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

Good morning, everyone, and welcome to this call for the second quarter 2021. Together with me today, I have, as usual, our CFO, Carl Cederschiold, our Deputy Head of Investor Relations, Peter Grabe; and Head of Accounting, Annika Engler. As usual, I will start by giving you an update on the overall strategic progression of the bank. And then Carl will talk you through the key financial topics for the quarter followed by a Q&A. The result we present today is basically in line with our expectations. It shows that the change in focus of the bank that we initiated a bit more than 2 years ago gives the expected results. As you all know, we started a big strategy review in 2019, where we scrutinized every part of the bank. The background was, of course, the negative earnings development in the years earlier. This review resulted in a few strategic choices, which we are now executing on. One of the most important decisions was to stop being a universal bank. We decided instead to focus our offering to products and services where we have really good skills, a good profitability and also a big potential to grow. We find these opportunities within lending and asset management. The numbers we present today reflect further results of this strategic change. Already, 1 year ago, we started seeing the impact on the cost development. And now we also see the positive impact on the revenue development. Business volumes increased and we deliver the business to the customer quicker and more precisely. We can see this in increased market shares within asset management as well as property lending. In our credit portfolio, the very high quality we've had for decades have improved even further. We expect this development to continue, where revenues grow quicker than costs. The execution continues, but it's far from complete. As we continue to execute and increase the focus even more, we expect the positive trend to continue. The measures are being taken according to plan, but in some areas, even a bit quicker than planned. The capital situation has continued to strengthen through profitable growth at low risk. So if I sum this quarter, it was our best quarterly result ever. We see a clear result of the changes we're doing. 1 year ago, we saw it on the cost, now we see it also in the revenues. We're building capital, but we also create business growth with good profitability and with more satisfied customers. So all in all, this is a strong foundation for shareholder value creation in terms of earnings per share growth and stable dividend growth. I'll stop here. And with that, I'll leave over to you, Carl.

Thank you, Carina. I will comment on a few selected topics and then we are happy to discuss all questions in detail in conjunction with the Q&A. To start off with a few remarks on our different home markets. In Sweden, the development business -- the development in the business where we focus has been strong. Earnings-wise, Q2 was the second-best quarter since 2011 and were driven by a few things. We saw sharply increase in revenues from the savings business where the monthly transfers into mutual funds continuously increase. Lending, particularly the property related, develops well for both households and corporates, and costs are decreasing. In Norway, we see good growth in the business, good efficiency, improved ROE and a strong earnings improvement as well as improved margins. In the U.K., the environment is a bit more challenging. But when the lockdown eases, we believe we can come back to better growth again. Our U.K. operation is making a similar transition as Sweden but it is more a fine-tuning of the branch network compared to in Sweden. In the U.K., we will improve the efficiency and build better scale advantages. Today, the unfavorable capital requirement burdens the visible ROE. If we were to run the U.K. with U.K. capital requirements, ROE would be north of 10%. On the positive note, we see strong inflows into our wealth management operation in the U.K. In Finland, the branch network has become more focused and is moving more towards the bank's natural customer segment. Efficiency is good, but costs are affected by the ongoing change of the core banking system. We expect that to prevail for a few more years. But underlying, the progress is good, not least visible in Q2 with growing business volumes. In Denmark, the branch network is also becoming more focused in a similar way as in Finland. Lending growth has been subdued up until Q1, but there was a significant pickup in Q2. Finally, the Netherlands, it's small but shining. The cost-to-income ratio is now down at 60% and the ROE is higher than in several other home markets. Here, we are running a focused and niche operation, but with strong growth. And we have seen a significant earnings pickup in Q2. Now over to the P&L and starting off with the NII development compared to Q2. So please go to Slide 7. The main driver compared to Q1 was a positive volume contribution. The largest impacts come from mortgages, but we are now also seeing corporate volumes showing positive sequential contribution again, in line with what Carina alluded to. We also had positive currency and day count effect. The margins were largely flattish in the quarter and the positive sequential contribution to NII from the net of margins and funding related to the fact that Q1 held a double funding cost for 81 instruments for 2 months. We saw slightly higher government fees in Q1 as we received the final bill from the authorities relating to fees for last years. If you go to Slide 8, you can see an illustration of the stability of the mortgage lending development as well as the recovery of corporate lending volumes after the pandemic-related volatility during the past year. If we move over to the fee and commissions, we can see on Slide 10 that Q2 again reached a new all-time high quarterly figure. Fee and commissions now make up 26% of our revenues and not too long ago, the share was just over 20%. On the next slide, Slide 11, you can see a rough split of the commission components, of which savings-related commissions in Q2 accounted for 64%. The very strong net inflows, together, of course, with recovered stock markets, drove savings-related commissions up 37% compared to last year. And it goes without saying that this will continue to be a key growth area for us.In June alone, we took 39% of the Swedish inflows. But also in other home markets, asset management is developing very well. The payment fees have, on the other hand, seen a decline during -- due to lower card fees during the pandemic, breaking an up until then positive trend. So far, no real recovery has been seen even though society is gradually opening up. But of course, we hope to see the picture change as we look forward. The sum of the remaining commissions, i.e., loan and deposit fees, guarantees, securities, commissions, et cetera, have shown a relative stable development during the year. Now over to cost on Slide 30. In order to illustrate the underlying trends, we have broken down the quarterly cost in development cost and underlying cost and adjusted for one-offs and Oktogonen provisions. Total underlying cost continued to drop and were down 2% compared to Q2 last year. Development costs, however, increased by 32%, which I will explain more about. Then please go back to Slide 14. In this slide, we have a slightly different breakdown of the cost in order to highlight the development expenses in more detail. What you see in this slide is that -- is the development cost in red and the capitalization of the development spend in dashed red. What you can note in this slide is, first, the total development spend, i.e., the red boxes and the red dashed boxes, increased 5% year-on-year. This is in line with our plan to spend an extra SEK 1 billion in targeted development over '21 and '22, on top of the normal ordinary spend of around SEK 2.5 billion per year. Second, you see that the capitalized amount of the development spend is now significantly lower than what you have seen historically and is explained by different nature of the products in our current IT development. For example, cloud migration. This means that a larger share of our development spend is now directly booked into the P&L, and less will show up as amortizations and depreciations in the coming years. Third, the trend in the underlying cost base is, again, moving in the right direction. As we have mentioned in the past -- in the past quarter, 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 of the initiatives, please go to Slide 15. If factoring in underlying inflation, the total initiatives required to reach the cost target amount to more than SEK 3 billion over 2 years. Up until the end of Q2, around SEK 1.3 billion or roughly 45% of the initiatives had been agreed and -- addressed and agreed upon with affected parties. Only parts of these have so far showed up in the reported cost though, but will, of course, do so gradually in coming quarters when people leave the bank. Reported costs have been reduced by around SEK 400 million since last summer on the back of execution of the initiatives. In terms of the restructuring reserves, we have so far used about SEK 1.3 billion of the total amount of SEK 2.3 billion. So far, a bit more than 700 employees have agreed to leave the bank. This represents about 6% of total staff in third quarter 2020. Now let's move over to the credit losses on Slide 16. We again saw net reversals in Q2 of SEK 47 million. And for the first half for 2021, the net reversals amounted to SEK 55 million. So clearly, the asset quality remains very strong despite the pandemic. In Q, there were, as always, fine-tunings of the IFRS 9, macro and COVID overlay assumptions, which you find on Slide 37. No material changes have been made to the COVID-related overlays, and we hold reserves of around SEK 600 million related to increased risk in certain sectors due to the pandemic. Let me finish off on capital, and please go to Slide 17. The CET1 ratio increased from 20.2% to 20.5%, putting the bank 6.5 percentage points above the expected FSA requirements per Q2 of 14.0%. This also means 3.5 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. Looking at this quarter, we generated 40 basis points from earnings less dividend. We used 30 basis points for business growth, but generated another 20 basis points from positive client and volume migration. So we had a very capital-efficient growth. Looking forward, the capital ratio requirements are likely to be affected by reciprocity of risk weight floors in Norway and a higher local systemic risk buffers. Regarding the risk weight floors, there are still question marks outstanding. But as we've said before, the worst-case scenario would mean an increased requirement in the area of 30 to 40 basis points, while it, at the same time, can be significantly less. In terms of the systemic risk buffers, there are also outstanding uncertainties, but the initial assessment is that it should not have any material impact on the bank. The implementation of the systemic risk buffer reciprocity is expected to come later, maybe next year, while the risk weight floors look to be applied this fall. Many of you are likely to ask again about the capital plan after September when the current dividend recommendations by the FSA will expire. Again, the only answer we can provide at this stage is the following: First, it is still too early to guess what the FSA view will be as we approach September. And 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 business outlook and opportunities and regulatory outlook. 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 regulatory requirement under normal circumstances. Obviously, we are still not in normal circumstances currently, 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 good place to be in, in terms of enabling us with flexibility to really support our clients and aim for growth in the businesses. So to sum up, growing NII in the quarter with continued strong mortgage lending, increased corporate lending, stable margins and FX and the day count tailwind. Commission income, again, reached a new all-time high, and, again, it is the success in our savings business that is the driver where we keep on taking twice the front book market share compared to our back book. Continued good progress of the work to streamline and strengthen the branch operation and the offering to our clients. We continue to invest more in IT development as we have guided for, and the underlying cost base continues down. About 40% to 45% of the targeted initiatives have now been addressed and agreed upon. So the cost progress run 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, with net reversals in the first half of 2021 despite the pandemic. The unused COVID overlay reserves still stand at around SEK 600 million. And the capital position is also very strong. So in sum, really good progress in the quarter, not least in Sweden, where the business activity is high, with also a gradual pickup in the corporate business. With that, please let's open up for questions.

[Operator Instructions] The first question comes from Magnus Andersson from ABG.

Yes. I might have missed part of your statements there on the Slide 14, but in order to be crystal clear, I mean this development costs, I guess that you will always have development costs in order to stay relevant as an incumbent bank. So just to be crystal clear, out of the extra SEK 1 billion in IT spending you were talking about in conjunction with the Q3 report last year, how much have you booked so far? And how much of what you have booked has hit the P&L and been capitalized, respectively?

Thank you, Magnus, for that question. We -- what we can say is that during the first half of year, we have SEK 1.490 billion in IT spend. So that's 5% higher than last year. So we are -- and we're likely to actually speed that up during the second quarter. Coming from the extra IT billion, I think the figure is roughly SEK 170 million. And then -- but what you have to take into consideration then is that the capitalization level on the balance sheet was only 9% during the second quarter. So the consequence for the cost side during the second half of the year will be a mix of -- most likely we will speed up the IT spend, and a higher proportion will be from the extra IT billion. But it is still uncertain what the level of the capitalization will be.

Okay. So because I got a bit surprised. I saw this SEK 168 million number in the report there on Page 5. So that's SEK 168 million out of the billion, including capitalization. So it implies that your second half will be very heavy in terms of the extra IT development cost then.

I mean we do it over 2 years. So if we were to do it...

Yes. But you talked about 2021 as the main year for this SEK 1 billion in 2 quarters now. But that changed a bit, extended.

It will be done over 2 years, so both '21 and '22. So in linear terms, it will be SEK 250 million, but that would imply that we cost -- we take it over the cost 100%. But yes, we will speed it up.

And it's still 65% you expect to expense.

I think the...

So that [ 45% ] is the capitalized.

One of the messages in this report is obviously that if you, as a bank, run a business where you develop everything yourselves, you build your core systems, et cetera, you have all the assets on the bank, then you tend to capitalize a fairly high proportion. And the average of us has been 30% to 35% in the past, and we've taken 65% of the cost. Once you move over to cloud integration and most likely using other one's system, you will have a tendency to take a higher proportion over cost. You can't tell theoretically what the correct level is. You will move it through the accounting rules once the development is done. But it is most likely that the bank, going forward, with a higher proportion of cloud integration, will have a lower proportion of capitalization. And as you see -- but 9%, as we have in this quarter, is very extreme, I would guess.

Okay. And then on a more strategic note for you, Carina, although it's not a large part of your business today. But in terms of investment banking, we are probably in the mother of the mother of all bull markets that I've seen at least. And we know that you are increasing your ambitions within that area. We noticed that locally. We hear it, we see it. But we don't see anything in your numbers from this as opposed to in other banks and independent firms, et cetera. So my question is just, from a strategic point of view, what's your ambition with this? You don't mention it -- you didn't mention it in your initial initiation speech, so to speak, but something has changed there. You're still not mentioning it, but should we expect it to, at some point, have any meaningful earnings contribution to your business? Or is it more to complement your branch office operations? If you can shed some light on that ramp-up of spending within that area?

Yes. Thank you very much for that, Magnus. Yes, I think that having an investment bank is definitely in line with the transformation that we've seen in Handelsbanken today, where we've focused on certain areas as well as we do in asset management and financing and so on. So this is very much a business that will support that transformation to support those customers where we can see that we -- they like the offer that we have and to support the business that we have with those customers. So that is very much in line with the focus and the transformation of banking -- the bank moving forward. So I think that you should reading in nothing else. We come from -- a couple of years back from an investment bank, where we saw that we lost a lot of market share, to be honest. And to support the business, that we are moving forward with this, will support. And that's why we do -- we have done an extra focus on the investment bank to support the business that we are going to focus on moving forward. So having an investment bank to support that, I think that is crucial. And in some areas, we can see when we look at how we want to develop the Private Banking business, for example, this is an important part of that, just for example. So we will see that moving forward, definitely.

But it sounds like it's more a support to your other business rather than that you strive for having a really strong independent investment bank within Handelsbanken.

Yes, definitely. I mean this is -- we want to have an investment bank that is -- have a really high quality because that is the business we want to move on in all the other focus areas that we have. So this is definitely something to -- going to support that business.

Our next question comes from [ Matt Lileda ] from SEB.

Yes. First question related to the U.K., how you see this progressing both in terms of the IRB model approval? When could we expect that to materialize? If you have any insight? And then also on the cost to income in relation to the transition of the U.K. operations. I know it won't be like the Swedish transition. But what could we expect or when could we start to see some effect in the U.K. cost to income or overall cost level? Because it's currently still on a very high level. That's the first question. And the second is more on the savings platform or net inflow. Do you have any distribution on how much is from Handelsbanken internal, and how much is from external platforms and the age distribution of those brackets, i.e., if it's Handelsbanken clients, is that younger generation coming in? Or is it old, existing clients and also from platform? I don't know if you have that info, but it would be very helpful.

Thanks, [ Matt ], for the questions. Well, first of all, I'll start with U.K. then. The IRB approval will -- the progress we're making is that, that will most likely be in place starting 2024-ish. So -- and that's a project we're running in conjunction with the PRA. So we're following the normal route there. But having said that, I mean, the capital level as well, that could be different going forward anyway, because it's just not an IRB issue. It's an issue of what the Swedish FSA decide that we should have what kind of buffer requirements you should have on the British operation. And then going over to the cost-to-income levels. What we can say is that U.K. is shifting from 5 regional banks to 1 U.K. operation. They are cutting down the branch levels at decent size. It's not -- it will not be the Swedish magnitude, but still decent. And as well, they put a lot of emphasis on integrating the wealth management and asset management business into the organization. So we do actually believe that we will have cost -- or decreasing cost, and we will actually have increasing income as well going forward. And we started seeing small touch upwards on the income side, and we will most likely, going into 2022, see decrease in cost. I mean we don't know if it will happen to Q3, but still, we believe there are many factors actually pointing to a good development there. Then moving over to the savings net inflow, a good question, [ Matt ]. What we can say like this is that we -- during the first half year, we had SEK 36 million -- or billion, sorry, in net inflow in total. I think we have SEK 70 billion, if you look a year back, in net inflow. The majority of it is into this -- to Handelsbanken funds, but it's quite a large proportion, which has actually come via retail brokers as Nordea and Avanza and also institutional flows. The SEK 36 billion for the first half of this year, SEK 23 million is Sweden and SEK 13 billion. 1-3, is other home markets. So there are quite a few developments going on beneath the surface here that we're growing outside of Sweden, which is really good because that's more retail money, i.e., higher income. And it's also -- we also have more legs to stand on and grow on. The majority of the retail flows from Sweden is most likely fairly high in age terms. But having said that, the product supply we're having with a high tilt towards ESG, and as you know, we've been talking around before, the sustainable energy fund, which, last year, took a lot of flows. This year is more or less flat or a bit positive actually. Obviously, that kind of tilt really is targeted or is targeted younger generations to really appreciate it. So I would most likely say that the flows coming from outside has a younger average age vis-à-vis Sweden. So it's a lot of components going on, but a really good question of you.

Okay. And just to clarify the U.K. costs, I mean, it is more or less flattish if you look your first 6 months '21 compared to 2020. And we should -- I should rather expect that to be flattish rather than decreasing, but then income will grow much faster. Or do you expect that number to come down?

No. No. We definitely expect built in number -- cost levels to come down. But it's a bit more challenging to say what quarter, but definitely coming down. We will have structural decrease in cost there.

[Operator Instructions] And our next question comes from Antonio Reale from Morgan Stanley.

I have 2 questions, 1 of which is a follow-up. And just the first 1 on cost. I'm looking at your Slide 15. I want to make sure I understand this correctly. You've addressed SEK 1.3 billion of cost savings, of which SEK 400 million are already in your cost base. And another SEK 900 million is agreed, but still to come through. If I take this SEK 1.3 billion and deduct it from your SEK 21.9 billion cost base, it means you need to -- you need another SEK 600 million to SEK 700 million net savings in 6 quarters to meet your target. So basically SEK 100 million net savings a quarter, give or take. Now first, do I understand that correctly? And secondly, how long will it take for the SEK 900 million to come to the cost base? And that's the first question. The second one is really a clarification still on costs. And I think you partially answered this, so apologies if it's a repetition. But I understand that the underlying cost trends, of course, have been affected by this higher IT development, as you showed on the slide earlier. And the IT developments are going through the P&L instead of being capitalized. You mentioned that you have a number of projects to do with migration to cloud. But is -- this is you front loading expenses as you book a lower amount by the balance sheet and amortize less over the years. Is that right? And so will that lead to a sort of lower cost base target from 2022? That's the clarification. And lastly, just if you have time, if you could provide your outlook for mortgage demand in Sweden. How do you see competition? And what, in your view, will be the effects of the amortization program from the Swedish government coming to an end in September on both house prices and mortgage demand?

Thank you, Antonio. I think the mortgage question is interesting for many. So I do apologize you for the third question there. No worries. First of all, the cost question then. Yes, you are correct on that we have agreed and negotiated SEK 1.3 billion of savings out. Of SEK 0.4 billion is flowing through the books right now. So there are another SEK 0.9 billion to materialize in lower cost. The -- we have agreed for staff reduction of SEK 700 million or a bit more than -- sorry, sorry, 700 persons in staff reductions. And that will the majority of them will come the next and the third and the fourth quarter of this year. But the total of the cost savings, you should expect to flow through during 2022 as well. And I agree with you, yes, there are SEK 600 million or SEK 700 million missing, which we will -- which we haven't agreed upon yet, but we have plans on. So they will flow through the book during 2022 as well according to plan. Then, in theory, you are definitely correct that if we take more of the cost over P&L and less over the balance sheet, obviously, that will imply lower cost going forward. It's a bit tricky and too early to tell the conclusion for this. But yes, of -- all of our banks will have a high proportion of cloud migration. And if we don't own the systems in the same degree, there will be more of a P&L and less over balance sheet. But it's too early to make any conclusions on the cost target going forward. So all else equal, yes, it will lower the future cost, but we still guide on SEK 20 billion. Then moving over to the mortgage side. I think it was a general question on competition there. Yes, it's fierce competition. We focused quite a lot on this one. We do believe that the success in mortgages should definitely be measured by market share, but it should -- but it's even more important, the absolute numbers. And we are taking the biggest market share in absolute numbers. We are growing the fastest. We are picking up the pace. In May, we had 90% market share, and that was equal to SEK 4 billion in absolute numbers. And in June, we had SEK 5 billion, and we don't know the market share of that one yet. We have done a few things. We have obviously strengthened the branch network. We have as well started improving the telephone bank, and we have as well improved the digital services to the branch network in order to improve their work on the mortgage business. So we do believe -- we do look positively there. Of course, there's fierce competition there. Most of the banks want to be in that market. We expect that to continue. We expect margins to have pressure on them. But we don't see a general trend downwards in margins now. And on the average of the bank, we actually see -- we have more home markets actually now with increasing margins than other. And then I think it was a question of the consequence of the amortization scheme going away. And we will have to wait and see the consequential for that one. Of course, there will be less money perhaps to be saved as generally in the market. But we've seen fairly few proportion of our clients being involved in amortization schemes and, i.e., then they should be less affected.

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

Here is Sofie from JPMorgan. So sorry for going back to the cost question. But I would just wondering again on Page 15, what kind of underlying inflation have you assumed on the cost base in 2022 from wages and other products. Do you expect wage inflation to be close to 0? Or how do you think about that? And does it mean that the underlying cost saves are actually a little bit more than the SEK 600 million to SEK 700 million that you need -- that you guys need to come up with? So that would be my first question. And then my second question would be kind of -- I know you made a general comment initially on the dividend payout. But how should we think about a potential interim dividend in the fourth quarter? Is it something that you can do? What approvals would you need? Is it just a Board meeting or an AGM that you need? Or are there any other kind of approvals you would need? And also, if you wanted to pay over 100% of your profit in dividends, would you need any special approvals for this?

Thank you, Sofie, for the questions. To start with the -- we've been using 2% inflation in the estimates. And obviously, a lot of things are moving in the banks. So there will be a lot of moving components when we're going to realize these cost journeys. But we've been using 2%, for your information. Then on the dividend question, obviously, it's early. We -- what we -- we like to have a lot of capital in the bank. We want to wait until the Swedish FSA tell us, both take away the restrictions, but also most likely guide us on countercyclical buffers. That will then imply the -- that will then makes us take back the analysis of that one and move -- go to the Board. And we will sit down with them and do it really, really quietly and over time. And then we will -- if -- it's far too early to tell if that's going to be adjusted then on the general annual meeting in the spring time or if it's need to do it earlier than that. But it's too early to tell. But -- and we don't know what kind of restrictions the Swedish FSA will put on us. So -- but it's a good situation to be in. We are really well capitalized.

Our next question comes from Robin Rane from Kepler Cheuvreux.

Yes. So 2 questions, please. Starting off with the Slide 28, where you have visualized the impact of Q2 last -- sorry, I think it was, yes, 28, visualized the impact of last year of additional funding and so on. Is -- do we expect any benefits, any more benefits from that going back to normal ahead? Or is that fully now in the numbers? And then secondly, I understand that you lowered the -- left-to-live-on calculation, or the [Foreign Language] in Swedish, calculation in the quarter. And I guess this is a -- more of a competitive consideration than anything else. But it would be interesting just to hear your reasoning on the risk in the Swedish market. I mean we are 15%, 20% higher on the housing prices now. And is now a good time to lower this threshold, do you think?

Let me start with the second question, and then I'll leave the first question to Peter. But no, as you said, we have -- we've lowered the -- in basic words, what we've done is the underwriting policy on mortgages, we've decreased the level of interest rate we calculate on to solve for the left-to-live-on number. And as you're saying, I think that we obviously been running a really conservative underwriting policy here. And I think in the end, the amortization scheme as well on the cap on the levels, how much amount you can borrow on your loan, that takes away quite a lot of the tails of the market. And then we're obviously a bank, which are really focused on the client segments, which we are. And we've been seeing for many years that most likely our levels has been a bit high on that proportion. So we don't see any large magnitude coming from that change actually. But of course, on a general note, of course, the market will be more risky when prices are high for sure.

Yes, this is Peter. And in regards to your first question, yes, last year was obviously very volatile on the NII line. And as we alluded to already in Q2 last year, we said that all of the negative impacts we experienced on the funding side would not be reversed due to the rate cuts, in particular in Norway and the U.K. And you saw that also in Q3, that we saw some recoveries or some positive sequential development on the funding side. But then when we went into Q4, we were back to sort of a normal starting point again. And as you can see, the development since Q4 has been very normal in a sense that the drivers have been the traditional ones, i.e., the volume development, a fairly neutral funding effects and fairly minor other effects. So you can say that Q4 is a fair starting point for you guys in your estimates.

Our next question comes from Namita Samtani from Barclays.

I've got 2 questions, please. Firstly, why has there been a lower Oktogonen charge this quarter versus the last quarter? And secondly, given the margin and funding impact and split out for net interest income in Sweden, could you please just talk about the margin dynamics there and whether there was pressure in the second quarter?

Thank you. Well, first of all, Oktogonen, the -- for you analysts, I mean, the way we accrue for Oktogonen is really a quantitative measure where we have a lag of a quarter. So what you see here, the numbers here are just a reflection of the difference between our ROE vis-à-vis our peers from Q1 and rolling 4 quarter backwards. So in the end, it will be a Board decision at the AGM next year. And we haven't put any subjectivity into that figure at all. And then coming down to the margin situation on the Swedish mortgages, we do -- it is definitely pressure, but we don't see that apparent pressure now. We have fairly flattish levels here in Sweden right now. It's too early to tell, but if there's any guidance to tell from other home markets, they actually have increasing margins in some parts. So it's -- we believe there will be fierce competition. We will have to see what the margin is. But we don't see any reason why the margin pressure should be much higher than this now.

Our next question comes from Andreas Hakansson from Danske Bank.

We've gone through most things, but let's look at 2 things. First of all, on Slide 14, you talked about the development cost as they temper. But aren't you forced to do this higher development cost now because you were underspending in this area historically? And should this mean that, going forward, you should continue to spend more in order -- so you're not going to lag behind again sometime in the future? That's my first question.

Okay. Thank you, Andreas. Yes, I think as we've been saying before, and I do really appreciate the analysis you put out on the banking market. I think that was really well thought through and really informative. But having said that, I don't think the correct peer group, on being the real good IT development bank, is not other banks. It's actually the stronger IT corporates out there. So I do think that banks, in general, are inefficient in IT. So I do think that you shouldn't see this -- you shouldn't read any trend into our numbers now that we try to speed up. What we do is, we try to help the transformation in the branch network. And in that sense, yes, of course, we're investing quite a lot in digitalization and in client interfaces and these kind of things. So I do think that it's not like the best-run bank will be the one with the highest IT expenses vis-à-vis banks. I think that's the wrong KPI of a strong digital bank. So I don't think -- what we guide on is that we have SEK 2.6 billion annual spending in IT on general perspective, and we guide for another SEK 1 billion over 2 years. So you should view us as trying to spend more or less SEK 3.1 billion or a bit more than that per year now in 2021 and 2022. We will have to see, then we will obviously adapt to what future may hold. But we -- it's not like we're catching up, no.

Okay. Then I just had a thought when you said that you are allocating less talk to Oktogonen because of the ROE calculation. It's been many times when you haven't allocated to Oktogonen, but then it's been more related to cost overruns or whatever. Is this the first time we're actually not able to allocate money to Oktogonen because your ROE is falling behind your peers?

Oh, I actually don't know the answer. I mean no, it's not. And from quarter-to-quarter, obviously, these may vary. But what we can say is that, yes, you're correct. We've had years now that has not been the ROE, which has been the consequence of our decision in the end. This time, it is -- this time, it is a measure of just the way we quantitatively reserve. But no, it's not the first time.

Our next question comes from Martin Leitgeb from Goldman Sachs.

If I could just have 2 follow-ups, please, 1 on NII and 1 on capital and the payout ratio. And on NII, I was just wondering if you could give us an update on how we should think about NII progression from here. It seems like margin was stable in the quarter, partially impacted by double AT1 costs in the first quarter. So without it, maybe slightly down, but volume trends continue to be strong. So should we continue that to -- should we expect that to continue from here, so flattish, slight improving outlook? Also the question just with regard to, I think, one of your peers was sounded slightly more cautious with regards to NII outlook going forward. And the second question, just on the payout ratio then, to come back to the 40% payout ratio, just looking at the capital level, looking at comments that revenues will grow faster than costs and the quality of the loan book. Is there -- do you see the 40% still as appropriate at this level? Or could it be a scenario that, going forward, this can be revisited and potentially go back to some form of historic approach where the previous year on payout ratio [ taking us back on ] accrual basis?

Thank you, Martin, for these questions. Well, To start out with on the NII. First of all, obviously, we are a large business in Sweden, but we do have other home markets as well. And then what we should say is that we're fairly constructive in the volume development in all of our home markets. We do believe that Sweden is -- has proven that they are really, really resilient and strong going now. And for the -- in the second quarter, they did take SEK 13 billion in the mortgage market. So I do think that's a more important measure than the market share in percentage points. So volume-wise, we do believe that Sweden is well suited, and we do as well see that the real estate financing towards corporates as well have strong growth. It's actually plus 6% over the first half year there. And then obviously, we have the volume development in other home markets. And it's not that many home markets where we're actually negative vis-à-vis the history now in volume terms. And then it comes down to margin perspective. And of course, we see a risk of margins dropping further, but we're adjusting to that one. And we do actually see that in quite a few of the markets, we're actually improving margins. And please remember that we took a huge margin hit in Q2 last year in U.K. and Norway on the deposit side. And if anything, that's actually retracing back a bit. So the mortgage market in Sweden is really, really important to us, but it's not the whole picture. Then on the capital level, I think it's fair to say that the constant in the equation is the target range of the Board. And obviously, they can change that over time, but we run with a target ratio of 1.3 percentage points. And then it comes down to the way we can grow the bank. And as you've seen in this quarter, we've been using quite a lot of the net revenue of the dividend to growth. But then on the other side, we made a positive volume and rating migration. So over time, if we manage to grow nicely and still leave capital on the bank, of course, we will, over time, distribute more than 40%. But I do think it's a good position to be and to what -- we anticipate 40%, and in the end, we will deliver. We -- I mean there are no reason for a bank to build the capital for the purpose of building capital. It is to support the client growth and be a really stable bank. And in that sense, we're steering to the 1% to 3% in target range, and we want to have capital to grow.

Our next question comes from Rick Strand from Nordea.

I have a follow-up question on the mortgage margin development in Sweden. You write in the report that it's unchanged Q-on-Q. Still, looking at your average prices versus your sort of a benchmark funding cost, it looks like margins for you and for the peers are sliding down, so some pressure there. Is there anything that we're sort of missing in this sort of simplified analysis when you conclude that margins are unchanged while they appear as they're sliding?

I mean the number that we commented on in report is the gross margin. So -- and when you talk about margins, you can do the calculations in different ways. But our message in the report is that there was no material impact on the margins in the mortgage business for the bank in the quarter. But then as said, I mean, you can calculate the margins in different ways. I don't think that the development that we're seeing should deviate materially from what you see elsewhere in the market. So I mean there is an underlying pressure in the mortgage industry as such, and we've had that for a number of years. And there's nothing really changing that picture as of now.

And sort of between Swedish banking and sort of treasury, has there been some sort of change in the fund transfer pricing or anything in Q2 versus Q1 that we should be aware of that's sort of impacting this development?

No.

No? All right. All right. Then a second question on depreciations that appear to be up somewhat in Q2, both sequentially but also year-over-year. Just interested to see if there's something impacting that temporarily. Or if we should expect a continued sort of higher -- somewhat higher level for depreciations going forward?

No. I think that's -- well, idiosyncratic isn't the right word in using in these terms, but it's not something which you should extrapolate going forward, no.

Our next question comes from Maria Semikhatova from Citibank.

A couple of questions on margins. Just on the Swedish mortgage market, your peer mentioned that there is underlying pressure from customers opting for longer-term, fixed mortgages. Can you maybe provide some color if you're seeing the same trend that's affecting your book and the split of fixed versus floating for your outstanding mortgage balances in Sweden? And then outside of Sweden, if we look in the second half of this year, I think we are -- economies are expecting a hike in Norway in September. If you can maybe quantify what could be the benefit for your operations there? And similarly, in Denmark, a number of players revised the threshold for charging negative rates on retail deposits and also lowered rates on corporate deposits. Are there any actions you are taking on your deposit base in Denmark? And maybe where you are relative to peers?

Okay. Maria, let's start and see if we can -- first, around the relation about fixed and floating in Sweden. Yes, we see the same trend, that more of our clients do pick the fixed loans. And that's fairly rational in this low-rate environment and especially if you do believe that rates will go up. And in that sense, that product mix change, that creates lower margins. So we see that underlying as well. Then you were asking around the Norway. And what we saw was, obviously, last year, we had -- we took a hit in Norway when Nordic bank cut rates. And that's obviously then what we said that, first of all, rates dropped structurally -- or margin dropped structurally on the deposit side when rates go lower. But also, it's a notice period, and that was a temporary thing. If Norway were to increase rates now, first of all, it's likely that the deposits margins structurally go up a bit, but their notice period could hit us again.

Yes. Similarly, as with deposits, when we make changes that would negatively affect customers, we have notice periods also on the lending side, which means that there will -- should there be a rate hike, it's likely that we should see some headwind due to a notice period in Norway as well as in the U.K., if we will see rates being hiked there as well.

But the long-term consequences will most likely be positive because it will reverse some of the negative trends in deposit margins. And then I actually didn't follow your question around Denmark. Did you, Peter? Or no?

Just on the retail deposit threshold, I think even Danske reduced their threshold for charging negative rates to DKK 150 (sic) [ DKK 100,000 ]. I think you have a higher threshold, if I'm not mistaken. Just wanted to confirm if there is the upside to margins in Denmark from repricing of customer deposits.

Yes. Please let us get back to that one in a minute, and let's take another question, and then we'll answer that one in a minute for you.

Our next question comes from Jacob Kruse from Autonomous.

Just 2 questions. So firstly, on the corporate business. I think you're gradually losing market share, although very slowly in the Swedish market. At the same time, you have really no credit losses even in this relatively stressed environment. So do you think that with this review of your business that there's any room to increase the risk appetite in some sectors a little bit? And my other question was just on the U.K. Do you see any issue at all with the business mix you have of the loan book there? Or are you comfortable with that being largely a mortgages and commercial real estate or property management business?

Thank you, Jacob. First of all, let's -- on the corporate business side, first of all, running a bank, we see very, very little reason actually to try to run a bank with -- and try to live with credit losses in order to gain volumes. So that's not the way we run the bank. We like good clients and good clients don't have credit losses. So that's the way we try to steer it. As you know, we are -- focusing the bank even stronger. And in that sense, we're focusing more on the real estate lending. And we do like that because, first of all, we know that business a lot. We have a really strong track record and a really strong distribution network to that part of the business. But then as well, it's collateral on the back of it. So we -- and we don't lose market share when we look at real estate lending on the corporate side. So that's the answer to your first question. I think the second question was around U.K. Was that correct, or? Sorry.

Yes, correct. Yes.

And then it was around the loan book.

I think the loan book on the corporate side is almost entirely property management at this point.

Yes.

And I guess my question is just this used to be sort of framed as a church by your principal local businesses and kind of very present in the local market. In that context, it just seems a bit odd that you're so focused on just one client segment. And I guess also within that, are you moving away with -- from that when you started to reduce the branch network?

I will answer the question before you fill in, Carl. I think it's important to say that when we look at the corporate business that we have in all our home markets, and not least in Sweden, we do have the highest market share actually. But since a lot of years back, 10, 15 years back, we have built a really good real estate portfolio when it comes to the corporate business. But again, we do have really good owner-managed companies as well. And with them, we have a really good profitable growth, and that we will continue. So we are not just going to do one way. But again, we do have a history way back, that this is where we do have a really good impact in the real estate business even when it comes to the capital market as well as the lending in the bank. But again, the corporate business, outside real estate markets, is really good as well. But we do that together with making sure that we have profitable growth, low risk even in that environment. But we do have really good corporate business overall, and we have a really fair market share, I would say. And that goes the same for all our home markets. And you can see that it's different, of course, when we started the home market. If you look at Holland, Netherlands, for example, yes, they focus very much on the real estate business. But that is where -- how we have had really profitable growth in the Netherlands. In the U.K., it's more a mix in Norway, it's definitely more of a mix. But again, since 10, 12 years back, we do have a really good corporate real estate business. So I think that is -- to focus even further is not a bad thing to do. But at the same time, keep the other corporate business really good and in all our home markets. So please fill in Carl.

And I think that, to some extent, actually answered your second question. That we don't think that we make any gradual changes. We don't think that the review of the branch network as such will have any meaningful impact. And then you should put in perspective that the journey we make in Sweden, even though we're halving our branch network, we actually do believe that we have a much better offering to the corporates actually. We're strengthening the capacity in the branches, which we still will run. And the same will obviously go for U.K. So you shouldn't view this in essence as we're changing the way we do business, just the methods of it.

The final question comes from Jens Hallén from Carnegie.

And my first -- I have 2 questions. My first question is a little bit linked to what you just answered, enough to do with revenue attrition. You used to talk about the SEK 1 billion. And the question is, do these estimates still stand? And if so, are they still -- are they now on the books fully? Or have you found ways to compensate for it?

Thank you, Jens. Well, first of all, the negative revenue attrition from scaling back the international markets, they are firmly in the books now. And they were conservatively estimated, obviously, and the impact was less in the end. And then the negative income attrition from what we were saying last quarter. That is, we don't have any new guidance coming from that one, no. And we don't have any more information to give you on the payment business as of yet. We will get back to that one when we have information to tell you.

Okay. Perfect. The -- my second question, this is just a clarification of what you said before. I just wanted to understand, did you say that you wanted a clear confirmation about future countercyclical buffers before making a decision on what to do with excess capital? Or was that just an example of things to come?

Obviously, what the Swedish FSA and other ones has been saying is that they -- that in normal times, we should have a full countercyclical buffer. And so we're obviously -- we will plan our capital situation based on the inferred of countercyclical buffers. And if they are transparent around them, they make our life a bit easier. If they're not transparent around that one, we will not go out and first distribute capital and then need to build it again. So it will most likely affect us. But obviously, if they're not telling us something transparently, then we will obviously need to treat that -- the planning of it ourselves. But they have been transparent around that. In normal times, they view it as full.

Exactly. So from a poor analyst point of view, we can -- worst case, we have to assume a full countercyclical buffer. But you don't tend -- you're not waiting for them to say what they're going to do. So we are -- we can have a worst-case scenario in terms of planning.

You will have to wait and see what the consequences of the Board decisions will be on the dividend, et cetera. But what we can say is that pre-corona, we obviously had 1.9 percentage effect of countercyclical buffers. So I mean, in that sense, we know the -- more or less the number.

Thank you. There appear to be no further questions. I will turn the conference to speakers for any closing remarks.

Okay. Thank you very much. And thank you very much, all of you, for listening to this -- listen to us during this hour, and thank you for all the questions. And I wish you all a really, really good vacation in the summer. So thank you very much, and have a nice day.

Thank you.