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

So good morning, everyone, and warm welcome to this call for the first quarter of 2021. Together with me today, I have our CFO, Carl Cederschiold; our Head of Group Financial Strategy and Investor Relations, Lars Hoglund; and Head of Accounting, Annika Engler. I will start by giving you an update on the overall strategic progression of the bank, and then Carl will walk you through the key financial topics for the quarter, followed by a Q&A. As usual, Lars will most likely jump in as well. Despite the prevailing uncertainties relating to the pandemic, the bank recorded its best Q1 so far. Apart from the corporate borrowing, demand being a -- in a bit of a standstill year-on-year, but sequentially up 2%, the business momentum was strong. On the mortgage side, we have continued to be the biggest player in the Swedish market when it comes to net inflows. And the same goes for mutual fund savings in Sweden where we took 40% of the net inflows in the market in Q1. The costs are under control. Underlying costs excluding Oktogonen and development costs show a strong trend down. The progress in the cost initiatives runs according to plan. SEK 1 billion is agreed and decided to be executed, most of it in 2021. We are increasing our development costs, and these are investments to build the bank for the future. And as I said, other costs are down. The asset quality remains very strong with a net reversal in the quarter despite a continued conservative management overlay approach to COVID-sensitive exposures. The capital position is also strong with a CET1 ratio 6.3% points above the FSA minimum at 3.3 percentage points above the upper end of our target range. This provides a good opportunity for growth, among other things. Most of our employees have been working from home also in Q1, but we have still managed to be very productive in executing on initiatives communicated last autumn. In Sweden, the transformation of the branch operations are progressing according to plan. The operation in Sweden continues to deliver growth with high efficiency and good profitability, and our customers remain satisfied. The work to set up a new customer service function with improved availability and extended mandate is also progressing well. Basically, all our other home markets show a more positive development in Q1 and in some of them a really good start of the year. In the U.K, the work to replace 5 regional banks to 4 districts and the formation of a new unit that will focus on further development of the digital customer offering and proactive support to the branches is also ongoing. So in sum, we have a strong quarter behind us, and we are moving steadily on our path to reach our ambitions of higher profitability, lower cost and more satisfied customers. All in all, this should mean a strong foundation for shareholder value creation in terms of earnings per share growth and a stable dividend growth. I'll stop here. And with that, I will leave over to you, Carl.

Thank you, Carina. I will touch upon a few selected topics, and then we are happy to discuss all the questions you have in details in conjunction with the Q&A. So let's start with net interest income. Compared to Q4, and please go to Slide 8. As you can see, the quarter was fairly uneventful when it comes to the overall margin development. But we were happy to see that the sequential volume contribution, again, was positive after 2 quarters of negative net contribution to NII when the soft corporate loan demand more than offset the stable growth on the mortgage side. The mortgage volumes have grown very steadily throughout the pandemic while the corporate volumes were very volatile until Q4 last year. Now the corporate demand is in a wait-and-see situation. But at the same time, we hear a lot of positive noise around activities in our branches. Once we have come a bit further in opening up society around our home markets. We had a negative contribution from day count effect as there were 2 less days in Q1 compared to Q4. Roughly half of that impact was offset by a positive FX contribution. And finally, the scale down of our international operation outside our home markets is contributing slightly negatively, which is in line with expectations. If you go to Slide 9, you also get an illustration of the progress of scaling down the corporate portfolio outside of our home markets. As you can see, we have come quite far in reducing those exposures. What is also positive on the business volume is what you see on Slide 10, which shows the development of deposits. The trend has been very positive for several years, and since 2018, the average annual growth rate has been 8% on household and 12% on corporate deposits. If we move over to the fee and commission, we can see on Slide 11 that Q1 reached a new all-time high quarterly figure. Fees and commission now make up 26% of our revenues, and not too long ago, the share was just over 20%. On the next Slide 12, you can see a rough split of the commission components, of which savings-related commissions today account for roughly 60. The very strong net inflows together, of course, with recovered stock markets drew savings-related commissions up 22% compared to last year. In the past decade, we have continuously had a market share of the net inflows of mutual funds in Sweden of around 20% to 30% compared to the back book market share of around 12%. In Q1, the market share was 40% of net inflows. And it goes without saying that this will continue to be a key growth area for us. The payment fees have, on the other hand, seen a decline due to lower card fees during the pandemic, breaking an up until then positive trend. The sum of the remaining commissions, i.e., loan and deposit fees, guarantees, securities, commissions, et cetera, have shown a relatively stable development during the year. Note, though, that the scale down of our known home market business means that especially the guarantees fees are trending down, all according to the plan we communicated 1.5 years ago. If we move over to costs on Slide 14. In order to illustrate the underlying trends, we've broken down the quarterly cost in the first component of development costs and the second one, the other costs. And we've adjusted everything for one Oktogonen provisions. Total underlying expenses continued to drop and were down 1% compared to last year. Note though that this includes an increase of development cost by 38%. Total development spend increases 4% in line with our plan. So you can conclude that we have capitalized less and expensed the higher share of our IT development this quarter. This is related to the nature of products in our current IT development. Other expenses dropped by 5%. It is quite clear in this picture that we turned the corner in Q1 last year with a shift in the cost trend. And if we move on to Slide 15 and the trends on a 12-month rolling basis, the picture of the changed trend becomes even clearer. We have started to gradually reap the benefits from the initiatives launched in the past 1.5 years, while at the same time scaling up IT investments. Over 2021 and 2022, we will make additional targeted IT development investments equivalent to a total of SEK 1 billion, which should come on top of our ordinary IT development of around SEK 2.5 billion per year. Hence, it is fair to assume that the green bars will be somewhat elevated over the next 7 quarters or so when we make these targeted investments. Until the end of Q1, around SEK 90 million of SEK 1 billion had been exercised, of which around SEK 20 million being capitalized. As we alluded to in Q4, it is probably fair to assume that these temporary increases in IT development, to a large extent, will offset the positive effects filtering through from the other initiatives during 2021, with a material net positive effect on the total cost line rather showing up in 2022. And for a few updating comments on the progress on the initiatives, please go to Slide 17. All in all, we have more than 100 initiatives ongoing, all contributing to the cost reduction. We follow all these initiatives closely and, of course, also have time lines for each of them. Some of them, like the branch operations in Sweden and U.K., are large, but many of them are considerably smaller. However, summing them up is what will take us to the SEK 20 billion cost level. If factoring in underlying inflation, the total initiatives required to reach the cost target amount to more than SEK 3 billion over 2.5 years. Up until end of Q1, around SEK 1 billion or roughly 30% of the initiatives have been addressed and agreed upon with the affected parties. Only parts of these have so far shown up in the reported cost, though, but we'll, of course, do so gradually in the coming quarters. Reported costs have been reduced by around SEK 200 million since last summer on the back of execution on the initiatives. In terms of the restructuring reserves, we have so far used about SEK 1 billion of the total amount of SEK 2.3 billion. Now let's move over to the credit losses on Slide 18. We saw net reversals in the first quarter of SEK 8 million and a credit loss ratio of 1 basis point. And just to clarify, when booking 1 basis point credit loss ratio, while making net reversals, credit losses are based on -- are based off on- and off-balance items, while the credit loss ratio is based on lending to the public on the balance sheet. You find the formulas behind this in the fact book. So clearly, the asset quality remains very, very strong despite the pandemic. In Q1, there were, as always, fine-tunings of the IFRS 9 macro and COVID overlay assumptions, which you find on Slide 38. One can note that we've increased the stress somewhat on the hotel company exposures. But generally, there were no major moves this quarter. Let me finish off on capital, and please go to Slide 19. The CET1 ratio decreased marginally from 20.3% to 20.2%, putting the bank 6.3 points above the expected FSA requirement per Q1 of 13.9%. This also means 3.3 points -- percentage points above the upper end of our target range, which is 1 to 3 percentage points above the FSA requirement. In the CET1 capital, we have deducted 40% dividend accrued from the earnings, in line with previous guidance. In the quarter, there were no major changes to items in the capital ratio components really sticking out. In terms of near-term regulatory changes to the capital requirement, it is mainly the CRE floor in Norway, which remains a question mark. We still have no information about when and how such a floor could impact the requirements, but as we've said before, a worst-case scenario would mean an increased requirement in the area of 30 to 40 basis points. At the same time could be -- while at the same time, it could be significantly less. Many of you are likely to ask again about the capital plan after September when the current dividend recommendations by the FSA will expire. Still, the only answer we can provide at this stage is the following: First, it is far too early to guess what the FSA's view will be as we approach September. Second, the dividend decision and capital distribution is, at the end of the day, a Board decision, which is based on an overall assessment, which, of course, can change over time, depending on the business outlook and opportunities and regulatory outlooks. So for now, all we can refer to is that the bank's long-term capital target range of 1 to 3 percentage points above the SREP under normal circumstances. Obviously, we are not in normal circumstances yet, but we will, of course, come back and address the capital situation in the coming quarters. In any case, our capitalization is very strong, and that's a really good place to be in, in terms of enabling us with flexibility to really support our customers and aim for growth in the bank. So to sum up, a very stable NII with continued strong mortgage lending, muted corporate lending, fairly neutral margin and funding effects and some FX tailwind being offset by negative day count effect. Commissioning can reach a new all-time high. And again, it is the success in the savings business that is the driver. Continued good progress on the work to streamline and strengthen the branch operations and the offering to our customers. The cost progress runs according to plan, and the bank remains firmly committed to the cost target of SEK 20 billion by the end of 2022. Asset quality remains very strong despite the pandemic and the capital position is also very strong. So with that, let's open up for questions. Thank you.

[Operator Instructions] Our first question comes from the line of Magnus Andersson from ABG.

Yes. First -- my first question is on costs, really. And your headcount development, you touched up on it, but just to try to understand what's happening here. You used almost half your restructuring reserve and we hardly see any impact at all in your headcount development in your home markets. You are, in your report, alluding to some [indiscernible] in the U.K. which will have a positive impact or make headcount go down. And related to that, just if it's still relevant to Slide 23 you had in Q4, where you showed we should expect kind of a flat underlying cost development year-on-year in 2021 at around SEK 21.6 billion, and that we get the whole decline in 2022, which I think would imply that we should see lower costs in the second half of this year than in the first half.

Okay. Thank you, Magnus. Let's start with trying to address some of the topics here. First of all, yes, you're alluding to the FTE development, and there's a few components worth to highlight here. As you're saying, we used up SEK 1 billion of the SEK 2.3 billion in restructuring reserves. And obviously, what we -- during last year, we offered staff going into retirement a bit earlier. And that's concluded in Q3, Q4, but the staff will obviously move -- leave the bank gradually over 2021. So we have used restructuring cost for that purpose, but the staff haven't left the bank yet. And then second on that one it is also that we've obviously switched out of consultants and into permanent staff instead. So that's a reduction in cost but actually some -- a component, which is increasing the number of FTEs employed by the bank. So that's at least 2 perspective. And then you are correct on that we guided on flat development on costs during 2021, and we should see the gradual -- or the bigger parts of the decrease during 2022.

And the specific measures in the U.K., I can add there, which we all see that the performance is still very lackluster, very low profitability despite net recoveries on the loan loss line, et cetera. I mean how are you going to improve your ROE there?

No. It's obviously true that we've been struggling in the U.K. for some years now. And we've been keep reiterating and we do that once again that first of all, we needed to plc ourselves when Brexit came, so that's taking up a lot of our time and efforts. Then we spent a lot of time as well on AML components, and we are totally in line with the U.K. regulators there and we move according to plan. And thirdly, obviously, right now, U.K. is in a restructuring mode, mirroring, to some extent, what we do in Sweden. They are closing 5 regional banks and moving to a county organization, and they're trimming their branch networks. So what we see underlying in business development is actually fairly positive. Obviously, U.K. has been a very close down perspective. But right now, we see fairly strong momentum in both deposits and the asset management perspective. And we are looking fairly positive on the outlook going forward when it comes to lending as well when the COVID and the lockdown abates. Having said that, obviously, it is clear that we run an -- in U.K. standards, we run a very efficient bank. If you compare us in cost-to-income ratio, et cetera, with peers, we are competitive there. But on the other hand, obviously, we run with a higher capitalization level at the time being. So we keep on moving on this restructuring. We keep on working and bringing it back, and we still see a really good market possibility in the long term.

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

I've got 2 questions and one clarification, please. The 2 questions are -- the first one is on U.K. NII. If I look at U.K. mortgage approvals, they've been at record highs in the last 6 months and pricing almost doubled versus a year ago. So my question is how come you've not been able to grow your NII? Do you think we've reached the trough point when it comes to NII this quarter? That's my first question. Second question is on the level of fees coming from asset management. You've spelled out very clearly that we've reached new record-high levels in terms of AUMs and very strong mutual fund inflows. And I realize it's always difficult to sort of predict markets, but you've been gaining lots of market shares for a few years now in Sweden. How should we think about the outlook for fees here for the rest of the year? And then lastly, just one clarification on the costs. So you said that the SEK 1 billion IT investments will be mostly offset by the cost savings, suggesting, all else equal, there should be no changes to the absolute underlying cost levels compared to last year. How should we think about Oktogonen for the year? Shall we just expect a similar quarterly contribution? Any comments you can share are welcome.

So Antonio, it's Lars here. I will start off with the first question. No, I mean, you're right in the observation, of course, that the margins in the U.K. market have improved lately. And we have seen those signs as well. Having said that, as you have seen, we haven't really come to the growth trajectory in our business volumes there yet on the lending side, as Carl was alluding to. But definitely, we see the underlying improvement in the margins there. And then I hand over back to Carl.

Yes. And then if we speak a bit about fees in asset management. Obviously, we have had very strong inflows and a really good volume development. But then it comes down into margins as well. And in playing the margin game correctly in the asset management is a multidimensional perspective. On the one side we believe that we will be margin pressure more or less in each bracket, whether you're looking at products or client segments or geographies. But on the other hand, you can see that if you tilt your product mix and if you are well positioned in equity funds, in sustainability funds, in solution funds and if you're well positioned to take margin share in retail markets and the other home markets, then you're actually fairly well positioned to increase your average margins. And that's exactly what's actually happened during the last year that even though we see margin pressure in each and every bracket, we've actually -- we've had stable or actually attached increased margins when it comes to the overall perspective. And then coming down to costs late -- lastly. Yes, you're correct in interpreting that the -- we believe that the increase in IT cost will more or less offset the decrease in the underlying cost level during 2021. So they will more or less cancel each other out, we believe. And if we are on move to SEK 20 billion, and if we keep the strong momentum of the bank, we believe we're in a good situation to have higher return on equity vis-à-vis our peers, and that would imply an Oktogonen provisioning. And then obviously, we need the Board's full support in the strategy we're running. But we believe we're well positioned for that.

And just maybe to highlight again, once again, on Oktogonen that the SEK 20 billion target is before any potential allocation to Oktogonen. Thanks.

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

Have you -- what has been the reception from Swedish customers on the closure of branches in Sweden so far? And how do you think about the market share of the growth, in particular, in mortgages, which is below your natural market share and at the same time as you close the branches?

Yes. Thank you. I'll take that question. When you look at the Swedish branch network and the transformation we're doing there, I think that -- as I said during the press conference, I feel very confident that when we do this, we do this aligned with the customer, and we can still see that the customer satisfaction and how they look into us are still on a very high level. So I think when we do this, we do it very carefully among -- together with the customer, with the employees and definitely to keep the business ongoing. So from that perspective, it's not very much noise. But again, I feel that we are taking care of those -- of the customers really, really well. so far, so good, if I may say so. So very small noise actually. So I think that we have been able to provide good option, good alternatives from that perspective. When it comes to the mortgage business, I think that we have a good position as it is today. But again, we are not developing that business in line with our back book. So the intention and the ambition is definitely to move ahead along with that. So some of the development, the IT spending we do is definitely in the mortgage business, i.e., when it comes to digitalization and to provide and offer both the local and through the digital channels. So our ambition is still very high here. So we are spending resources and time and spending to support that business even looking forward.

All right. And then on the capital, I know that the distribution question is, of course, a Board decision and so on. But I guess you are SEK 30 billion to SEK 40 billion above the lower range of your targeted buffer. I mean, what's -- the circumstances now is not normal, but what could happen to -- that you would need all this capital actually?

No. But I think the way we see it is that the Swedish FSA will need to come out and stop their recommendation about the restrictions on dividends. And obviously, we want to -- it's not unlikely that we get some guidance as well on inferrals of countercyclical buffers. And until we see and until we understand the inferral to a normal situation, I think it's very tough to guide on the capital strategy going forward. But of course, as we keep reiterating is that under normal circumstances, we want to run within the buffers. So it's just to get clearances on a few of the unknowns and then we can move forward.

All right. Would it be an option for you to consider growth through acquisitions, employing this capital?

I mean it's not that we view it that we have an extra amount of money to play around with. We will always try to build a business we can as good as possible. And obviously, that -- mainly we've been interesting in organic growth, but obviously, we doesn't rule out structural growth. But it's not that we see it as that anything has changed in that conditions. We've always run the bank with a really good capital situation, and we will try to do that going forward.

And the next question comes from the line of Adrian Cighi from Crédit Suisse.

Two questions from my side as well. On capital, a follow-up, please. You mentioned the potential headwinds from the Norwegian CRE. But can you give us any thoughts on the expected headwinds from the ongoing model review by the Swedish ship, let's say, even in terms of color, if not quantum. And secondly, in terms of revenue attrition from the ongoing restructuring plan, can you give us any update where we are versus the initial estimates lease?

Thank you for these questions. Well, first of all, obviously, we are having a model review of the IRB models in Swedish from the Swedish FSA. And these are delivered now during the first half of this year, and they will be reviewed. We have no view on the -- or we can't guide you on the consequences of that one. But obviously, it's no dramatic in that situation. When it comes to the revenue attrition, we have guided on that a total of a negative SEK 1 billion in the past. And that's -- and the first half of that one should -- was attached to the moving back from the international market. And in this report, we've just shown that most likely, we've seen the majority of that income effect. So the first half of the SEK 1 billion is probably in the books already. And then on the other half, we don't have any other information to give at the time being. And no negative consequences on that either. It's just that we will have to wait and see.

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

Yes. Here is Sofie from JPMorgan. So I was wondering on the Swedish banking tax. Is the [indiscernible]? Do you have any update on if the banking tax is still going ahead? And how? What the potential impact for Handelsbanken is potentially from the beginning of next year? Then my second question would be that [indiscernible] or Stage 3, Stage 3 went up a little bit quarter-on-quarter and coverage went down to 30% from 32% end of the fourth quarter. Kind of what level of coverage do you think is sufficient for Handelsbanken? Do you think the 30% NPL coverage will go down even further? Or do you think this is basically as to levels it gets? And then my final question would be, if you could -- just on the U.K., how should we think about the U.K. costs going forward? Previously, you mentioned that you need to make quite big IT investments in the U.K. Are these costs included in the SEK 1 billion IT spend? And the SEK 1 billion IT spend that you have, how much is basically in the U.K.?

Thanks, Sofie. It's Lars here. I will start off with the 2 first questions. So on the Swedish banking tax, I mean, nothing new there, really. I mean, we believe it's still up for sort of judgment on the EU level, whether that will be possible or not. What we have said, if it's decided, if it's approved, you can basically view the impact on our P&L in the similar range as the current resolution fund fee. And having said that, the way that fee is constructed still is that once we have reached a certain level of the fund, so to speak, that fee should drop off and become much, much smaller. So you might have a year or 2 with a double impact, but then once the resolution fund fee then hopefully drops off, we will sort of be back at the current level of impact. But again, no decisions in the parliament yet on the banking tax. Then your question on Stage 3 volumes. Yes, they went up a little bit in the quarter, as you say, but the provisions were down somewhat. And this is really because of the nature of the exposures that went into Stage 3. I mean you can have exposures going into that stage, but where you still deem that you will make no losses. And typically, that's because of the collateral you have on those exposures. And if you look carefully in the table, which I know you have already done, you can see that some of it is related to property lending, and that typically means we have collateral with very low LTVs. So that's sort of the general explanation. And then we don't guide or have any view really on the level of -- on the level of provision on Stage 3. That will vary from quarter-to-quarter as you have seen, again, depending on the nature of the exposures on the collateral. And then I think Carl is ready to take number three.

Yes. And then on the U.K. question around the IT investments and whether or not that's a part of the extra SEK 1 billion. No, the IT investments in U.K., they will be a part of SEK 2.5 billion-ish of the yearly spend in IT. The extra SEK 1 billion we focused on rather changing and improving the digital meeting places with clients and so on. And in that part, yes, a part of the SEK 1 billion might be allocated to U.K., but not coming to a core banking system change in U.K.

[Operator Instructions]. Thank you.

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

Yes. Starting off with a high-level question. Given the sort of tough competition on Swedish mortgages and your current restructuring program in Sweden and closure of branches, what do you see as most challenging so far and also going forward in terms of sort of keeping your current customer base and mortgage customers or attracting new ones?

Thank you. I can take that and start with that. Yes. I think that -- I mean, we have started the transformation, the restructuring earlier this quarter, and we can see that we can still keep up with the mortgage business pretty well, I would say. But of course, when we look ahead, I still think that we can provide a really good offer through the branches that we will have locally, but at the same time, as I said, that we are increasing the speed to make sure that we do have a digital solution when it comes to the mortgage business overall. So -- and again, we will have a customer service in place to provide our offer through telephone and proactivity through that in those places where we're sort of leaving for the moment. I think that we have been thought that very carefully through to make sure that we still can be very local, still can be very transparent and visible in the markets that we do have a lot of customers. So I think from that perspective, I feel quite confident that we can keep up and even increase.

Okay. And then in terms of IT spending and capitalization, you're right in the report that it's fluctuating between the quarters, et cetera. But I'm thinking sort of going forward, is it fair to assume that the investments you will do ahead will have a lower capitalization rate, i.e., meaning that you will gradually reduce the capital IT assets that you have on your balance sheet in the coming years?

Thanks for that question, Rickard. I think it's too early to tell, obviously. Our capitalization level will be dependent on the structure of the IT investments. If we are running a bank with huge investments in core banking platforms, et cetera, which we will keep for many, many years, obviously, we will put more on the balance sheet. But if the IT investments are more in meeting places and digital advancements towards the clients, I think it's fair to assume a lower capitalization level. But that's -- we will have to see that going forward. So it's not a strategic decision. It's rather a consequence of the thing we invest in development.

And the next question comes from the line of Jens Hallén from Carnegie.

First question on Oktogonen. If I just look at the reservation for now in Q1 and annualize that, we end up at the SEK 850 million cap for the year. Is the bank already that profitable compared to peers? And if so, is that then including what the other banks were doing in terms of loan loss provisions during 2020?

Thanks for that question, Jens. I think rather the component and the way we -- the decision process for reserving or not is fairly actually -- it's fairly mechanical, actually. We just compare vis-à-vis the past. And then the real decision of accruing or not will be done at the end of the year by the Board. So we -- so based on the figures we've already seen for last year, the mechanics tell us to reserve. And since we have had a constructive discussion with the Board around their view today at the bank, our momentum in restructuring as well, it's -- this is the best thing we could do, but the decision will be made at the end of the year.

And you're absolutely right, Jens. Sorry, you're absolutely right in that when we compare our ROE with the ROE or the peers, if they have made big loan loss provisions, that will impact their ROE. And we think that makes all the sense in the world. If you have lower loan losses, that has a value.

No, absolutely. I think, actually, when I was looking forward, if they then happen to have large reversals underlying, you're not going to be worse than them, that they would still report sort of elevated ROEs. But I guess, it will be a mechanical process then as well.

True. Correct.

Okay. Then just the second question on -- you talked about positive noise from corporate credit demand. I think something we've been looking for, for a while. My question is based on your conversations with your customers, I mean how much buffer do you think that they -- these companies need due to COVID-19 pandemic to start investing in borrowing? Will they need quarters or years? What do you think?

I think it's a very good question. I think that when we talk to our customers that, I think that what we saw throughout the 2020, we all knew what happened when they started to buffer a lot of liquidity and have a lot of drawdown in all the banks and in Handelsbanken as well. And we could see that definitely decreased throughout -- in the end of 2020. But when we talk to the customer, I think that they as well as we wait to the society to open up again and to make sure that we'll will start moving forward. And from that perspective, when we look at all our home markets, actually, we can see that there are a lot of discussions in the pipeline. And from that, we take a lot of positive impulse to see that the demand will definitely increase as soon as we get away from this pandemic, so to speak. So I feel positive. And I think the -- when we talk to the CEOs in all our home markets, they do have the same feeling, so to speak, in [indiscernible] when they talk to the customers.

And many times, we talk about the government support as a negative factor if they are going to be removed. I think there's a positive factor there around as well. When government support are being withdrawn, companies need to finance themselves independently. And that -- when that happens and being removed, that increases the demand most likely. So when lockdowns are abating and when things move back to normal, we believe, first of all, we, from a restructuring perspective, are in a better situation to actually support and offer our corporate clients a really good advice. And second, they're in need of more money and funds.

Yes. And I can just add to that and say that, I mean, this is not just a large corporate. I think that is where we can see the same wait-and-see, so to speak, when it comes to the SME companies as well. But again, I think from the dialogue that we have with those customers, I feel that there are the wait-and-see period, everyone hopes that to be over because they need to do -- make investments and so on. So yes.

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

Two questions, please. The first one, can I ask you to talk about the possible long-term impact of all this deposit growth you're seeing, which again was quite sharp this quarter. Just thinking about possible opportunities here either on the household side to convert to mutual funds or perhaps on the corporate side to charge more deep negative rates possibly to issue less debt. Are there any kind of those opportunities, which you think are compelling? And the second question, which I think I asked for the second quarter in a row is about Swedish house prices. And I understand the structural dynamics of the markets, and it's not a bubble question. But now that home prices are growing 20% year-on-year. The question really is one about your role in that kind of a market and how you think that level of price growth can be decelerated, whether you have a role to play in that?

Well, let me start in trying to address and most likely some other ones will jump in here as well. First of all, the long-term impact of the deposit growth. I think it's fair to say that when you look at the banking sector, in general, obviously, most of us has had huge inflows into deposits. And that's obviously a telling story of the nature of our economies in the world we live in where there are tons of cash available and needed to be part somewhere because the world lives in lockdown. So obviously, we don't foresee this as a long-term trend carrying on forever. Having said that, obviously, we team -- we tend to be a bit better positioned in these senses, and we are accumulating a bit higher ratios of that than many of our peers being a really stable bank. Obviously, as you're saying, the -- on the household side and the retail side, these can be converted, obviously to 2 parts. Savings is one obvious choice, obviously moving them into rather fund savings. And most likely, that's been part of the answer to the success recently. Second of all, obviously, we are a bank which have a bit higher ratio than the peers in capital market financing. And obviously, we can use quite a lot of the deposits as well to decrease our financing cost as well. So 2 good components for us. Then going to the Swedish house prices, as you say, obviously, we might have a structural imbalance in Sweden, which deems to keep on having the demand out there. But yes, we've seen hefty price increases. And you can reason around -- you can debate about the reasoning of that one being people adapting to the COVID and wanting bigger spaces to live in and want another house to live in and they believe that they're going to work more from home, et cetera. But putting them aside, I think it's really important to stress that we don't change our behavior much in this development. We keep on having our strict way -- our strict view of our credit approval process. We want people who are very well capitalized, who are able to pay their cost, we want a strong collateral. So I think for us, it's not -- we like our clients. We want to be able to support the demand, but we don't change our behavior in it.

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

On the NII, I'm looking at the bridge on Page 27 in your fact book or in the presentation, rather. You said that the net effect on margins and funding costs in Sweden was minus 18. Then I look at -- you have actually reduced your funding quite significant. I think you had redemptions of some SEK 75 billion in the quarter, and you have only issued a part of that. So there should have been quite some tailwind from funding. So could you tell us that number to minus 18, how much is margin pressure and how much is funding cost, if possible?

I think, Andreas, we have to come back on that with a more detailed answer, actually. But I mean, in general, yes, the volume of outstanding funding is impacted by the redemption we had won of the large benchmark cover bond loans in Sweden in the quarter. And that obviously entails some short-term impacts on that number when we have these redemptions. But we'll have to come back with a more detailed answer.

But big picture, I mean, you had SEK 19 million of lending volume contribution and minus 18 of this net number. Would it be fair to believe that if I exclude the funding, you would have a negative delta between volumes and margins in the quarter?

As we say in the segment Sweden, we have a rounded 1 basis point drop, if you want, of margin in the mortgage market in Sweden. So that is obviously seen in that number.

Sure. But those other products -- we can take that later on.

We take that later.

Second question. Yes, second question. On your SREP, someone else asked the question similar. And I just want to come back to it. Could you give us a best estimate, should I think that a normalized SREP adding back your buffers is around 16% within region impact and so on. And then I should add 100 to 300 bps and then compare that to the 20% and say that you have roughly 100 bps above your requirement? Or is -- how do you feel about that?

I think you're reasoning quite a lot around what we want answers from the Swedish FSA here out. But what we can say is, you're correct in that. We want to be 1 to 3 percentage points above the SREP. And the SREP, obviously, going forward, most likely will include countercyclical buffers. But we don't know how quick they will be imposed. We don't know the levels they will come back to. But what we can say is that pre-corona, they were at 1.9 percentage points to us. So if you're making that math, obviously, 13.9 plus 1.9 is 15.8, and we want to be 1 to 3 percentage points above that. But that's a lot of assumptions in it. And that's the reason why we're waiting for this -- from clarification from the Swedish FSA.

But would it be fair to believe, given that you have quite a conservative Board that if they're going to take a decision in Q4 about your dividend, and if there's uncertainty around if and when the countercyclical buffer will come back, they're rather going to say that it's not a normal environment, so the 1% to 3% doesn't apply? Or is that the wrong way of looking at it?

I think it's fair to say that we have a conservative Board, and we want to run the bank in the safest of fashion. And -- but that's not the same to -- we cannot go in advance of these kind of conclusions. And I think you're making far too many assumptions in that conclusion. But yes, we have a conservative Board.

And the next question comes from the line of [indiscernible] from SEB.

Two questions, if I may. Private banking volume's up 42% year-over-year. Could you shed some light on that? Is that primarily related to asset management growth? Or could you comment on -- I mean, the number of client development, so to say. Have you added a lot of private banking clients or changed definition of being a private banking client, et cetera? And the second more U.K. model approval, is there anything there that has progressed really?

Thank you, [ Max ]. I can start with the question when it comes to the private banking business. I mean, we are running the private banking in the same way we have done for quite some time, actually. So when you look at the increase on the new volumes, it also includes a lot of new customers as well. I don't have the right -- the exact figure on that. But that is how we can say that we definitely increase the private banking business and the volumes into our asset management. So that is definitely a combination of old customers and new customers in this.

Yes. And we've said, obviously, that we're moving from a business model where we had private banking available at 5 places in Sweden. And we're moving to the county structure in Sweden where we will have private banking available in 20 to 25 places. And we come some way in that development actually. So we are improving our geographical footprint in private banking as well, which will obviously increase our competitive edge. Then going to U.K., I read that question as a fairly broad question. And sorry, was it a question around the IRB model?

Yes. Yes.

Okay. Sorry. Obviously, we -- as we've said before, we are capitalizing our U.K. exposure now from the Swedish FSA's demand. And the consequence of that one is that we are measuring our risk-weighted amounts by a standardized model and then we're capitalizing ourselves with the Swedish buffers. And that's obviously a very non-competitive position we're in right now, and it's fair to assume that over time, the U.K. PRE -- PRA and Swedish FSA will most likely need to converge their methods. When that happens, it's far too early to tell, but obviously, we are in the most conservative position right now. And that obviously hurts our return on equity. So we're putting a lot of focus in improving our efficiency and doing everything we can in order to produce as good return on equity as possible. But then obviously, it comes down to as well the capitalization level. And we are in the process of applying for IRB method in U.K. But it's far too early to tell.

But no progress during the quarter, so to say.

No, no, no. No progress during the quarter. Sorry for long answer.

No, no, that's fine. Very good.

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

My first question is just to follow up on some of the comments on mortgages in Sweden. And I was just wondering, so the combination of continued strong deposit inflow rather subdued corporate lending growth at present. How do you think is mortgage pricing evolving in Sweden? Do you see it broadly stable, [indiscernible] edging lower? Is there a continued downward pressure? The point I'm trying to get is, how should we think about NII progression in 2021? So it's the combination of volume growth, likely to be offset to some degree by marginal pressure. The second question, I was just wondering on the 40% dividend accrual. Just looking, obviously, at the comments earlier on capital at 20% compares already giving a lot of headroom even if one were to factor in the countercyclical buffer. Do you -- what is the reason to keeping the payout ratio at 40% at present? And is there a scope to potentially, this year next year, reverting back to somewhat higher accrual levels?

Well, let me start, and then Lars, you can jump in as well. When it comes to mortgages, obviously, we don't have a guidance on what we believe is the correct margins going forward. But obviously, we can see that the market -- we've seen quite strong trends towards digitalization in the past, and we believe these will prolong. They will carry on. We are putting a lot of emphasis in that perspective ourselves. We'd obviously seen margin pressure coming from the new players who rather construct mortgage funds than using their balance sheet. That will most likely prolong, but they can't grow in forever because then the Swedish FSA will most likely have a view on that one. And then obviously, we've also seen that the banking package adoption to that one from the Swedish FSA has actually increased the capital demand a bit more on the smaller players. So all in all, we can see that the margin pressure might been a bit bigger actually a year ago or so then it at current. But that's -- it's a bit back to Andreas' question as well, what comes from the financing component and what comes from the top line price to client pace? So a tricky question to ask, but we like the market. We think we are competitive at these -- at the position we're in right now. Then when it comes down to the 40% dividend accrual, obviously, the key component in all of this is that we want to run the bank at 1 to 3 percentage points above the regulatory demand. If it proves over time that we build capital if we're just paying a 40% dividend, then obviously, we're in a good situation, and then we will make more cash available to be divided out to the shareholders. But these things will have -- these things will be clarified over time. And so 1 to 3 percentage point is the constant one in this equation.

Are you able to say anything on NII progression? How we should think of NII progression in 2021?

No. I mean, we never guide on the revenues, as you know. What we keep saying is that over time, when you think about NII progression in our bank, it's about volume growth. And then over time, the margin impact tends to oscillate around [ 0 ]. Then, of course, it can jump up and down as we've seen. But over time, it's all about volume development.

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

Quick questions, if I may. When I look at your disclosure with regard to credit risk, IRB, I see -- I notice that the -- under the advanced approach, the risk weight on corporate goes down by roughly 1 percentage point in only 3 months. And I was wondering what is driving that. I'm not saying you should have gone up, but seeing down, considering that the continent has remained more or less short is a bit surprising to me. This is the first question. And the second question I have with regard to your cost target of SEK 20 billion. It is without Oktogonen fine. Does that include any action that you're taking in the U.K.? And is it including some kind of costs like travel, marketing and these kind of things to get back to normal by the end of 2022? And then forgive me if -- that a quick one for Carina. Right at the beginning of the presentation, when you were talking about capital, you stated, this gives opportunity for growth among other things. This is with -- this is the word you mentioned. What does it mean among other things if you could clarify a little bit that?

I can start, and then, I guess, Lars and then Carl will continue. Yes, what I meant is that we are in a very good position when it comes to the capital situation we have. It gives us and it gives the Board opportunities definitely. And of course, that we will get back to that. But we have aspiration for growth and when we look at that, when I said that, it's mainly about organic growth in all our home markets where we are. So that is what I meant. We do -- we are in a very good position. We are in a good spot in looking moving forward in that perspective.

And to your question around the cost target, no, we haven't. Obviously, we will adapt to the situation post the COVID crisis, and we really like to get back to that situation. If we -- most obviously, traveling cost will go up, for instance. So we haven't made any assumptions of what the correct level on that is. We run a fairly dynamic bank now who we believe -- which we believe is adaptable to the circumstances. So obviously, we run initiatives, but restricting traveling is not one of them.

And then Riccardo, Lars here, on your question on the corporate risk weight down in the quarter, as you say, in advance. And yes, you're right. And I mean you have seen that trend for quite a few quarters. And the reason is really that, as we talked about, we continue to gradually improve the quality of our portfolio towards lower and lower risk exposure. So that is clearly reflected in the risk weight. So nothing special this quarter, so to speak.

And obviously, scaling out of the international markets is -- it's not the majority of our business, but that's one component, which should, all else equal, improve the credit quality of the portfolio.

Okay. Okay. Just a quick for -- I'm not sure I understood it correctly. On the cost, the SEK 20 billion includes some sort of normalization of traveling. Do I get it right?

Correct.

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

Yes, just a couple of questions on the cost side. First of all, is there any update on the potential sale that you mentioned of card acquiring operation and [indiscernible] subsidiary? And what would be the impact on your SEK 20 billion cost target in case you decide not to proceed with the sale? And secondly, on headcount in the Swedish operations, just wanted to clarify as a result of restructuring, you changed some of the allocation of headcount across divisions. So in Sweden, there was roughly 270 employees reassigned to other segments. So when you previously guided that the restructuring of branches in Sweden would result in 1,000 fewer FTEs, did you include this reassignment with effectively net reduction of around 700 at the group level?

Okay. Thanks for these questions, Maria. First of all, on the payment side, we don't have any other information to give at the present being. We will get back on information in due time on that perspective. Then when it comes to the FTE -- estimate in the FTE reduction, we don't have any reason to guide on anything else than 1,000 FTEs. It is true that we, organizational-wise, have changed the way we work. And we moved some of the functions from, obviously, cutting down from 5 regional banks to 1 county operation. We've said to you that we will centralize and to bring on the efficiency in a few of the functional areas. So -- and that has caused a change of FTEs as a consequence. But no reason to change the 1,000 FTE component due to that.

Understood. And just maybe a quick follow-up. You mentioned that you were replacing effectively consultants with your own headcount. Has that been already done? Or do you expect kind of further increase from this?

I think it's fair to say that, that will be an ongoing job and task. But yes, definitely, it has been done already to some extent.

And then just to clarify on the card acquiring operations. So you do not disclose the contribution of this to your cost target, but can you confirm that, that -- the sale is included in the SEK 20 billion target by 2022?

The review of the payment business, we can confirm that's included in the SEK 20 billion cost target, but we can't comment any more than that.

And I will now hand it back for any closing remarks.

Okay. Thank you very much, and thank you very much for spending the time with us, and thank you for all very good questions. And well, have a really nice day. See you and hear from you again. Thank you. Bye-bye.

Thank you.

Thank you.