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

Good morning, everyone, and welcome to this call for the third quarter. Together with me today, I have our CFO, Carl Cederschiöld; Head of IR, Lars Höglund; and Head of Accounting, Annika Engler. 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 then 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. So 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? And I would definitely start with the 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 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 5 locations in Sweden. This presence will be increased to more than 20 location. So 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, they -- 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. So again, no, the answer is definitely no. We are not moving away from branches. Still, the branches is still a backbone 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. So that is definitely the first question that I think comes in many, many different ways. But just to conclude that, no, we are not moving away from the branches. And 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% to 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 as -- 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. So 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. And over the 5 -- the last 5 years, we have merged and closed almost 100 branches in Sweden. So we are always adjusting our branch network and our offering in general to our customers after the customers' demand. The customer satisfaction gap has widened, and we have a strong business inflow, both in lending and asset management in the same period. So 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. And the third question is, what will the digital speed up leads 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 2 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. But it is natural. 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. And 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 need it, 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. And now we have, regarding Sweden, outlined the direction. We have also decided to start preparing for potentially divesting our card acquisition business 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, and we will do -- as we will do in Sweden. So with that said, I think that I'll hand over to you, Carl. And you will get back -- come back and address this also to -- for the cost target we have set for the bank. So 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 on slide and then we're happy to discuss all questions in detail in conjunction with the Q&A. So to start off with net interest income, we saw an increase of 4% from Q2. As you can see on Slide 8, the volume growth in household lending continues to be very strong. Our market share of net inflows was around 18% in July and August. And 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. And as funding markets have 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 second half of the year as very expensive short-term issuance done in April matured. The bulk of this reversal came in Q3, as expected. So 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. And year-to-date, the net inflows has been SEK 16 billion compared to net outflows in the market of SEK 8 billion. Compared to the first 9 month 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 second quarter. And overall, the fee and commissions grew 6% compared to the second quarter. Let's move on to costs on 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 third quarter last year, the cost in Q3 this year is down 2%, adjusted for one-offs. And as you can see on Slide 12, the 12-month run rating cost have dropped in 2 consecutive quarter, 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, and annualized cost savings of around SEK 400 million are present in Q3 figures, i.e., costs in the third quarter are SEK 100 million less compared to if the initiatives wouldn't have been launched. So if we move to Slide 30, 3-0. 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 1, which related to the initiatives communicated last fall, we have yet to exercise a bit more than SEK 1 billion of annualized cost savings. And as mentioned before, the progress seems running according to plan. Step 2, 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 improved efficiency in the administration. Second, the bank has come to the conclusion to offer merchant services, including Exeter, which is a subsidiary in the consumer finance and checkout solutions base, 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. At the same time, we will strengthen our efforts in other areas, such as an improved 24/7 client support service and during 2021 and 2022, we will see elevated IT investments by in total SEK 1 billion. Then 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 2, we stated that the total income effect by step 1 and 2 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 4 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% to 90% of business volume. As a cost conservative bank, it is of utmost important 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, merchant branches will, in many cases, have an insignificant effect for customers. For instance, the distance between the branch we will close in the center part of Visby, on Gotland and the nearby branch we will keep is only 500 meter or 6 minutes walking distance. So 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. And 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 noncore offerings we move away from and the noncore 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. So moving on to credit losses, which were SEK 49 million in the third quarter. Just like in the second quarter, the credit loss ratio was 0 basis points. And 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 second quarter. 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 third quarter. 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. And as you can see, the share of lending that is mortgage or property-related is significantly higher vis-à-vis our peers. And 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. Obviously, this should also hold true for the macro stories. Having a business model focused on collateralized lending with low LTVs, 2 clients with strong cash flows, our belief is that our decisive risk factor is idiosyncratic rather than macro development. So 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% to 17%. Worth underlying -- underlining is that the 19.4% does not include the previous dividend proposal for 2019 earnings of SEK 5.50 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 U.K. exposures on group level will be calculated based on standardized approach from Jan 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'm 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. So 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. And 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. And 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. And with that, please, I open up for Q&A. Thank you.

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

So first of all, can I just ask about the SEK 1 billion of revenue attrition that you talked about? If I remember rightly, that's compared to the 2019 revenue levels, isn't it? So are you able to tell us how much of that has materialized this year and then perhaps what the phasing of that might be going forward? And then secondly, on NII. You've mentioned the bulk of the Q2 negative one-offs have come back. So is it fair to say that Q3 is a good kind of base number going forwards? And then any sort of comments you might have on the underlying margin situation or competitive environment in Sweden, and particularly mortgages, would be very helpful? And then 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 kind of major strategic announcements about that business. What are your sort of plans to turn that one around?

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, as you -- this SEK 1 billion includes both the consequences from the initiative we initiated last fall and also the initiatives we're doing this autumn. So -- and 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 we -- that figure will not be as high as we were talking about last year. This -- and it also obviously includes then the noncore business and the noncore offerings, which we move out of this year. So 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 core exposure -- some of the noncore exposures. So nothing of the SEK 1 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 9 months of this year or is that still to come?

No. You -- most likely, you see the majority of the SEK 500 million we were talking about last year.

Okay.

Moving over to mortgages then. And the question here was -- yes, 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 second quarter 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. So that might be a small positive effect in Q4, but nothing dramatically. When we look at the competitive landscape, we obviously can see that it is -- the majority of market share is being taken by the larger banks vis-à-vis the -- 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, but that's far too early to tell. We don't see any major changes so far in the margins or that perspective. So we're looking fairly constructive on that business going forward. And lastly, then U.K. Yes, first of all, obviously, we've been talking quite a lot about in the past about U.K. as our growing business, and 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%. So we do believe there's a strong possibility there going forward. But having said that, obviously, Brexit and us -- and the movement into becoming a PLC, obviously has put constraints on our growth ambition short term. So we have adopted quite a bit of our governance process of our operation and franchise there. So -- and it is likely that this will harm us for some while even further, but we really do believe that's a profitable and good business model going forward. Then thirdly, I should address the -- obviously, the decision from the FSA to -- that we need to capitalize our risk-weighted exposures by the standardized approach there. And yes, if we're looking at ROE terms, on the PLC level, we are having competitive figures there. But being a Swedish shareholder of the U.K. operation will be negatively affected for some time. And we're working on implementing, obviously, the IRB in U.K., but as -- 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 orders. So we have a lot of people lining up for asking questions. I would like to ask you now initially to focus on your 2 most important questions. And then if time allows, we can take another round. But 2 questions per person max, please. Thanks.

The next question comes from the line of Magnus Andersson from ABG.

Yes. Okay. If I have to concentrate 2 questions, first of all then, just on margin and mortgages. I mean why did you lower your list prices on such a broad base on the 15th of October? I mean historically, you've always said that you're price follower, now you're 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. We -- our prices are shifted because of the -- our changed cost of funding and financing. And yes, obviously, as we were guiding you to, we might have had a higher financing cost for the second quarter, which abates now. So you shouldn't read this as a dramatic change from our perspective. But of course, we like to have higher market share in mortgages.

So it was -- but I mean, clearly, you ended up below all your large-cap peers in terms of list price, and I guess that's not by coincidence?

[ There's a ] possibility to do that. And 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 he's cooperating out there. But again, of course, this is something that we will really take good care of, definitely. So no doubt about that. And as Carl said, that our ambition is quite high. And -- but again, we did it because we had the opportunity with -- when it comes to the cost of funding.

Okay. And then just on costs then. I know -- when I look at headcount, you're fairly flat year-on-year, and now you have your usual summary in terms -- in your numbers. When will we start to see headcount reduction? You also say that you've used 33% of your 19 -- SEK 30 million restructuring reserve, but it's -- we don't see any net effect yet on your headcount reduction, but 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, and 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. Finally, just on these payments, evaluation of the payments business and 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. So we will have to wait and see when that comes to the market, if and when.

Okay. So you just started them? Study?

And maybe I should add here. We will not comment anything more on this until we have something new to tell you.

And the next question comes from the line of Antonio Reale from Morgan Stanley.

It's Antonio here from Morgan Stanley. I've got a couple of follow-ups, please. The first one, so 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 October then but after inflation and IT investments? So that the SEK 3.3 billion cost saving is sort of a net figure for IT and inflation? And that's my first question. And the second one is a follow-up on NII. We've seen, obviously, signs of improvement across a number of divisions in Q3. But if I look at the U.K. NII, it was -- it continued to be disappointing in the quarter. Could you talk us through 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 sort of U.K. system are growing 3%, 4%. Just a bit of color on what's happening in your NII in the U.K., please?

Okay. Let me start with the first question. What we -- we had done a thorough granular -- or transparency around the initiative we took last fall. So 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. So sorry for that one. And then, yes the -- 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. And thirdly, U.K. NII. Yes, as you're saying, first of all, just to reiterate what we said last quarter was obviously that U.K. went into more or less a 0 rate environment. That -- we took a hit there. We definitely took -- or at least a temporary -- we entered a face with lower margins, obviously, when rates came down to 0, that most likely will be here. And obviously, yes, not all of the notice periods have adapted in this third quarter. And then, Lars, you can add some.

Yes. I mean on the volumes in general in the U.K., you can say, yes, they are more or less flat or even down a little bit. And I think that the quick and simple answer to that question is that our customers have no additional lending needs at the moment in U.K. It is a slow activity in general, and there is no additional lending need from our customers in the U.K. Then on the margin side, I mean, on the mortgage side, it's been pressured for a long time, as we talked about. That has stabilized a bit now. It's too early to talk about the 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. But on the lending side, clearly more stable margins now than we have seen for some time.

Can I just add something? When you said -- when you 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 the 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. So I think that is one of the effect of as we can see during those months.

And the next question comes from the line of Nicolas McBeath from DNB.

This is Nicolas from DNB. So first, a question on the 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? Yes, whatever that may add. I think you've had around 7 basis points on average over the past 10 years. Do you see any reason to -- for those loan losses to be higher than that, yes, going into next year on the back of the COVID-19 downturn? That's my first question, please.

Well, obviously, as long as the pandemic keeps on being here, we will obviously have the COVID-19 overlay. And in that sense, yes, that is elevated vis-à-vis Handelsbanken regular the way we do the ECL provisioning. But 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. So no, we don't see a reason for that.

Okay. And then I'm sorry if I missed it, but could you just repeat how much tailwind usually left from the NII headwinds in Q2 going into the next quarter? And also, can you comment anything about the outlook for corporate loan volume demand in the next couple of quarters? And if you expect total lending volumes to show positive growth here over, yes, Q4 and then possibly also an outlook into 2021?

Okay. First of all, we see minor tailwind to evaporate to the fourth quarter. So no major increases structurally from expensive funding maturing. But minor parts, yes. Then going to the corporate lending, I think it's still very hard to tell, actually. We've had a very, very strange year though. Obviously, there with extremely high demand in Q2 and then obviously, people paying off their loans. So still too early to tell, and we can't see a clear trend by our corporates still. And then obviously, we won't guide on the growth going forward. It's too early to tell. We've been a bit surprised by the strong mortgage markets and obviously, the corporates are still uncertain.

And the next question comes from the line of Robin Rane from Kepler Cheuvreux.

Yes. So if we look at the SEK 20 billion run rate at the end of 2022, is -- should we view this as sort of a cost cap well, excluding of course, going in to -- yes, going forward, 2023 and perhaps '24? Or should we think about it more as this base level plus inflation going forward? That's my first question, please.

Thank you, Robert. (sic) [ Robin ]. No, 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. Makes sense. And then on Oktogonen, so you don't make any provision for Oktogonen is -- or allocation, sorry, to Oktogonen this quarter either however your -- 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, please?

Well, first of all, obviously, the Oktogonen is a Board decision, and we've been going through now a few years with even though we've had 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. But from a management perspective, I think we view it as our target task to get the bank back to being a really efficient bank. And then we think we're in a good situation to get provision once again.

Yes. And just to add in to that, I think that we are moving definitely in the right direction. And this is a direction we've been moving on from -- since 2019. So I think we are in a really good way. But still this quarter, no, we didn't do any provision. And -- but 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. But I think that we have a bit more steps to take.

And the next question comes from the line of Andreas Hakansson from Danske Bank.

Yes. 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? I mean you've been underperforming compared to Sweden in those markets forever, basically. And then -- 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.

Yes. Thank you very much for that, Andreas. What we are doing in Denmark is pretty much the same thing that we have just announced working with the Swedish branch network. So -- and 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 in their -- in the group as a whole. So -- and I feel quite optimistic that we can do that. So we've had a quite broad branch network in Denmark. So we are now focusing on really good markets and then to make sure that we can focus on the core business and the core customers that we have. So I can't guide you in any direction than 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.

And in Finland any -- because in Finland, the profitability is quite much lower than even that in Denmark. What are you doing there to change that?

We have done exactly the same thing, actually. And they have been doing that for quite some time. Actually, it started already last year, and 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 -- 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. But they have done it for quite some -- a bit longer.

Yes. Then a second question. Swedbank talked just a bit about a negative impact in NII because of a very strong deposit growth. You reported 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?

Yes. Andreas, it's Lars here. I mean, it's quite simple. It's where we see the drop is on corporate deposits and included in that is obviously the short-term U.S. dollar deposits that we receive every day, but certainly much so in the second quarter, and we deposit them with the Federal Reserve. So that is what creates the volatility on our deposits. So 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. So that's simply a reflection of that. So the underlying operational deposits keep growing, but this item makes it volatile when you look at it.

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

Yes. Here is Sofie from JPMorgan. 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 that is the actual credit losses for the period. Could you just give some 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? And 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%. And it looks like it partly relates to the 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. And that -- these figures you're alluding to are around these ones. So 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.

So this basically relates then to [indiscernible] oil exposure that you could have sold off?

I won't comment on that one, but...

Okay. But in terms of the stage 3 coverage, it just looks very low at 32%. Also looking at some of your kind of stress BD values, they also look very, very low at only 3%. I mean how should we think -- how much stress you really have in the book? And also, why haven't you stressed the loss given default ratio?

Sofie, it's Lars here. I can start off and then maybe my colleagues will add. But no, 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 1 individual exposure that we took provisions for last year. That is obviously now not in the books anymore. So there you see, mathematically, a drop in the provisioning ratio. But on a more sort of general frame, you can say that given that our exposure is also in stage 3, to a large extent are secured with collateral, that tends to impact the reserve ratio in stage 3. So that's sort of more broadly the answer to why that is. And then that leads me over to your next question on why do we not stress the LGDs? Well, we do stress the LGDs through the macro scenarios -- the macro assumptions where we do stress, for example, property prices. So we take it in the entire portfolio in that way. Then 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. But we don't do -- we don't apply a general LGD stress in the overlay, but we take it through these steps.

And 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. And as we've been telling you, most of the quarters, obviously, we work very, very actively with the portfolio. And some of the exposures we offload and some of the exposures, always, we increase the stage 3 provision. So there are movements behind the SEK 28 million. Thank you.

Okay. And then just the final question. On the write-off of SEK 943 million that you took, when you saw that exposure, was it recovered or did you have to take any additional provisions against that loss?

No. I mean we -- you might have seen in the segment Sweden that we have a fairly big recovery. So that answers your question.

The next question comes from the line of Kazim Andaç from Deutsche Bank.

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 you think it's something material? And then if you can walk us through the headwinds and tailwinds on capital for the last quarter of the year?

Okay. Kazim, Lars here. I'll start off with 20 basis points. No, I mean, 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.

And then coming back to the head of tailwinds into the fourth quarter. Obviously, as we're saying, we know that the U.K. risk exposures will increase by SEK 65 billion as of 1st of Jan. We still don't know what the capital demand on these risk exposures will be. We're likely to know that very soon or fairly soon. Then second, as I was telling you earlier on, the Norwegian CRE floors will take away 30 basis points from our 19.4% level. So that's what will happen. And then obviously, we have all the usual volatility of growth and pension systems coming into the picture. Thank you.

And the next question comes from the line of Nick Davey from Exane BNP Paribas.

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. So 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? And maybe also linked to that, do you have any views about price lifts from here? Because 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. So 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 the period when you stopped contributing into it in its sort of current shape, have you done any work on -- if there comes a moment in the sort of 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?

Let me start off with the first one and then Lars, you can add in. No, as you're saying, obviously, we don't like to be procyclical 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. So that's the basis behind our rationale. That's what you should expect from us going forward as well. So you shouldn't expect us trying to chase some market share in an overheated environment, no.

And you had a question also on any views on prices from here. I mean I think our chief economist -- 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. And 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. And at least, we haven't heard any signals about any potential new measures coming in. So nothing that we know of. And then you had a question also on Oktogonen and their cash flow situation. And Carl is looking at me, so I'll take that one. No. So I mean the situation for Oktogonen is such that they used to have 2 income flows: When the bank was allocating, that was one; and then the dividends. Now from here onwards, it's the dividends from their shares, that would be the income. The liabilities they have, I mean, 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. And this tends to vary quite a bit over time how people do. So the outflows are quite hard to predict. So no, we haven't done any calculation at what point, if any point they would need to sell the shares in Handelsbanken banking. But 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. So their holding stake has also varied over time.

Okay. And sorry, just to come back on the housing market. I mean 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, and we have always said back then that prices go up and down, and of course, at some point, they will go down again. But I think 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 households' cash flow and stress test that. And we still apply a 7.5% stress mortgage rate in the calculation. So that disqualifies quite a few people from borrowing. So that's the basis for our lending rather than any given price increase. But prices go up and down. And 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, and that's a new phenomenon. So maybe a change of preference where people want to live.

And the next question comes from the line of Maria Semikhatova from Citibank.

Yes. On your decision to review the payment business, how much -- what's the contribution of the subsidiaries into your results in the third quarter? And do I understand correctly that your cost and revenue attrition guidance effectively includes the decision to divest this segment? And what would be your guidance on cost savings and revenue if you decide not to proceed with the sale?

Well, first of all, I don't have the second quarter 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 million. And the cost side of it was more or less SEK 400-ish million. So that's the situation for 2019. No, they're not included in the figures as such. They're obviously included -- and Carina has a picture where she shows the -- what's our core business and what's our noncore business. And of course, we've been viewing our payment business as a part of the noncore business. And in that sense, obviously, we -- that is a part of the estimate of how we view the possible income drop and cost savings. We can't comment on the -- on what the figure would be if it happens that we don't sell the business. We will come back to that one later, so...

And we're 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. So other than that, we will not comment on this process until we have some news to tell you.

Okay. I understand. Then this maybe a slightly different way to ask a question on 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.

And the next question comes from the line of Rickard Strand from Nordea.

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 branches closure in the coming quarters? Then 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. On your question about the branches in Q3. As I said earlier today that we have been doing this for the last 4, 5 years to close down 100 branches and merge together with other branches next to them and that continues. So it's not a big amount in Q3. We are doing the assessment right now to make sure that we're doing -- making the right decisions on where we will have the 200 branches. So we will get back to that.

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

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, and you have also stated that outside of the COVID-19 overlay, you should not see -- you don't see a reason why risk cost in the foreseeable future should be -- well, 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 employment? Is that something that we should -- that is a matter of concern for you? Or it's too early to see an impact from kind of 8% to 9% unemployment in Sweden? And should it remain at these levels for much longer time to see any impact on the book of Handelsbanken? And this is my first question.

Yes. Thank you, Riccardo, for that questions. No, obviously, as I was laying out the words earlier on, we -- 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 or mortgage or real estate property-related lending. And we do that to clients we view as having really strong cash flows, and we do it collateralized. And these things, we believe, are the major component of explaining our very low credit losses historically. So therefore, no, we don't foresee a strong correlation or we won't have a strong correlation model-wise between macro development and ECL. And we don't see that we will have a correlation between real credit losses and macro assumptions or COVID being here for longer. So that's the reason why we don't -- we believe our risk factor is idiosyncratic, and that won't change with COVID.

And just to add there, I mean, you may have seen in our disclosure that we have, in the 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. But I think it's also fair to stress here that when you look at the Swedish unemployment rate today, so first of all, our Chief Economist believes that we are pretty close to peak in the unemployment, but then also when you look at people actually being unemployed today, these are typically not homeowners.

Right. Okay. So 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. And the second question, if I may. On -- one of your previous 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. But that includes the initiatives we were telling you about last year. So the -- and the impact from that proportion of last year most likely is a bit less than we estimated at that time. But the total number, our best guess is SEK 1 billion.

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

Just a 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 your expectation that the 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 time line for that IRB rollout for the U.K.? And 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? And is that Handelsbanken being conservative? What are the reasons for the somewhat lower dividend accrual for 2020?

Thank you, Martin. Well, 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-à-vis our peers. Then obviously, from a aggregated level for the bank, there -- we will have negative consequences in being in Swedish shareholders of owning the U.K. operation. We would work quite hefty with improving our efficiency there. We do believe that this is a good business model. We do believe that there's growth possibilities going forward. But most likely, the IRB model won't be in place up -- before a few years from now. So -- but having said that, obviously, you run the bank and you can't just choose to have the one business areas which perform the best all the time. So that's in our portfolio mix, and we think it offers a growth opportunity going forward. Yes. And then your second question about -- if the 40% redivided accrual is -- yes, you might say that, that's conservative. We rather come to the market and guide on 40% and then we have room to build a stable bank to support our clients in their growth perspective. And if there's money left on the table, of course, we're going to give that back to our shareholders. But that's the reasoning behind it.

And maybe just to clarify and remind you that this was a decision taken in the beginning of the pandemic. If we had not taken any decision, the rule would have forced us to have a much higher accrual for 2020. And on the back of the outbreak of the pandemic, this was the good -- the proper level to accrue for, we believe.

And the next question comes from the line of Jacob Kruse from Autonomous.

So 2 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 kind of a price leader in mortgages, which I think it used to be. I guess the branch cuts you've talked about. But it seems like there's more of a cultural shift going on than perhaps just the branch closures? And then 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? And could you just remind me where we are on Swedish commercial real estate capital increased requirements as well?

I will start and then I think that Carl and Lars will fill in. But on your first question, if we are changing anything in 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 home 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. So again, we are still a decentralized bank that the way we do business, and we are definitely local. So 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, 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. So 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. And I think that what we have been doing for the last year and that we can -- 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. So this is definitely to make sure that we can keep the business model running forward.

Jacob, it's Lars here. On your second topic of capital. I mean -- so 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. And this is likely to come into effect at least partly in 2021. But we don't have any details around that yet. And then 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. And 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. So that's pretty much what we have guided for before as well. So that should kick in from Q4.

Okay. And 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.

And the next question comes from the line of Hari Sivakumaran from KBW.

I just want to return to the SEK 500 million of revenue attrition. What's the mix of NII and fees? And 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. And then my second question, just on the branch reductions, 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. And second of all, yes, we -- obviously, the payment business is included in our noncore business, but we won't guide on the proportions of that one.

And just 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. But as we said, we -- depending on what we do with this business now, we still intend to keep offering it to our core customers. So that's obviously generating revenues in that case. So that's why we're not more specific than that. I'm sorry. Your second question?

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. So that will carry on over time.

And the next question is from Andreas Hakansson from Danske Bank.

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? I mean 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? Or what are the rules?

Andreas, well, as I think you already know, I mean Oktogonen has not only had Handelsbanken shares, they've had a portfolio of different equities in that. So the rules are that they can have other shares than Handelsbanken in the portfolio. And then...

But there's no limitation? You 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 and so that's how they are going to run the portfolio. It's not a question we can answer or have a view on, really.

I will now hand it back to the speakers for closing remarks.

So thank you very much for taking the time. And I think that -- I hope that we have solved some of the questions or issues that you've had. So thank you very much for your time, and hope to hear and see you soon again. Thank you much.

Thank you.