have. So you shouldn't see this as a general recipe for the way we approach the for the way we approach the various home countries. And then having said that as well, in Sweden, we've had 5 regional banks.
In Norway, Denmark and Finland, we obviously and Netherlands, we obviously just have one head office. U. K. Have a few regional banks. So 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.
We are just talking about the Swedish operation as it is.
And the next question comes from the line of Jacob Kruse from Autonomous Research. Please go ahead.
Thank you. Can I ask first off on the UK business, the increased capital or the risk weight that you're exposed on a group level? If I look at the subsidiary count, you made about an 8.5% sorry, 12% ROE sorry, 8.5% ROE in the UK in 2019 with loan loss recoveries. So does this change your appetite for growth in that business? Does it change the strategic rationale for owning the UK?
That was my first question. My second question was just on the cost savings and the branch reductions, 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 Inspections decision obviously affects the ROE in over a short time period.
But 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%. And obviously, we will work with our U. K. Operation, but this effect of the Swedish Finance decision doesn't affect us that much.
Okay. And now 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. But 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.
So I think it's for most of them, it's quite logical. And when we talk about increasing even more make the branches decentralized, that is has been very positive and give them even more mandate and to do business the way they want to. So, so far, positive reactions, I would say.
Okay. Thank you. Can I just follow-up on the first question? If you're saying you could target a 5 fold increase in market share, I guess it's a 5 fold increase in capital. What are
Jacob, it's Lars here. I mean, 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. So just to clarify that.
But I mean, obviously, as Karl is saying, we work also with the U. K. Obviously, they've had some cost headwinds over the last few years for known reasons. I mean, the subsidiarization, etcetera, has given them a higher cost base, a higher cost income ratio. And of course, it's important that the U.
K. Operation can grow in a profitable way to add to ROE. And 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 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.
The €1,000,000,000 that we announced this morning is not covering that scope. So what we are doing gradually in the U. K. Is part of our ongoing IT development spend.
And the next question comes from the line of Robin Ronnen from Kepler Cheuvreux. Please go ahead.
Hi, good afternoon. So most of my questions have been asked, but to follow-up on the capital. So I guess since you made this subsidiarization of the UK business, you have been in dialogue with the different authorities, including Swedish, I would say. So have you did this come as a surprise for you that they retracted on the how you treat the UK business? Or is this something that you have been seeing coming?
And also on the dividend, so you announced today that you won't have an extramarital 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? Or I mean given that I think the bank has capacity to pay out this, what are your thoughts about the dividend in next year?
Yes. So hi, Robin. Maybe if I start on your first question and then Karl will take your question. But so I mean, basically, we never comment on the discussions we have with authorities in general. Now the Swedish FSA took this decision yesterday, and we obviously wanted to communicate that straight away.
I mean, in general, the FSAs of the world take a lot of these decisions. Most of them are have a very, very small impact. It could be some small changes in methodology, small changes in model. That is sort of part of the supervisory business. And now this decision had a different impact.
So but other than that, I won't comment on the discussions we have with the authorities.
And regarding the dividend, yes, obviously, the decision has been taken by the board now not to invite to 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. Then when it comes to what the Board will decide or the shareholder meeting actually will decide during the springtime, it's up to them. So we don't know that, and we will have to wait to see that. But we will be in a good situation, most likely, on a capital level.
Okay. Thank you very
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. And it sort of feels like you've done the sort of broader noncore markets. You've done Sweden now. And then I think in response to Ricardo's question, you mentioned you're still working your way through some of the other geographies.
Do you have a kind of a time line on that? I mean, are we talking a sort of 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?
Thanks. No, you're not likely to see anything in the coming weeks. But joking aside, but no, obviously, we constantly review our business, and we want to become an even more further focused bank. But it's not that we have outlined that we will come with new arrangements every year or so. So we will go through step by step and but no major issues coming as we see it.
Okay. So just to slightly rephrase that then, have you had a deep look at your UK business and Netherlands business yet?
Yes. We have had a deep look at it, and we're reviewing that constantly, yes.
Okay. Okay. Thanks.
And the next question comes from the line of Maria Samikasova from Citibank. Please go
ahead. Just a couple of questions. First of all, on Atagone contribution. Did 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? And second, just a clarifying question. You mentioned that the $1,000,000,000 revenue loss that you're expecting, this includes the previous measures that you announced last year. And I believe that you before mentioned around $500,000,000 revenue loss. So do I understand correctly that this new Swedish restructuring implies around NOK 500,000,000 loss of income according to your forecast?
Maria, let me start with the first one and then I hand over to Lars. Oktogonen, we the only change we will do is that we see that as variable salary now. So we will not the possible distribution, which is obviously a Board decision, will not be made to Doctor. Gonen. It will be made as cash payments to the employees.
But 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.
Yes. And hi, Marie. I'll go for the second one here on revenues. So in Q3 last year, we announced some measures, and we said revenues the revenue impact would be some SEK 500,000,000 and that was very much related to the geographical changes we did. And definitely, parts of that has already filtered through, you can say, in our P and L.
Now it's another additional, give or take, SEK 500,000,000. So building the total up to SEK 1,000,000,000 from 2019 till the end of 2022. And we will get back to, as we have said, with more details around where this comes from. But I think, I mean, much more importantly, back to Carina's initial speech, I mean, 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. So in that sense, the net impact should be clearly revenue enhancing.
But the SEK 500,000,000 is on top of the old SEK 500,000,000, 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 'nineteen, I believe it's 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. But given the nature of the business that we started winding down over the last year, quite a bit of that was rather short term in nature. So 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. So of course, the under revenues also drop aligned with that.
But we haven't given that follow-up on that number.
Okay. Thank you.
And the last question is a follow-up question from the line of Jacob Kruseff from Autonomous Research. Please go
ahead. Thank you. Just on your comments around the other side of the equation, the potential to reduce capital target. I can see the part where you have a
Yes. Again, Jacob. So no, I mean, as I said, part of the buffer requirements as they look today still in the Swedish framework are part of them are expressed as a percentage of risk weighted assets and part of them are expressed to the bank in absolute numbers. And if we assume that those numbers will not change just because we changed the model here, purely mathematically, means that when you increase risk weighted assets, that part of the ratio will drop somewhat. So that's more sort of mathematically.
But then, of course, when you think about it, I mean, we have now on group level from first to Jan, we have the standardized way of measuring the U. K. Volumes, which by nature gives a much higher risk weight density. So 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.
As there are no further questions, I'll hand it back to the speakers for closing
remarks. Okay. No further questions. So 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. And again, we will get back to you in Q3 with definitely more details coming through in the future.
So thank you very much.
Thank you. Thank you.