Svenska Handelsbanken AB (publ) (SHBA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to this conference call for the fourth quarter and full year 2019. Joining me today are Lars Höglund, Head of Investor Relations; and Annika Engler, Head of Group Accounting. Slide #5, please. Before going deeper into the numbers, I'd like to go back and remind you about the changes we began talking about when our CEO started her job 10 months ago. The way forward that we presented last year means that the bank becomes more focused on our core customers and offering to -- that they demand. This will support a profitable growth with increased efficiency in the bank. This also means even lower risk and also that we release some capital. That in itself enables the continued growth with our core customers, but it also adds to the buffering into 2020, when capital requirements in general for Swedish banks are on an increasing path again. All these measures enable us to increase the efficiency in the bank. And altogether, we expect to lower our underlying cost base by around SEK 1.5 billion during the next 2 years. Then on to Slide 24, where we show the results for the quarter, which increased by 2%, adjusted for currency effects and one-offs. Net interest income increased by 1%, but was flat adjusted for currency. The volume growth slowed down a bit also during Q4, but we have also reduced some exposures in line with our more focused strategy. The contribution from increased volumes was offset by a negative net impact from margins and funding costs. We did see an increase in the short rates during Q4 in Sweden, impacting the funding costs in the covered bonds. The competition in the Swedish market remains hard, but no changes really in the fourth quarter. We have announced a 25 basis points hike with the first effect in January this year. And as always, competition decides how much of that will filter through to the customers in the end. As mentioned before, we also had a lag effect in Norway from the rate hike earlier in the fall due to the notice period we have against customers. Q1 this year should be free from those Norwegian lag effects. We experienced some margin pressure also outside Sweden for mortgages, but less severe than earlier in the year. U.K. had a stable margin in the quarter. Fees and commissions were up by 2%. We saw continued strong savings business but also card business with an increase of 7% when adjusted for the kickbacks we received in Q3. Costs were up by 3% when adjusting for currency and one-offs in Q3. I'll get back to that. And finally, credit losses dropped further to 1 basis point for the quarter and 4 basis points for the full year. Slide #25 shows the net interest income development year-on-year. And I'd like to add a few comments to that. Here, you can see the strong volume impact more than SEK 1.5 billion. The net effect of margins and funding costs deduct around SEK 1 billion and just over 1/2 of that relates to Sweden. When short rates moved up sharply at the end of 2018 to surpass 0 in early 2019, that had a negative funding cost impact on the swap rates used in the covered bond funding. We talked about this already in early 2019. So when we look at year-on-year development, there is a substantial negative effect here. In 2019, there has also been some pressure on the mortgage rates in Sweden, as we described in Q3. But that is really not the sole reason behind the negative net effect here. So all in all, net negative impact of margins and funding costs in Sweden were just over SEK 500 million in 2019. Home markets outside Sweden have suffered more from general margin pressure on mortgages during the year. Also, net interest income was negatively affected by IFRS 16, to some extent, and also items related to the liquidity portfolio. But that part was more than offset in NFT. And finally, of course, state fees fell some SEK 600 million. And for 2020, we expect another drop because of lower resolution fund fees as it moves from 9 basis points to 5 basis points in 2020 as well as the fact that we don't pay that fee on the U.K. volumes from now on. Back to Slide #11. You can see our capital position that has had a strong development. The common equity Tier 1 ratio was 18.5%, which is up from 17.4% in the third quarter and 16.8% a year ago. We estimate that the Swedish FSA requirement was 15.8% at the end of 2019, which means that we, at this point, have a buffer of 2.7 percentage points to the Swedish FSA requirement and that we are 1.7 percentage points into our target range. Improvement since Q3 is explained by the fact that we have reduced some exposures with high-risk weights, in line with what I described earlier. Other factors are profit generation and improvements in net pension assets. Just as we have highlighted several quarters now, we clearly see that capital requirements are on an increasing path for Swedish banks again. The Swedish FSA proposal on risk-weighted floors for lending to commercial real estate will add some 40 basis points to the Pillar 2 requirement when introduced during fall this year. In Norway, high-risk weights for commercial property lending will come into effect in late 2020, which will reduce our buffer to requirement by some 40 basis points. And higher countercyclical buffers, primarily in Denmark and U.K. at the end of 2020, will add 20 basis points to the requirements. Later on, we will also have a certain impact from the ongoing modeling review related to EBA requirements. Now when we enter into 2020, some uncertainty remains regarding macro and market development at the same time as we have good growth opportunities. So to conclude, we have a good capital position, we are facing increasing capital requirements in the coming years and we see good continued growth opportunities. Against this background, the Board has proposed a dividend of SEK 5.50 per share for 2019, which is unchanged compared to 2018. On Slide #8, we take a look at the quarterly costs. As usual, in the fourth quarter, there was a seasonal increase of costs also in 2019. But when looking back to the years before 2017, the increase in the fourth quarter of 2019 was about SEK 100 million less than it used to be a few years back, despite the fact that the total cost base is now larger. The measures that we have announced in the third quarter did not impact the fourth quarter costs. And I will get back to that. What we have seen is rather a large cost focus in the entire bank, together with other efficiency measures going on that we have talked about before. On to Slide #9. Here, we look at the full year cost development compared to 2018. We saw an underlying increase of just over 5%, which is lower than the 8% we saw in 2018. In 2019, the cost increase was mainly explained by AML costs as well as pension costs. Apart from these 2 items, the cost development was modest. Looking into 2020, we expect both development costs and AML costs to be at the same level as in 2019. We don't expect pension costs to increase as strongly as they did in 2019. At the end of 2020, we will have achieved a reduction in the underlying annual cost base of SEK 1 billion, all else equal. So to summarize, we are on the right track with costs, but of course, still not where we want to be. Slide #10, please, where we go back to the measures we presented in Q3. These include a geographical concentration outside of our markets, a somewhat more focused product offering as well as internal efficiency improvements. As I've said, we haven't yet seen the impact on costs during the fourth quarter. We have, however, during 2019, taken decisions and actions within these measures that will start to impact the cost base now in early 2020. All in all, these measures so far will contribute some SEK 200 million in annualized cost reduction. So we have started to deliver on the reduction that we have talked about. During the fourth quarter, we used a bit more than SEK 60 million of the restructuring reserve, which totals to more than SEK 900 million. Now back to credit quality and credit losses on Slide #12. 1 basis point was the lowest level of credit losses that we have had since the third quarter 2007. For the full year of 2019, it was 4 basis points, and it basically reflected one exposure in Sweden. In our home markets outside Sweden, we mostly had net recoveries for 2019. This is a proof of our strong focus on credit quality. We also know how crucial this is. Large credit losses are among the most expensive things bank can encounter. One needs to be humble also when it comes to credit losses, but naturally, we are pleased to see the credit quality being so strong. The increased focus in the bank that I talked about means that we'll leave exposures in the fringes of our core areas. That has a slightly higher level of risk, which means a further reduction of risk levels in the bank. But this slide is also very clear in a longer perspective. It shows a very stable credit quality over a longer period of time. Also, when we compare it with other banks in our area. Now Slide #13, please. Many banks right now, not only Handelsbanken, show very low credit losses. But in the bigger picture, I think this slide is interesting. It's compiled from the EBA transparency exercise that was published in late 2019. It shows the share of problem loans in European banks. The left chart is the entire European sample and Handelsbanken has the lowest share, which may be difficult to see here. The scale distorts things a bit. But if we focus on 6 Nordic banks in the right chart, it's easier to see. You can take different views on where we are in the credit cycle currently. But once the credit markets become more challenging, the strong credit quality that we have gives us a very good starting point. Then on to Slide #34, please. What you see here is our capital requirement in relation to our average annual credit losses since 2000. What the picture shows is the very substantial buffers that our capital requirement entails. The requirement we have covers an annual average credit loss 90 times, and then, of course, we have our buffers on top of that requirement. So we do not only have the strongest asset quality as the baseline shows, we also have the highest capitalization to cover that asset quality. Back to Slide #16, please, where we show our development in the Swedish business, sliced in a few different ways. The mortgage market up in the left corner. We have been clear that this is an area where we aim to become even stronger. Our experience is that the inflow of new business is explained by our level of activity and presence locally as well as in different other channels rather than by price. And of course, we have to be relevant price-wise. And we also do price in accordance with the market. We will focus on increasing our activity, improving visibility and further developing our digital offering. During 2019, we were the largest net lender and the trend in the fourth quarter was positive. However, the share of new lending was still a bit lower than our back book share. We did increase our activity and visibility during fall, and in November, we launched our green mortgages. This product is in strong demand, not least by our younger customers. Mutual fund savings up to the right, where we have received a higher share of net inflows than the back book throughout the decade. Also in 2019, where we were the largest player in terms of net inflows, the share, again, being twice the size of the back book share. At the same time, our customers increased the savings on Handelsbanken accounts even more. We did increase the household deposit market share from 18.1% to 18.4%, which is quite a rare magnitude of increase in this market. 24% of total net inflows ended up in Handelsbanken accounts. And finally, our other property lending, including housing associations, continued to grow steadily. Since 2016, we have seen an annual growth rate of 6%. All in all, I think this shows how well our business model is working. And with the stronger focus we now deploy into our core customer needs, it bodes well for a continued, good business development. Moving on to Slide #17. When we summarize 2019 for our Swedish operations, it clearly shows the excellent job that our branches have done, again, in doing more business with satisfied customers. The cost-to-income ratio has gradually improved over the last 10 years and is now 34.4%, which shows an efficient operation. The credit loss we had in Sweden is one isolated situation with really no read across to the broader economy. The changes we are doing in the bank now are, among other things, aiming at improving the conditions for our teams in the branches even further. That means better tools and release time. Digitalization of the mortgage process is proceeding as planned. We will introduce AI solutions in further processes in the branches and we will also give the branches tools where they can easier monitor customer activity. The advisory tool will be extended to also include the mortgage business. On Slide #18, we look at the other Nordic home markets. Norway also had a good development with the cost-to-income ratio around 35%. We expect increased focus on advisory, private banking and continuous digitalization to show up further in the business going forward. Denmark, as we know, it's a tougher market now with the rate environment and competition. We had an excellent underlying business, high customer satisfaction and good development. So competition is something we do handle well. During 2019, the focus on asset management in Denmark contributed to a strong development of our fee income. Other lines of the fee business also did well. Our customer base means that we have good potential to further grow the fee business in Denmark, which obviously will help us handling the very low rates as long as they remain. And finally, Finland, where the good momentum has returned as can be seen here. Hard work and more focused offering, including strong focus on core customers, are behind that. We have a cost impact in Finland now due to the change of the core banking system that will continue a few years. That will, however, further improve both the customer service and efficiency over time. Then Slide #19, please and our growth markets, the Netherlands and U.K. We continue to grow in the Netherlands, which is clear from the numbers. Operating profit increased by 7% in 2019 to exactly SEK 300 million. It is a small operation still, but with a great potential. U.K. had a weaker growth in 2019 for different reasons. At the same time, what they have achieved during the last year shows the power and quality of our U.K. business. We have set up a subsidiary and have become a British bank, with a higher cost level as a result. We have spent a lot on AML measures, which has also taken a lot of time in the branches, and costs have been elevated. Still, customer satisfaction is very high. And thanks to net recoveries in the credit portfolio, underlying operating profit for the year still increased by 5%. The slide also shows the massive increase in profits in the U.K. over the last decade, which, of course, has been driven by the steady business growth. So this bodes well for the U.K. business and the potential for further growth. And finally, to Slide #20. When we summarize 2019, we can see that we are on the right track, but we certainly have more work to do to get to where we want to be cost-wise. By focusing the bank more distinctly to the core customers and their needs, we create the foundation for a continued profitable growth. The interaction between our local decision-makers in the branches and an even higher ambition to improve simplicity and availability through digital tools will be key here. A strong focus on sustainability is helping our business and customer satisfaction already, but we will gear up even further here. We are entering into 2020 with high hopes for further stable growth with sustained low risk in the business. At the same time, the measures we are taking will change the cost trend that we have seen over the last few years. A strong capitalization and an excellent asset quality is a really good starting point into the new decade. With that, I conclude my presentation and open up for questions. Thank you.

[Operator Instructions] Our first question comes from the line of Chris Hartley from Redburn.

I've got a quick question on the Swedish mortgage market, please. So you repriced your mortgages before Christmas and actually a bit more aggressively than your peers. Was just wondering now we've had a month of that, can you give us a sense of how the sort of women and men on the ground are -- in the branches are finding that to be sort of struggling to keep customers. Are they having to offer big discounts? And then because you hiked your prices before Christmas, does that mean we should expect to see a bit of a benefit in your Q1 NII numbers and off the back of that? And then second question. Just thinking about your noncore divestments from a capital perspective, are you able to give us a feel for how far you are through that process? And how much we might -- how much more of that we might see in the future?

Chris, and thank you. So starting with the question about mortgages and the repricing we did in Q4, late Q4. Well, it's really early days. This is something that will be taken care of in our branch office network, as you also referred to. And we have no signals of any sort of dramatic impact from that. It's something that is now ongoing, and we are having discussions in the branches with our customers to -- so -- but it's too early to really tell about the impact from that. But the fact that we did increase the rates before year-end also means that we do not have the sort of the negative impact as we had a year ago when we made a move in January instead of December. So it's a positive impact because we have the positive impact earlier on as a consequence of that. And then regarding where we are on the noncore business. I would say that this is something that feeds through gradually, and it's not a massive exercise, it's something that happens in here and there as a consequence of the increased focus and increased awareness, but I would also say producing a good return and to be capital-efficient and so on. So that work is ongoing, but I don't foresee any massive changes going forward. So -- but I think that is as far as I'd like to go on that topic.

Our next question comes from the line of Sofie Peterzens from JPMorgan.

Here is Sofie from JPMorgan. So I had a question on your development costs. With the third quarter earnings, you guided that you expect development costs of around SEK 2.1 billion to SEK 2.2 billion for 2019, but these costs came in at SEK 1.9 billion, so SEK 200 million, SEK 300 million lower than expected or what you previously guided for. Could you just explain and give a little bit more detail what drove this kind of SEK 200 million, SEK 300 million lower cost in development costs? And then my second question would be on Oktogonen. And how should we think about the contribution to Oktogonen in 2020? And then my third question would be on the banking package in Sweden. What are your expectations? I know you mentioned that capital requirements are going up. But has there been any indication from the Swedish regulator on what the banking package actually includes?

Sofie, thank you. So regarding development costs, we had guided for SEK 2.1 billion to SEK 2.2 billion, and we haven't changed that guidance during the year. It has been very stable. Now we came in a bit lower than that, than expected. No dramatic changes behind that, I might say, because the deviance was quite small. So that's what is to it, I think. And then going forward, the expectation is that we -- the cost will be at the same level also for 2020. So that's where we are on that topic. So no, nothing dramatic in that, I think. And then when it comes to Oktogonen, I think the best way to put it is that the way it has also been described by our CEO, and she has received questions on this topic. And that's to -- I mean, the background you know about. It's coming to the conclusion that the development we have been on for some years -- over the last 2 years with cost increasing much more rapidly than income is not sustainable in the long run. And we need to get out of that situation. And now we think that we found ourselves in a place where we should be, but we are not still where we want to be. Meaning that, yes, we have changed things, partly due to increased cost focus, and also some of the efficiency measures we have previously announced are feeding through. So that has impacted the cost development, both, I would say, in Q3, to a certain extent and also in Q4. But those figures have not been impacted by the structural changes we have announced. So we have started the journey, but we are still not where we want to be, but we are in a much better position today than we were a couple of quarters back in time. So we are, of course, close to that point. But we -- I don't want to make any forecast for 2020, and we simply have to wait and see how we perform. But we -- it's also quite clear that we have not proposed to make a provision for Q4, obviously. And then finally, on the banking package. No, we have not received any guidance from the Swedish FSA on how this is going to be implemented. And as you know, I mean, the big question mark is which buffer requirements they will actually implement, and that is unknown to us still. So we simply have to wait and see what that will lead to. So no further guidance. But what we do know is, of course, what we have also discussed in the report, the impact from the CRE exposures and the capital requirements for them, both in Sweden and Norway, as well as the countries of cyclical buffer requirements that will be added in late 2020.

Lars Höglund here. If I may add a few points on the MREL side of things there. So I think if you look at what the National Debt Office is saying and disclosing on the back of the package, they keep the view they had before. So for now, we are assuming similar kind of issuance need in terms of senior nonpreferred as before. So no changes there as of now. But again, we still don't know the final outcome. But that's the assumption we have now.

Okay. And just a quick just clarification. So when you mentioned that the development costs are going to be at the same level going forward, I assume you mean they're going to be around SEK 1.9 billion in 2020.

SEK 1.9 billion. No, they are 2 -- SEK 2.1 billion was the outcome in -- for the full year of 2019.

Okay. So they were SEK 2.1 billion?

Yes. So SEK 2.59 billion.

Okay. I thought they were lower. Okay.

No, no.

Sofie, you're probably looking at a slide where we have allocated part of the development cost into AML spend. But if you look in the table on Slide 5 -- Page 5 in the report, you will see the exact development cost.

And the next question comes from the line of Johan Ekblom from UBS.

Just a few quick questions. On the cost side, I mean, you highlighted the lower than historical seasonality. Is there anything structural happening there? Or looking into kind of the seasonal pattern for the next couple of years, should we assume the kind of SEK 150 million or the SEK 250 million that you alluded to was kind of the run rate pre-2018? So that's the first question. And then the second question is just in terms of your comments around growth and reallocating capital. So clearly, you're taking out some higher risk density exposures. How do you think about reinvesting that capital? Because I guess, if you take out things with a higher risk density and add it to your core business, you need to add a lot more volumes to kind of compensate for that. And how can you do that in an environment where volume growth appears to be stable to slowing without compromising on your risk profile? Or should we -- or maybe the answer is we should expect lower volume growth going forward. So that's the second question. And then just third, just a clarification. On the resolution fee, have you guided to what the impact is you expect for next year? Because I guess, there's some changes in the basis with the Swedish mortgage floors that might limit the impact a bit.

Thank you, Johan. So to start with cost and potential structural impact related to the increase in Q4 compared to previous years. No, there is no structural changes we have made. I mean, it's -- I mean, a strong cost focus mean that you follow all the cost all through the year, of course, closely and make sure that everything doesn't end up in Q4. So that's part of it, but it's cost focused. And if you look at the items where we have had increases during previous years compared to this year, you can see that it's actually staff costs and purchased services that really represent a change and it's not -- I mean, that -- it's a consequence of increased cost focus, I would say, and following this really closely. Then when it comes to the question about growth and reallocation of capital and resources in that regard. Yes, it's true. So some of them, the corporate exposures that leave us as a high-risk density, meaning high-risk exposure amount and risk weights on average than the lending that we enter into the books, so -- and then if that means that we have to do much more lending in order to compensate for that, well, that would be the case if the return on equity and margins was much higher on the lending that we do lose. But I wouldn't say that, that is the case to a significant extent. It's rather that part of this exercise has also been about really going through exposures we have to make sure that we don't -- that we do target business that is not profitable enough. So that's part of the exercise. So I don't see that risk. And when it comes to potential for future growth, I -- lending growth has been slowing down a bit, especially during the second half of 2019. Could that change? Yes, we've seen some signs of improvements in Sweden, I'd say. And then I think you also have to consider the situation in the U.K., which could be, I mean, the uncertainty from Brexit. And also the fact that we have been spending a lot of time related to AML process improvements, that has occupied a lot of people within our branch office network, meaning that they have spent time doing that to a higher extent and less time with doing business with customers. And there, we see a change. So that will, at some point during 2020, come to an end, so -- and that bodes well for growth opportunities. And I also think that is the case for some other home markets as well that growth has been quite slow due to structural impact, so -- and that might change. But especially in the U.K. and Sweden, it seems to be -- it's not dramatic, but it's looking good. And then finally, on the resolution fee. So -- well, yes, it will go to 5 basis points, as mentioned also, as you know. And that means that it will be reduced. And then we don't have to pay for our U.K. exposures anymore due to the subsidiarization. The impact from the U.K. not being part of that is approximately SEK 150 million. So we -- the best estimate we can make is, I mean, I would say, somewhere around between SEK 700 million and SEK 800 million of impact, but that is an uncertain figure because it's -- the resolution authority, Swedish National Debt Office that is, they do a risk estimation and compare banks. And it's impossible to know in advance exactly how that plays out. So a bit of uncertainty on that topic.

The next question comes from the line of Martin Leitgeb from Goldman Sachs.

Just a follow-up on capital. Obviously, the very strong trend on capital this quarter with the core Tier 1 ratio being up 100 basis points. And I understand the comments made on the capital headwinds this year. So the 40, 40 and 20 basis points headwinds you called out. I was just wondering, so leaving the dividend unchanged, does that essentially mean that you don't expect to have any kind of offset to those regulatory capital headwinds. You envisage that -- or it is essentially a measure of prudence that there still could be some elements maybe in some of the Pillar 2 requirements also which could help you offset. And the other thing is, I was just wondering in terms of this capital headwinds. Is there any change you envisage in terms of the loan book or the composition of the loan book in order to mitigate those impacts further?

Thank you, Martin. So regarding the decision about the dividend and potential set off -- offsetting effects, no, we don't foresee any specific offsetting effects. It's -- we are, once again, on a path with increasing capital requirements. And the ones mentioned in the call is, of course, the most important ones and also, the outcome potentially of the EBA exercise. So we have to rebuild our IRB models for the complete book, you could say. And we don't expect that to lead to a significant increase in capital requirements, but it could certainly lead to some degree of increases. What you should also keep in mind when you look at that is that the introduction of capital requirements or floors for CRE exposures is also weighted front-loaded from the Swedish FSA. So that will potentially, to a certain degree, balance out. But nevertheless, we are on an increasing path when it comes to capital requirements again. So -- and then when we had made a decision and the proposal about the dividend, that is one important reason for that. And then we want to be on the conservative end. And we want to be able to grow when we have the opportunity to do so. And that is also a reason to keep the capital levels where they are. And those are the reasons, I think.

Our next question comes from the line of Riccardo Rovere from Mediobanca.

First of all, I wanted to ask you on -- just on the capital requirement, just a clarification, if I understood it correctly, don't want to get the numbers wrong. You stated that commercial real estate, risk weight floors will add 40 basis in Sweden, 40 basis in Norway, and then you're going to have another 20 basis increase in the capital requirement because of the countercyclical buffer. This is just to be sure I understood it correctly. This is my first question. Second question I have is on NII. Out of the 25 basis point increase in the repo rate in December in Sweden, do you think Handelsbanken will be able to retain part of that? Or do you think competition will eat the whole 25 basis point hike? And then when you go to -- when you state that you have used so far SEK 66 million, maybe, of restructuring cost out of the SEK 930 million you booked, what part of that you think you should be able to use in 2020 out of the residual SEK 870 million? And then another thing I wanted to ask is on the pension -- I'm sorry, on capital, you stated that pension assets and liabilities contribute at, if I remember correctly, 30 basis points in the quarter, rates have moved down again, equity markets are a bit lumpy. Do you have an idea of what could be the impact if we use the current level of rates instead of the one at the end of 2019?

Okay. Thank you, Riccardo. So about -- yes, you're completely correct. You understood it completely correct when it comes to the impact of our CRE regulations, both in Sweden, Norway and 20 basis points for countercyclical buffers in Denmark and the U.K. And then related to that net pension assets and the 30 basis point impact. Now I won't comment on the impact of changes in interest rates since year-end. So -- but it's correct that we had a positive impact, and that's due to changes in net pension assets that has been favorable for us. So that's one part of it. And then the rest, of course, is the profit generation and some other changes we have commented in the report. And then net interest income and the 25 basis points repo rate change. And as -- also feeding us through external pricing. And to what extent we expect to keep that? It's really up to the business to work on that. And of course, we will try to keep it, but it's really hard to assess in advance. We have seen during the year quite tough competition in this area. It has been at the same level approximately during the year, I would say, meaning also that when you look back at what happened a year ago, part of that has been lost, but part of that has been kept. But it's too early to really tell to what extent we can keep it. And then finally, regarding the restructuring reserve and the SEK 66 million we took in Q4 for that. What will happen in 2020? We don't want to make any forecast about that. But I think you can say that when you look at the actions we take, quite a large part of that will actually feed through during 2020. But what takes longer time to go through with is the closure of our international operations because that is not really something that takes a bit more time.

Okay, okay, okay. But you stated that a good part of the residual SEK 870 should be somehow used in 2020, right?

I don't want to comment on that and make any forecast about that particular issue. But I think also, you could -- when you try to assess that, what you could keep in mind is that 1 -- 2/3 of the complete package will be dealt with and handled during 2020. And that gives you some guidance. But then you also have to consider that what takes longer time is the closure of international operations. But that is as far as I'd like to go when it comes to guiding.

[Operator Instructions] Our next question comes from the line of Jacob Kruse from Autonomous.

Two questions. Firstly, the Swedish FSA commented on the Basel IV calculations by the EBA in late December. So they had calculated this 30% increase to risk-weighted assets for Swedish banks. Could -- I know there's a number of discussion points regarding potential mitigation here. But could you say how you in your own calculation compared to that 30% benchmark for the sector as a whole? And then just secondly, on the U.K. You made some comments. But just in terms of the U.K. lending amount post the election for the first part of the year, could you give some flavor that what you're seeing? In particular, I guess, in the corporate and SME sectors?

Jacob, so regarding Swedish FSA and Basel IV and the 30% increase, we -- when we estimate the impact of Basel IV, which is really difficult to do because we don't have the full picture of how FSA will implement this. They have made a quite technical calculation based on some assumptions, as you know. But when we make our best assessment and make a conservative assessment where we -- the only things we do take out of the calculation is items that are typically only related to IRB method and then estimate that all the buffer requirements will continue to apply going forward. We still come to the conclusion that we have a level of capitalization today that is in line with what would be required as a consequence of Basel IV in 2027. But a lot of uncertainty around that, especially when it comes to the buffer requirement. It's easier, of course, to estimate the risk exposure amount calculation using the standardized method. But it's -- the big question mark is the impact of buffer requirements. And then when it comes to U.K. and U.K. growth potential. No specific comments on any sort of sectors that we have in mind that where we see particular growth. We seem to have to wait and see, I'd like to say. But I think when you look at -- I mean, the view we have on our U.K. operations is very positive. The signals we get from the business in U.K. is that they have business opportunities. And they have been impacted in their activities by the very much internal work they have been put through during 2019. That will continue to a certain extent in 2020 as well, but it's -- the situation will improve a bit. And then the uncertainty around Brexit is -- that's an unknown thing how that will end, of course. But yes, that's how we all think. It's hard to assess.

And just a follow-up on that. You haven't really opened up any new branches in the U.K. for quite a few quarters now. Does that in any way reflect your uncertainty around Brexit? Or is this more digital and those kind of trends driving this?

No. I would say that the number of branches in the U.K. is more -- and the reason why we stopped opening up so many new branches was that we did open many for -- during a certain period. And we felt that to reach presence -- local presence and coverage in the U.K., that was enough and we wanted to consolidate that situation. And then we have been very occupied with subsidiarization and also AML process improvements during the last 2 years. And I -- so that has impacted the complete operation in the U.K., I would say. And during such a period, it hasn't been tempting to opening up new branches. I wouldn't exclude that we will do it in the future because, I mean, the view we have on our U.K. operations is still the same. The underlying business potentially is still very good for us there. So that's what we see still. And it's not a reflection of increased level of digitalization. What we do in our U.K. operations is to invest in IT support and systems and so on. So that will improve operating efficiency, and we'll continue to invest in the future as well to improve that even further. But it's not a reflection of the fact that we can grow much faster without opening up new branch offices due to digitalization, I would say.

And the final question comes from the line of Andy Stimpson of Bank of America.

Just 2 on costs from me, please. Firstly, just a follow-up on Johan's question on the seasonality. I just want to check whether we should assume that the seasonality does reestablish itself for 2020 and onwards or not? And then the second one is just a clarification, if you forgive me. The cost guidance is for the exit run rate of costs at the end of 2020 to be SEK 1 billion lower than the annualized level from the underlying 3Q level, and those are gross cost cut numbers, and then we will need to think about inflation on the top. But then your Slide 10 does show that those costs should be lower in absolute terms as well. And then we need to decide on whether we assume you make an Oktogonen payment as well. Have I got all of those building blocks correct?

Thank you, Andy. Well, first of all, when it comes to cost seasonality, I think what we do is to keep a very high level of cost focus, and that helps. And there are certain reasons why you have this seasonality, but you want to keep it under control, of course. And I think that is as much as you can say because you never know exactly what will happen in Q4. But the intention is to keep it where it is and closer to where it has been also in the past. And regarding how to interpret the outcome of the structural changes we are making. Yes, we are -- it's -- we are estimating -- we have defined an activity, a portfolio of things we are going through with. And gradually, we will reduce spending, number of employees, number of customers, cut out some systems potentially and so on. And during 2020, the total amount that we have done will be SEK 1 billion, meaning that when we enter into 2021, the cost level for that portfolio is SEK 1 billion less than it is today. And so -- but then, of course, on top of that, the net figure will be something different because we do have some -- in other parts of the business, we do have some cost inflation and also other things that move in a different direction. I hope that answers your questions.

Yes.

Okay. Is that all? Okay. So thank you very much for attending. Bye-bye.