Good morning everyone, welcome to this call for the Q3 . Together with me today, I have our CFO, Carl Cederschiöld, Head of IR, Lars Höglund, and Head of Accounting, Annika Lundberg. We have got some questions during the last few weeks, and also this morning, that I wanted to start off to address right away. Carl will highlight some of the financials for this strong quarter, and then we will leave quite a bit of room for your questions, where I'm sure Lars will jump in. If I start with one of the questions that we have received during the last couple of weeks is that, are we doing a major change away from branches and into digital now with the steps we take in Sweden? I would definitely start with answer No, that is not what we are doing.
We will have around 200 branches in Sweden, and they will be located in towns and communities where we see a good business and real demand for our customers to have a branch present, a branch that will provide qualified service and advice and with a meaningful decision power also. Today, for example, we have private banking in five locations in Sweden. This presence will be increased to more than 20 locations. We are improving the branches for those customers who need the branches. Credit responsibility will remain with the branch, even for loans that are granted in digital processes. More and more customers prefer to meet us through digital channels or through calls. Less and less visits to the branches for everyday matters. There is, however, a strong demand for a local presence with branches from customers when they have more qualified needs.
For example, when discussing your investments as a private individual or for the corporate customers who wants to meet the decision maker in the bank who really understand the local business. Again, no. The answer is definitely no. We are not moving away from branches. The branches is still our backbones of the business that we have in Handelsbanken. We will also develop our 24/7 customer service, which will also have a local touch with more advice and also credit granting abilities for those customers who prefer to meet us that way and not walk into a branch nearby. That is definitely the first question that I think comes in many different ways. Just to conclude that no, we are not moving away from the branches.
The second question that comes in is, are we putting a major revenue stream at risk when we concentrate our branch network? No, we don't expect any negative revenue impact from development of the branch network. We constantly look into branch network, and we've done that for quite some time. Already today, 85%-90% of the business volumes in the Swedish branch network sit with around 200 branches. We are talking about, for example, merging branch in the city of Visby into the bigger branch 600 meters away, which is easier to access for the customers and with the ability to keep more resources and capabilities. We are also talking about merging small branches in small villages into a larger branch in the nearest town. Many branches already today have very limited opening hours, and they share a branch manager with a larger branch.
Effectively, the customers already today are not using these branches. The transactions, which the most is in those branches, are handled digitally or through the customer service. Over the last five years, we have merged and closed almost 100 branches in Sweden. We are always adjusting our branch network and our offering in general to our customers after the customer's demand. The customer satisfaction gap has widened, and we have a strong business inflow, both in lending and asset management, in the same period. I think that what we are doing now is to do the same thing and to make sure that we don't leave any customer behind, and to make sure that we take care of them digitally through the 24/7 service and through the branches. The third question is, what will the digital speed up lead to in terms of digitalization?
We will spend some SEK 3 billion per year in 2021 and 2022 in IT development. That includes SEK 1 billion extra over the next two years. We start off from a very strong position. As I said, we have top customer satisfaction with our digital service already today, but we see customer demand moving quickly into having even more availability and even more services being provided digitally. For example, when it comes to mortgages. Our customer wants a bank that is proactive and that advise them depending on where they are in life. Of course, it will also benefit our internal efficiency. As I said already last year, that I wanted to speed up our digital journey, and this is clearly an important step in that development. It's a natural evolution and not a revolution as some people have phrased it.
It's really about making our offering easier available and even more accessible to enable the customer to interact seamlessly with us. Fourth, the last question that I will bring on the table is why are we doing this change in Sweden, and don't we address our other home markets? When I started off as a CEO 2019, I said that we will be reviewing the entire bank to see what we do and where. We needed, first of all, to get back to cost control. We are back at a good cost control now, as you've seen in this quarter. Now we have, regarding Sweden, outlined the direction. We have also decided to start preparing for potentially divesting our card acquisition business and Ecster to free up resources where they make more efficient use for our core customer.
We continue to review the bank and how to continue to develop ourselves. In Finland and Denmark, for example, they are already underway of doing similar changes to their branch network, as we will do in Sweden. With that said, I think that I'll hand over to you, Carl, and you will come back and address this also for the cost target we have set for the bank. With that, I will hand over to you, Carl.
Thank you, Carina. You've all seen the results, and I want to comment on a few selected topics and slide, and then we're happy to discuss all questions in detail in conjunction with the Q&A. To start off with net interest income, we saw an increase of 4% from Q2. As you can see on slide eight, the volume growth in household lending continues to be very strong. Our market share of net inflows was around 18% in July and August. Year to date, we've been the biggest player in the market, although still somewhat below our back book market share of 22%. This is a core product for the bank, and the ambition is to strengthen our position further in the market. As we mentioned in Q2, the corporate lending picked up during the turbulence of the spring was largely of temporary nature.
As funding markets has stabilized in the past month, these short-term loans have been repaid by the corporates. Hence, the overall lending to the public is down in the quarter and contributing slightly negative to the NII. If you jump all the way to slide 41, you see all the other quarter-on-quarter drivers on the NII. What's worth highlighting on this slide is the bounce back of the net effect of funding and margins in Q3 after the drop in Q2. Again, the development is very much in line with our guidance in Q2 that about 2/3 of the negative funding impact seen in Q2 should reverse in the H2 of the year as very expensive short-term issuance done in April matured. The bulk of this reversal came in Q3 as expected.
If we move over to the fee and commission, nearly 60% is generated from savings commission. As you can see on slide 16, the savings-related commissions reached all-time high in the wake of the rebound on stock markets and strong inflows. We have captured 30% of the net inflows in the Swedish mutual fund market. Year to date, the net inflows has been SEK 16 billion compared to net outflows in the market of eight. Compared to the first nine months in 2019, the net inflows in the bank were nearly 40% higher. As you know, this is a core area for the bank, and our ambition is to continue to strengthen our position even more. We will dedicate development resources to make sure that our savings offering and solutions will continue to attract inflows far above our back book market share of only 12%.
In terms of the other fee and commissions, we saw that payment fees came back a bit from the drop in the Q2 . Overall, the fee and commissions grew 6% compared to the Q2 . Let's move on to costs and slide 11, which shows the quarterly development. I think it's very fair to say that the cost development is under control. Compared to the Q3 last year, the cost in Q3 this year is down 2% adjusted for one-offs. As you can see on slide 12, the 12-month run rate in cost have dropped in two consecutive quarters, which means that the annual growth rate is quickly approaching negative territory. This is a result of a few things.
First, as you can see on slide 13, we are now starting to harvest the effects from the initiatives communicated last years of becoming a more focused bank. A cost decrease amounting to SEK 690 million has so far been agreed upon an annualized cost savings of around SEK 400 million are present in Q3 figures, i.e., costs in the Q3 are SEK 100 million less compared to if the initiatives wouldn't have been launched. If we move to slide 30, three, zero. After our announcement a month ago, we naturally received quite a few questions for more details on our cost target. That is an obvious demand when setting a target to reduce cost by SEK 3.3 billion or 15%, including an underlying cost inflation of 2% in the assessment.
In terms of step one, which related to the initiatives communicated last fall, we have yet to exercise a bit more than SEK 1 billion of annualized cost savings. As mentioned before, the progress is running according to plan. Step two, which was announced a month ago, relates to a number of things. First, the effects from concentrating our branch network in Sweden. This will entail some obvious cost savings from staff redundancies and improve the efficiency in the administration. Second, the bank has come to the conclusion to offer merchant services, including Ecster, which is a subsidiary in the consumer finance and checkout solution space, in cooperation with partners rather than producing it internally. The work to evaluate the best strategic choice is in progress, and we will communicate further development as soon as possible.
All in all, we assess that the second step of becoming more focused should lower the cost base by around SEK 1.5 billion. During 2021 and 2022, we will strengthen our efforts in other areas, such as an improved 24/7 client support service, and we will see elevated IT investments by in total SEK 1 billion. Finally, the residual will be met by inferring cost caps in the organization, including all of our home markets. This is done to deal with the underlying cost inflation and other needs that may come up. This will create a continuous focus on development, improvement, and efficiency throughout our organization in order to have investments met by efficiency-creating actions. When announcing step two, we stated that the total income effect by step one and two initiatives is expected to be around SEK 1 billion negative on an annualized basis.
Important to note here, as Carina was alluding to, which you can see on slide 27, is that during the last four years, we have closed 100 branches. During this time, our Swedish lending volume has increased by 4% yearly. Total income has increased by 10%, and our client satisfaction rate has increased in relation to our peers. One of the reasons for this is most likely that around 200 branches in Sweden represent some 85%-90% of business volume. As a cost-conservative bank, it is of utmost importance to invest in our clients' preferred meeting places and remember that 99% of the interactions take place over the web or mobile app. Furthermore, as we illustrate on slide 26, merging branches will, in many cases, have an insignificant effect for customers.
For instance, the distance between the branch we will close in the central part of Visby on Gotland and the nearby branch we will keep is only 500 meters or six minutes walking distance. We will keep on being there for our clients. It might be a branch slightly more distance, but with improved capability, credit mandate, and access, or via improved web or mobile services, as most clients prefer today. In case the branch nor the web or app is the perfect choice, we are no longer away than a phone call. The anticipated negative income effect of SEK 1 billion will come from the non-core offerings we move away from and the non-core clients or exposures we offload. The figure is an aggregate number based on the actions we initiated last fall, plus the initiatives we are initiating now.
Moving on to credit losses, which were SEK 49 million in the Q3 . Just like in the Q2 , the credit loss ratio was zero basis points. As we have been highlighting throughout the pandemic, we see very low correlation between COVID-19 and our bank's asset quality. On slide 23, you see that the amount of Stage 3 provisions remain at very low levels, leading to SEK 28 million on credit losses. Updated macro assumptions led to a positive effect of SEK 40 million as the macro outlook has improved since Q2 . We have updated our stress overlay by including even more exposures and increase in the stress weightings. Partly offsetting this was a slight change in the portfolio mix with better quality in the exposures compared to the exposures leaving the bank.
All in all, the new provisions for Stage 1 and 2 exposures summed up to SEK 52 million in the Q3 . Write-offs and recoveries accumulated to a positive effect of SEK 31 million. Many market participants struggle understanding how a bank like ours can post negligible or insignificant credit losses in an unprecedented crisis. I would try to provide some thoughts on that. First of all, a bank's asset quality is never better than our clients'. At Slide 22, we highlight the lending mix of the Nordic large cap banks. Handelsbanken has always preferred secured lending with a conservative loan-to-value level. As you can see, the share of lending that is mortgage or property related is significantly higher vis-à-vis our peers. To a very high degree, we hold collateral against this exposure. We believe this picture is a big part of the explanation for the historically lower credit losses.
The more conservative portfolio mix leads to significantly lower volumes in Stage 3 loans versus our peers. When we compare the reserve ratio of Stage 3 loans to local peers, our reserve ratio is roughly in line, even though this, of course, varies depending on the nature of the credits and collateralization. With significantly lower volumes and similar reserve ratios, the outcome is lower amount of Stage 3 provisions in absolute terms. Moving on to COVID-19 overlay, we believe there is a clear correlation between the relative Stage 1 and 2 ECL provisioning and the proportion of exposed sectors in the portfolio, as well as the share of collateralized lending. This should also hold true for the macro stress. Having a business model focused on collateralized lending with low LTVs to clients with strong cash flows, our belief is that our decisive risk factor is idiosyncratic rather than macro development.
To summarize, we believe that we have taken a very conservative view in our stressing and overlay exercise of the portfolio. Let me finish off on capital. Please go to slide 45. The CET1 ratio increased to 19.4 from 18.7, with no major surprises behind the quarterly development. The 19.4 CET1 ratio puts us 5.4 percentage points above the SREP and well above the upper end of our target range, which is 15%-17%. Worth underlining is that the 19.4 does not include the previous dividend proposal for 2019 earnings of SEK 5.5 per share. If including the dividend, our CET1 ratio would be roughly 150 basis points higher. Looking forward into 2021, we foresee some changes. First, the implementation of the European banking package will be introduced in Sweden.
The FSA has guided for a reduction of the SREP for Handelsbanken by around 50 basis points when this is implemented, and that's including the effects of the forthcoming risk weight floor on commercial real estate. Second, commercial real estate floor will be implemented on our Norwegian exposures. This is expected to lower our gap to the SREP by around 30 basis points. Third, as announced a month ago, the risk weights for UK exposures on group level will be calculated based on standardized approach from January 2021 compared to IRB today. This will increase the risk exposure assets by around SEK 65 billion, all else equal. However, the impact on the SREP from this risk exposure change remains unknown. We will get more clarity from the FSA in the coming month.
All in all, adding all of the above mentioned factors into consideration, we are most likely about 2.5 percentage points above our upper target range. That is a very strong and envious capital position. Since you're likely to ask about dividends, let me say that I am not going to front run this decision. The board will recommend the AGM a suggestion for dividend proposal in February based on an overall assessment. To sum up, recovery in net interest income as expected and communicated in the second quarter. Strong commission income development driven by all-time high savings-related commissions. Costs under control with cost growth dropping quickly. Strong commitment to the cost target of SEK 20 billion by end of 2022. Very low credit losses despite significant COVID overlay. Strong capital position far above the long-term target range.
Last but not least, I'd like to stress the financial development we foresee in becoming a more focused bank. We will increase emphasis on growing lending business to our core customers. This income line carries a low cost-to-income ratio, especially in mortgages, while ROE is above the current Handelsbanken average. This is even though our internal credit losses merit much lower risk weights than the floor stipulate. At the same time, we put a lot focus in growing our savings offering and asset management business. These income lines come with a very high ROE. These growth efforts, together with our cost target, aims at improving earnings growth, cost-to-income ratio, and return on equity. Hopefully, this will take us a good step forward in reversing the unfortunate development of the previous year when cost has outpaced income growth. With that, please, I open up for Q&A. Thank you.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad and you enter a queue. Our first question comes from the line of Chris Hartley from Redburn. Please go ahead.
First of all, could I just ask about the SEK 1 billion of revenue attrition that you talk about? If I remember right, that's compared to the 2019 revenue levels, isn't it? Are you able to tell us how much of that has materialized this year, perhaps what the phasing of that might be going forward? Secondly, on NII, you've mentioned that the bulk of the Q2 negative one-offs have come back. Is it fair to say that Q3 is a good base number going forward? Any comments you might have on the underlying margin situation or competitive environment in Sweden, and particularly mortgages, would be very helpful. Thank you. Finally, just maybe you could talk about the outlook for your U.K. business. You've been struggling to improve profitability there for a couple of years now.
I haven't really heard any major strategic announcements about that business. What are your plans to turn that one around? Thanks.
Thank you. Let me start off, and then Lars and Carina can fill in. First of all, on the negative SEK 1 billion in income attrition then. Yes, this SEK 1 billion includes both the consequences from the initiative we initiated last fall and also the initiatives we're doing this autumn. Last year we were talking about SEK 500 million in negative consequences. Partly, that is already in our books, and so far our experience is that figure will not be as high as we were talking about last year. It also obviously includes then the non-core business and the non-core offerings, which we move out of this year. In practice, that means moving out from the international operations with the exposures and the client we might lose by that. It means some efficiency gain within the investment banks.
It means the evaluation of the payment business we run, and also offloading some of the non-core exposures. Nothing of the billion is touching the branch operations or the savings business or whatever we deem is core business.
Sorry, just to clarify, is any of that attrition in the revenue numbers we've seen for the first nine months of this year, or is that still to come?
No. Most likely you see the majority of the SEK 500 million we were talking about last year.
Okay. Thank you.
Moving over to mortgages. The question here, the NII going forward. Well, first of all, obviously, yes, we're picking up market share there. We believe that the guidance we gave the second quarter, that the majority of the hit to the Q2 was based on the funding levels and financing of building the liquidity reserve. Yes, the majority has come through now in the books in the third quarter. We think it's a fair assessment to say that we can go from Q3 without any major impacts going into the fourth quarter. We still see some of the payment notices in U.K. harming us. That might be a small positive effect in Q4, nothing dramatically.
When we look at the competitive landscape, we obviously can see that the majority of market share is being taken by the larger banks, vis-à-vis when we came in early into this year. We have the ambition to increase our market share going forward. The banking package might help in that sense, that's far too early to tell. We don't see any major changes so far in the margins or that perspective. We're looking fairly constructive on that business going forward. Lastly, U.K. Yes, first of all, obviously, we've been talking quite a lot in the past about U.K. as our growing business. We really believe we have a good possibility in U.K. over long term. We do believe we're targeting roughly a proportion of the market of 5%, and our market share currently is roughly 1%.
We do believe there's a strong possibility there going forward. Having said that, obviously Brexit and the movement into becoming a PLC obviously has put constraints on our growth ambitions short term. We have adapted quite a bit of our governance process of our operation and franchise there. It is likely that this will harm us for some while even further. We really do believe that's a profitable and good business model going forward. Thirdly, I should address obviously the decision from the FSA that we need to capitalize our risk-weighted exposures by the standardized approach there. Yes, if we're looking at ROE terms on the PLC level, we are having competitive figures there. Being a Swedish shareholder of the U.K. operation will be negatively affected for some time. We're working on implementing obviously the IRB in U.K.
On the consolidated bank level, you see it in the figures we posted. We still believe we're on a very good and strong and solid capital level, which we don't need to capitalize up.
It's Lars here. Just to add some comments of order. We have a lot of people lining up who are asking questions. I would like to ask you now initially to focus on your two most important questions, and then if time allows, we can take another round. Two questions per person max, please. Thanks.
The next question.
The next question comes from the line of Magnus Andersson from ABG. Please go ahead.
Yeah. Okay. Hello everyone. If I have to concentrate two questions, first of all, then just on margin and mortgages. Why did you lower your list prices on such a broad base on the 15th of October? Historically, you've always said that you're a price follower. Now you are obviously price leader. Is this purely an attempt to try to gain market share?
No. It's not a pure ambition to gain market share. Our prices are shifted because of our changed cost of funding and financing. Yes, obviously, as we were guiding you to, we might have had a higher financing cost for the second quarter, which abates now. You shouldn't read this as a dramatic change from our perspective. Of course, we like to have higher market share in mortgages.
Clearly you ended up below all your large cap peers in terms of list price. I guess that's not by coincidence.
The possibility to do that. As Carl said, when it came to the cost of funding and of course, the price is set out in the branches from the branch managers and his cooperative out there. Again, of course, this is something that we will really take good care of definitely. No doubt about that. As Carl said that our ambition is quite high. Again, we did it because we had the opportunity when it comes to the cost of funding.
Okay. Just on costs, I note when I look at headcount, you're fairly flat year-over-year, and now you have your usual summer interns in your numbers. When will we start to see headcount reduction? You also say that you've used 33% of your SEK 1,930 million restructuring reserve, but we don't see any net effect yet on your headcount reduction. When will we start to see that?
We won't guide on the FTE development. We obviously aim to have a total cost level of SEK 20 billion by the end of 2022. That's then up for the managers of the various organizations, how they will attack that one. It could come via lower FTEs. It could come via a different way of doing their business.
Okay, thanks. Finally, just on this evaluation of the payments business and the probable sale of it, do you have anything on timing there? Have you just initiated the process or could it be now or will it be towards the end of the period?
No, we've just done a thorough analysis of our payments business, and now we're opening up for that one. We will have to wait and see when that comes to the market. If and when.
Okay. You just started then.
Maybe I could add here, we will not comment anything more on this until we have something new to tell you.
Okay. Thank you.
The next question comes from the line of Antonio Reale from Morgan Stanley. Please go ahead.
Hi, good morning, everyone. It's Antonio here from Morgan Stanley. I've got a couple of follow-ups, please. The first one, what is the phasing of the cost savings and revenue attrition, please? Could you remind us how much do you expect for both by year-end 2021 and 2022? Related to that, do I understand correctly that the SEK 20 billion target cost is before Oktogonen but after inflation and IT investments, that the SEK 3.3 billion cost saving is sort of a net figure for IT and inflation? That's my first question. The second one is a follow-up on NII. We've seen obviously signs of improvement across a number of divisions in Q3. If I look at the U.K. NII, it continued to be disappointing in the quarter. Could you talk us to what you're seeing in terms of margin trends, both on the lending and deposit side?
If I look at volumes, I think they were down in the quarter while U.K. system are growing 3%-4%. Just a bit of color on what's happening in your NII in the U.K., please. Thank you.
Let me start with the first question. We had done a thorough transparency around the initiative we took last fall. That you know that we're targeting SEK 1 billion being agreed upon at the end of this year, and then the remaining SEK 500 million during last year. That's the only granularity you will get on us guiding on the phasing in going to the SEK 20 billion in the end of 2022. Sorry for that one. Yes, going to the SEK 20 billion at the end of 2022, that includes IT, it includes cost inflation, but it doesn't include Oktogonen, exactly as you said, Antonio. Thirdly, UK NII. Yes, as you're saying, first of all, just to reiterate what we said last quarter was obviously that UK went into more or less a zero rate environment. That we took a hit there.
We definitely entered a phase with lower margins, obviously, when rates came down to zero. That most likely will be here. Obviously, yes, not all of the notice periods have adapted in this Q3 . Lars, you can add some.
On the volumes in general in the U.K., you could say, yes, they are more or less flat or even down a little bit. I think that the quick and simple answer to that question is that our customers have no additional lending needs at the moment in the U.K. It is a slow activity in general, and there is no additional lending need from our customers in the U.K. On the margin side, on the mortgage side, it's been pressure for a long time as we talked about. That has stabilized a bit now. It's too early to talk about a new trend, but at least more stable this quarter. Still some impact on the deposit side, as Carl mentioned. You have a fairly long notice period, which has to some degree affected also margins in Q3.
On the lending side, clearly more stable margins now than we have seen for some time.
Can I just add something? When we talked about the volumes in U.K., I think that you should see that in the perspective of the almost closed down U.K. during the pandemic. The demand for increased business was quite low. The activity was quite low, not least in the private business when it came to mortgages, because you weren't even allowed to look at the new apartment and so on. I think that is one of the effects as well, as we can see during those months.
Very clear. Thank you.
The next question comes from the line of Nicolas McBeath from DNB. Please go ahead.
Hello, this is Nicolas from DNB. First a question on loan losses. Just to get your view on if you see any reason to expect that this should be elevated going into 2021 relative to your long-term average? Whatever that may be. I think you've had around seven basis points on average over the past 10 years. Do you see any reason for those loan losses to be higher than that going into next year on the back of the COVID-19 downturn? That's my first question, please.
Obviously as long as the pandemic keeps on being here, we will obviously have the COVID-19 overlay. In that sense, yes, that is elevated vis-à-vis Handelsbanken regular the way we do the ECL provisioning. On other parts than that, no, we don't see a reason that they should be elevated, and they haven't been elevated during the pandemic so far. No, we don't see a reason for that.
Okay, thanks. I'm sorry if I missed it, but could you just please repeat how much tailwind you see left from the NII headwinds in Q2 going into the next quarter? Comments anything about the outlook for corporate loan volume demand in the next couple of quarters? If you expect total lending volumes to show positive growth here over Q4 and then possibly also any outlook into 2021?
Okay. First of all, we see minor tailwind to evaporate to the fourth quarter. No major increases structurally from expensive funding maturing. Minor parts, yes. Going to the corporate lending, I think it's still very hard to tell, actually. We've had a very strange year obviously there with extremely high demand in Q2 and then obviously people paying off their loans. Still too early to tell, and we can't see a clear trend by our corporates still. Obviously we won't guide on the growth going forward. It's too early to tell. We've been a bit surprised of the strong mortgage markets and obviously the corporates are still uncertain.
Okay. Thank you.
The next question comes from the line of Robin Rane from Kepler Cheuvreux. Please go ahead.
Yes, good morning. If we look at the SEK 20 billion run rate at the end of 2022, should we view this as a sort of a cost cap while excluding then Oktogonen, of course going forward 2023 and perhaps 2024? Should we think about it more as this base level plus inflation going forward? That's my first question, please.
Thank you, Robin. You should view it as a cost cap. Until we say anything else, you should view us as targeting SEK 20 billion as an absolute cost level from the end of 2022 going forward, obviously excluding Oktogonen, as you were saying.
Okay, excellent. Then on Oktogonen. You don't make any provision for Oktogonen this, or allocation, sorry, to Oktogonen this quarter either. However, how low your credit loss ratio is. Can you give some color on how you think the board or how you think about this thing?
Well, first of all, obviously the Oktogonen is a board decision. We've been going through now a few years with even though we have reached our ROE targets, there hasn't been an Oktogonen provisioning. We still believe Oktogonen is a really good system. We want to have it in place. From a management perspective, I think we view it as our task to get the bank back to being a really efficient bank. Then we think we're in good situation to get provisioned once again.
Yeah. Just to add into that, I think that we're moving definitely in the right direction, and this is a direction we've been moving on from since 2019. I think we are on a really good way. Still this quarter, no, we didn't do any provision. We will get back to that. We just don't want to say when, but we're on our way when it comes to the cost. I think that we have a bit more steps to take.
Okay, thank you very much.
The next question comes from the line of Andreas Hakansson from Danske Bank. Please go ahead.
Yes. Hi, everyone. First question. Carina, you said that you are working with the Finnish and the Danish operations. Could you tell us what type of ROE outlook should we see? You've been underperforming compared to Sweden in those markets for forever, basically. Do you see any chance that you can actually get the profitability up to actually support the group profitability, or will we still see a lag, and what are you doing there? That's the first question.
Thank you very much for that, Andreas. What we're doing in Denmark is pretty much the same thing that we have just announced working with the Swedish branch network. They have been doing that for quite some time, and that is obviously to make sure that we can focus and be more efficient even in Denmark so they can support both of the result and ROE in the group as a whole. I feel quite optimistic that we can do that. We've had a quite broad branch network in Denmark, so we are now focusing on really good markets, and to make sure that we can focus on the core business and the core customers that we have.
I can't guide you in any direction in that, but of course, the intention is to keep on looking into every part of the bank to make sure that everyone can support the result and the ROE and the efficiency in the bank.
In Finland, because in Finland, the profitability is quite much lower even than in Denmark. What are you doing there to change that?
We have done exactly the same thing actually. They have been doing that for quite some time, actually. It started already last year. They are doing the same thing to make sure that they are focused on the right customers and the right business, and to look into the branch networks and provide a more and a broader branch network where we have the business that can support the group as a whole when it comes to increased income and the efficiency and the ROE. They have done it-
Okay
for a bit longer.
A second question. Swedbank talked yesterday about a negative impact on NII because of the very strong deposit growth. You report a SEK 58 billion decline in deposits in the quarter. Could you tell us what's happening and why do we see this big volatility on your deposit line?
Hi, Andreas, it's Lars here. It's quite simple. It's where we see the drop is on corporate deposits, included in that is obviously the short-term USD deposits that we receive every day. Certainly much so in the second quarter, we deposit them with the Federal Reserve. That is what creates the volatility on our deposits. If you look at the cash balances with central banks now we have, it's a smaller number than in Q2. Still high, but smaller than in Q2. That's simply a reflection of that.
Okay. Thanks.
the underlying operational deposits keep growing, but this item makes it volatile when you look at it.
Okay. That's clear. Thanks.
The next question comes from the line of Sofie Peterzens from JP Morgan. Please go ahead.
Yeah. Hi. Here is Sofie from JP Morgan. I was looking on slide or page 13 in your fact book. Your credit losses are very low for the quarter, but when I look in detail, it looks like you actually took a write-off of SEK 943 million in the quarter, and it says that it's the actual credit losses for the period. Could you just give details around what this SEK 943 million of write-offs were related to? Is it a single name? Is it a certain sector? Why did you write it off? Also related to that, your coverage of Stage 3 provisions is now one of the lowest among the Nordic banks and definitely in Europe as well at 32%. It looks like it broadly relates to this, that SEK 943 million write-off that you took in the quarter.
At what level of provisioning for Stage 3 would you be comfortable with?
Thank you, Sofie, for that question. Well, some of you might have seen in the papers some while ago that some of the exposures we had on the bank were sold off. These figures you're alluding to are around these ones. Obviously, we were reserving in Stage 3, and then this exposure is off the books now, which is then creating big volatility on the different lines.
This basically relates then to the United oil exposure that you could have sold off.
I won't comment on that one.
Okay. In terms of the Stage 3 coverage, it just looks very low at 32%. Looking at some of your kind of stress PD values, they also look very low at only 3%. How should we think, how much stress do you really have in the book? Why haven't you stressed the Loss Given Default ratios?
Hi, Sofie, it's Lars here. I can start off and then maybe my colleagues will add. No, as I mean, first and foremost, when you look at our Stage 3 exposures, yes, now the reserve ratio has come down. It was considerably higher last year. Again, because of one individual exposure that we took provisions for last year. That is obviously now not in the books anymore. There you see mathematically a drop in the provisioning ratio. On a more general frame, you can say that given that our exposures also in Stage 3 to large extent are secured with collateral, that tends to impact the reserve ratio in Stage 3. That's more broadly the answer to why that is. Then that leads me over to your next question on why do we not stress the LGDs.
We do stress the LGDs through the macro scenarios, the macro assumptions where we do stress, for example, property prices. We take it in the entire portfolio in that way. What we have specifically done in this quarter is also that we have applied a 50% price crash for hotel properties on top of the macro scenarios. We don't apply a general LGD stress in the overlay, but we take it through these steps.
Perhaps, Lars, I can add as well. Beneath the SEK 28 million in Stage 3, there are obviously movements. There are increases and there are decreases. As we've been telling you most of the quarters, obviously, we work very actively with the portfolio. Some of the exposures we offload, and some of the exposures, obviously, we increase the Stage 3 provisioning on. There are movements behind the SEK 28 million. Thank you.
Okay. Just the final question. On the write-off of SEK 943 million that you took, when you sold that exposure, was it fully covered or did you have to take any additional provisions against that loss?
No. You might have seen in the segment Sweden that we have a fairly big recovery. That answers your question.
Okay. Thank you. That's everything.
The next question comes from the line of Kazim Andac from Deutsche Bank. Please go ahead.
Thanks for taking my question. Most of my questions have already been answered, but just a very quick one on capital. What are the other effects of 20 basis points that contributed positively to the CET1 ratio in the quarter, if it's something material? If you can walk us through the headwinds and tailwinds on capital for the last quarter of the year. Thank you.
Okay. Hi, Kazim. Lars here. I'll start off with the 20 basis points.
Okay.
No, that is the sum of several small bits and pieces. You typically always see an other item of 10 or 20 basis points. Could be small model changes, could be small methodology changes, but nothing material.
Coming back to the tailwinds into the Q4 . Obviously, as we're saying, we know that the U.K. risk exposures will increase by SEK 65 billion as of 1st of January. We still don't know what the capital demanded on these risk exposures will be. We're likely to know that very soon or fairly soon. Second, as I was telling you earlier on, the Norwegian CRE floors will take away 30 basis points from our 19.4 level. That's what will happen. Obviously we have all the usual volatility of growth and pension systems coming into the picture. Thank you.
Thank you very much.
The next question comes from the line of Nick Davey from Exane BNP Paribas. Please go ahead.
Good morning, everyone. Two questions, please. The first one on the Swedish housing market, where prices are growing about 9% year-on-year. I think in the past you always were proud of lending countercyclically, and today we hear you talking about cutting mortgage rates and aiming for a bit more market share. My question is, do you see any risks to the current pace of growth, or is there any pace of house price growth in Sweden which would make you uncomfortable? Maybe also linked to that, do you have any views about prices from here? In the past when this kind of boom happened, there were different responses like higher mortgage risk weights or increased amortization, and neither of those seems to be on the table for the time being.
I just wondered whether you felt any sort of role in slowing down the pace of house price growth or any comments you can make that would be helpful. Second question might be a stupid one, but just on Oktogonen and at a period when you stop contributing into it in its current shape, have you done any work on if there comes a moment in the realistic near term where Oktogonen becomes a kind of forced seller of your shares? Any idea on timing or if that's even an applicable issue? Thank you.
Let me start off with the first one, and then Lars, you can add in. As you're saying, obviously, we don't like to be pro-cyclical in our behavior. Having said that, obviously we don't grant credits to anyone based on prices or based on the cyclicality. We do it based on the cash flows and the client and the collateral we get. And obviously we
You hear us extremely often talk about the low LTVs and the majority of the collateral we hold. That's the basis behind our rationale. That's what you should expect from us going forward as well. You shouldn't expect us trying to chase a market share in an overheated environment, no.
You had a question also, any views on prices from here? I think our chief economists, I guess the price increase we have seen lately has been somewhat stronger than she believed and from here on, we don't really have any strong views where things will be going. You were also asking about potential new measures. Well, I think the amortization requirement was sort of put on hold, as you know, earlier this year, up until August next year. At least we haven't heard any signals about any potential new measures coming in.
Nothing that we know of. You had a question also on Oktogonen and their cash flow situation. Carl is looking at me, so I'll take that one. The situation for Oktogonen is such that they used to have two income flows. When the bank was allocating, that was one, and then the dividends. From here onwards, it's the dividends from their shares that will be the income. The liabilities they have, the cash outflow, that typically varies quite a bit over time, depending on how people decide to get their share in Oktogonen. You can either have it upfront or you can have it split up to, I think, 20 years. This tends to vary quite a bit over time how people do, so the outflows are quite hard to predict.
No, we haven't done any calculation at what point if any point they would need to sell the shares in Handelsbanken. Just also to remind you that it was not that many years ago that Oktogonen actually climbed above 10% holding. They were below 10% up until a few years back. The holding stake has also varied over time.
Okay, thank you. Sorry, just to come back on the housing market. Is there a level of house price growth which would make you uncomfortable if the situation continues and hypothetically we get up to 10%, 15% growth next year? Is there a moment where you would take your foot off the pedal for mortgage lending?
I think we have clearly seen such periods going back in time where house prices have gone up quite a lot in a given year. We have always said back then that prices go up and down. Of course at some point they will go down again. I think that the most important point is the one that Carl made earlier, that we never lend based on what sort of collateral we'll get. We only look at the household's cash flow and stress test that. We still apply 7.5% stress mortgage rate in the calculation. That disqualifies quite a few people from borrowing. That's the basis for our lending rather than any given price increase. Prices go up and down. Right now they are going up quite a bit.
Possibly we could add that what is going up the most now is single-family houses outside the city center. That's a new phenomenon. Maybe a change of preference where people want to live.
Understood. Okay. Thank you.
The next question comes from the line of Maria Semikhatova from Citibank. Please go ahead.
Yes. Hello, thank you for taking my question. On your decision to review the payment business, how much was the contribution of the subsidiaries into your results in the Q3 ? Do I understand correctly that your cost and revenue attrition guidance effectively includes the decision to divest this segment? What would be your guidance on cost savings and revenue if you decide not to proceed with the sale?
First of all, I don't have the Q2 figures in my head, but roughly 2019, I think the payment business was roughly a bit less than SEK 1 billion in income, or a bit more than roughly SEK 800, and the cost side of it was more or less SEK 400-ish. That's the situation for 2019. No, they're not included in the figures as such. They're obviously included, Carina has a picture where she shows what's our core business and what's our non-core business. Of course, we've been viewing our payment business as a part of the non-core business. In that sense, obviously, that is a part of the estimate of how we view the possible income drop and cost savings. We can't comment on what the figure would be if it happens that we don't sell the business.
We will come back to that one later if so. We also write in the report that regardless of the outcome of this review we're doing now, we still aim to have an offering to our core customers, and that typically also comes with some revenues in that case. Other than that, we will not comment on this process until we have some news to tell you.
Okay, understood. Just maybe a slightly different way to ask a question on the cost savings. Are you in a position to disclose how much will be coming from branch reduction in Sweden?
No, we won't comment on the proportions of the cost reductions.
Okay, thank you. That's all my questions.
The next question comes from the line of Rickard Strand from Nordea. Please go ahead.
Good day. Two questions from my side. You mentioned that a few branches in Sweden has already been closed in the Q3. Could you elaborate on how you see the timing of the branch closure in the coming quarters? Secondly, you made a SEK 38 million impairment on IT intangibles in Q3. Do you see a risk of further impairments from some part of your intangible assets going forward?
Let me start off with the IT question, and then I'll leave to Carina to talk about the branches. No, we don't see an increased risk of impairments in IT. This was obviously a one-off.
Okay. Your question about the branches in Q3. As I said earlier today that we have been doing this for the last four or five years to close down 100 branches and merge together with other branches next to them. That continues. It's not a big amount in Q3. We are doing the assessment right now to make sure that we're making the right decisions on where we will have the 200 branches. We will get back to that.
Okay, thanks.
The next question comes from the line of Riccardo Rovere from Mediobanca. Please go ahead.
Good morning to everybody. A couple, if I may. The first one to get back one second on credit losses. If I understood correctly, one of your previous comments, you stated that the portfolio, on one hand, your portfolio is different, more mortgages, more housing, more collateralized in general. You have also stated that outside of the COVID-19 overlay, you don't see a reason why risk cost in the foreseeable future should be much above the long-term average, if I understand correctly, one of your previous comments. On this topic, the unemployment in Sweden is now actually fairly above what was the long-term average, and this should also have some impact on the cash flows of your clients. How should we see your statements with regard to unemployment?
Is that something that is a matter of concern for you, or is it too early to see an impact from 8%-9% unemployment in Sweden? If should it remain at these levels for much longer time to see any impact on the book of Handelsbanken? This is my first question.
Thank you, Riccardo, for that question. No, obviously, as I was laying out the words earlier on based on, and you see that on page 22, I reckon, the portfolio mix of our lending. Obviously, we have a very high proportion of mortgage or real estate property-related lending. We do that to clients we view as having really strong cash flows, and we do it collateralized. These things we believe are the major component of explaining our very low credit losses historically. Therefore, no, we don't foresee a strong correlation or we won't have a strong correlation model-wise between macro development and ECL. We don't see that we will have a correlation between real credit losses and macro assumptions or COVID being here for longer. That's the reason why we believe our risk factor is idiosyncratic, and that won't change with COVID.
Just to add there, you may have seen in our disclosure that we have in overlay added already in Q1 on the unsecured part of household lending. We have added quite a bit of overlay on the back of the outlook for unemployment. I think it's also fair to stress here that when you look at the Swedish unemployment rate today, first of all, our chief economist believes that we are pretty close to peak in the unemployment. Also when you look at people actually being unemployed today, these are typically not homeowners.
Right. Okay. Basically, if I understand it correctly, at the current levels, let's say the low level of rates and the real estate prices are more than enough to compensate for any kind of issues from unemployment, if I understand correctly what you say, more or less.
Yes.
Okay. The second question, if I may. On one of your previous
One of the starting comments from Carina, I just want to be 100% sure I understand it correctly. The SEK 1 billion revenue attrition from the actions that you disclosed a month ago or so, the SEK 1 billion is seen as a worst case scenario? Did I get it right, but you think it might be less than that? I'm not sure I got it correctly.
Yes. We believe SEK 1 billion is the best estimate we can make. That includes the initiatives we were telling you about last year. The impact from that proportion of last year most likely is a bit less than we estimated at that time.
Okay
Our best guess is SEK 1 billion.
Okay. Got it. Thanks.
The next question comes from the line of Martin Leitgeb from Goldman Sachs. Please go ahead.
Yes. Good morning. Just to follow up on the question on the U.K. earlier. I was just wondering again, in terms of the business you do in the U.K., has anything changed due to the different treatment in terms of capital? Or is the expectation that a move to advanced model IRB could come relatively in the short term and does not impact essentially the returns of the business overall? Do you have a timeline for that IRB rollout for the U.K.? Secondly, I was just wondering on your dividend accrual, it seems the accrual for 2020 dividend is somewhat below that of your Nordic peers, and I was just wondering what drives that. I think historically, there was some mention in terms of bigger growth opportunity. I was just wondering, is there scope potentially to increase that dividend accrual as per year?
Is that Handelsbanken being conservative or the other reason for the somewhat lower dividend accrual for 2020? Thank you.
Thank you, Martin. First of all, in the U.K., has anything changed in the way we view our business? We like to state, first of all, that obviously we believe that our possible market share is roughly 5%. We have 1% there right now. If you look about cost to income efficiency rates and also ROE rates from a U.K. PRA perspective, we are efficient when we measure ourselves vis-a-vis our peers. Obviously from aggregated level for the bank, we will have negative consequences in being in Swedish shareholders of owning the U.K. operation. We will work quite heavily with improving our efficiency there. We do believe that this is a good business model. We do believe that there are growth possibilities going forward. Most likely the IRB model won't be in place until a few years from now.
Having said that, obviously you run a bank and you can't just choose to have the one business areas which perform the best all the time. That's in our portfolio mix, and we think it offers a growth opportunity going forward. Yeah. Your second question about if the 40% dividend accrual is Yes, you might say that that's conservative. We rather come to the market and guide on 40%, we have room to build a stable bank to support our clients in their growth perspective. If there's money left on the table, of course, we're going to give that back to our shareholders. That's the reasoning behind it.
Yeah. Maybe just to clarify and remind you that this was a decision taken in the beginning of the pandemic. If we had not taken a decision, the rule would have forced us to have a much higher accrual for 2020. On the back of the outbreak of the pandemic, this was the proper level to accrue for, we believe.
Thank you.
The next question comes from the line of Jacob Kruse from Autonomous. Please go ahead.
Hi. Thank you. Two questions for me, please. Firstly, how much have you changed the way you run the bank? It sounds just like you're implementing budgets now, which you didn't use to do. You're a price leader in mortgages, which you didn't use to be. I guess the branch cuts you've talked about. It seems like there's more of a culture shift going on than perhaps just the branch closures. My second question was on the capital. Swedbank talked about IRB adjustments, which could lead to additional capital headwinds next year. Is that something that you foresee as well? Could you just remind me where we are on Swedish commercial real estate capital increased requirements as well? Thank you.
I can start, and I think that Carl and Lars will fill in. On your first question, if we are changing anything and how we're running the bank, the answer is definitely no. This is no budget we are doing. What we are doing is to, we looked in, and I said that again when I took this position, we started to look very deep into the bank, all the units, all the whole markets to make sure that we could focus and be a more efficient bank because we had an issue on the table, and that was the cost and how we were running the bank through that perspective. Again, we are still a decentralized bank. The way we do business, and we are definitely local. The bank is still running from the branches and the business that we have there.
What we are doing now is to make sure that we're looking forward after 2022, can have a more cost-efficient bank to grow from, and to make sure that we can provide the customers with the real offer and so on. This is definitely something that we look into to make sure that we still can be decentralized, local, and have a really good business moving forward. I think that what we have been doing for the last year and that you can see for the last quarters is that stopping the cost increase, so to speak, and make sure to turn it down, and then today you can see a really good cost control is one step in the right direction. This is definitely to make sure that we can keep the business model running forward.
Hi, Jacob, it's Lars here on your second topic of capital. IRB models, as we've talked about before, there is a review ongoing, initiated by the EBA quite a couple of years back, in fact, for new IRB models to have them more harmonized across Europe. This is likely to come into effect at least partly in 2021, but we don't have any details around that yet. On your question on the Swedish CRE add-on. Yes, that one is expected to be communicated in the SREP, which is due now in the fourth quarter. When we look at the FSA's paper from 25th September on the banking package, they had included in their new indicated capital requirement that factor, meaning around 30 basis points for ourselves in terms of higher requirements. That's pretty much what we have guided for before as well.
That should kick in from Q4.
Okay. Thank you. When it comes to that EBA-initiated exercise, you don't have any kind of idea of what you're looking at in terms of headwinds or RWA add-ons or magnitudes?
No, we haven't communicated anything around that yet. It's too early still.
Okay. Thank you.
The next question comes from the line of Hari Sivakumaran from KBW. Please go ahead.
Hi there. I just want to return to the SEK 500 million of revenue attrition. What's the mix of NII and fees? It wasn't clear to me, have you included the evaluation of the payments business? I think I heard earlier SEK 800 million of revenues. My second question, just on the branch reduction, what level of engagement has been with the union so far?
Okay. To start with, no, we won't guide you on the composition of the SEK 500 million between the different lines on the P&L report. Second of all, yes, obviously, the payment business is included in our non-core business, but we won't guide on the proportions of that one.
Yes, to comment on your number SEK 800 million, I think that referred to a number you said, Carl, about the number for last year for that business. As we said, depending on what we do with this business now, we still intend to keep offering it to our core customers. That's obviously generating revenues in that case. That's why we're not more specific than that. I'm sorry, your second question.
Thank you. Yes, just on the engagement with the union so far.
Engagements with union is that they do support the general movement. They support the ambition we have, and then obviously we will have local discussions with the unions in all the various changes which will happen. That will carry on over time.
Thank you.
The next question is from Andreas Hakansson from Danske Bank. Please go ahead.
Sorry, just a quick follow-up on Nick's question on Oktogonen. Could you tell me, is Oktogonen, do they need to hold Handelsbanken shares? Given that they don't have a board representation anymore and that they don't get an allocation directly anymore, wouldn't it be better for them actually to have a broad normal management of an index or something like that instead? What are the rules?
Hi, Andreas. Well, as I think you already know, Oktogonen has not only had Handelsbanken shares, they've had a portfolio of different equities in that. The rules are that they can have other shares than Handelsbanken in the portfolio.
Is there a limitation? They don't need to have a certain amount of Handelsbanken. That's what I didn't know.
No, I think this is a question obviously related to the board of Oktogonen. How they are going to run the portfolio is not a question we can answer or have a view on, really.
Okay, thanks.
I'll now hand it back to the speakers for closing remarks.
Thank you very much for taking the time, and I hope that we have solved some of the questions, the issues that you've had. Thank you very much for your time, and hope to hear and see you soon again. Thank you very much.