Svenska Handelsbanken AB PUBL (OTCPK:SVNLF) Q4 2018 Earnings Conference Call February 6, 2019 4:30 AM ET

Company Participants

Rolf Marquardt – CFO

Lars Hoglund – Head of IR and Rating

Conference Call Participants

Jan Wolter – Credit Suisse

Robin Rane – Kepler Cheuvreux

Jacob Kruse – Autonomous

Matti Ahokas – Danske Bank

Adrian Cighi – Royal Bank of Canada

Riccardo Rovere – Mediobanca

Richard Smith – KBW

Rolf Marquardt

Good morning, everyone, and welcome to this conference call for the Fourth Quarter 2018. Joining me today, I have Lars Hoglund, Head of Investor Relations; and Annika Engler, Head of Group Accounting. The slides used for my presentation are as usual available at

And I will start with slide number 2, the usual starting slide where you can see that our stable value creation continued also in the fourth quarter. When summing up 2018, we can conclude that we have continued to strengthen our position with our local and digital model. The business development in our home markets has been good with growing business volumes.

The customer satisfaction has improved even more. And in several areas, we have continued to gain market share, not least in the savings business throughout the bank. 2018 was also a year when we stepped up our investment pace in our local and digital model, especially in our growth markets, but also in the very important field of control functions.

During 2018, we have seen more and more signs of increased uncertainty and more difficult conditions in the credit markets. This follows into 2019. And therefore, it feels important that we prepare ourselves for potentially bit more difficult times ahead. We have done so by an increased activity in the funding markets, and we enter 2019 with a level of liquidity and capitalization that makes us well prepared to continue to be able to support our customers in a scenario with increased uncertainty and where we continue to grow.

On the basis of that, the Board proposes an unchanged ordinary dividend of SEK5.50 per share. We find it prudent and the right time to keep solid buffers to be able to approach also 2019 in a position of strength.

Onto slide 5, when looking at the fourth quarter, compared to the third, the main income lines were stable. As previously flagged, we booked a dividend of SEK200 million from VISA Sweden. On the cost side, there were a few items of nonrecurring nature summing up to SEK109 million. We had a positive one-off in Norwegian staff costs related to the change in the pension system we did in 2017.

In Denmark, on the other hand, we had a one-off staff cost of SEK42 million, mostly as an adjustment to the new Danish legislation on holiday pay. Also in Denmark, there was a cost for the new common Danish clearing system which amounted to SEK28 million. And finally, we had a couple of situations creating higher than normal sundry losses, which amounted to SEK82 million compared to SEK17 million in Q3.

Adjusted for these items, the costs followed very normal seasonal pattern. Loan losses were 6 basis points in Q4, which jumps up to full year 4 basis points.

Let’s go to slide 6 to start off with a general comment of the underlying development of the bank. For you that have followed us over the past years, you know that there have been some significant items of non-recurring nature. In this picture, we look at the underlying development of the net profit since 2014. Firstly, we have adjusted for one-off items such as capital gains from divestments of shares, changed pension plan impacts, et cetera.

We have also adjusted for capitalized costs. Then we have also adjusted for the Resolution Fund fee that all banks in Sweden have to pay. This fee reached its peak level in 2018 after significant increases in each of the most recent years.

Despite 2017 and 2018 being heavy investment years for the bank, the average annual growth rate in this year’s underlying profits has been almost 5.5%. This shows that our business model continues to deliver and that we are gradually benefiting from the investments we have made in our home markets and business development.

Please go to slide 8. In 2018, the net interest income grew by 5% or just over SEK1.5 billion. As you see in the slide, larger business volumes explain more than the whole increase in net interest income, and the UK accounts for more than SEK400 million of the increase. The screaming red box showing the increased mandatory government fees will shift to blue in 2019 when the Resolution Fund fee will drop back to 9 basis points from the 12.5 basis points in 2018.

In terms of currency effects, they can of course move in either direction but in 2018, they created some tailwind for us. In Sweden, the volume impact boosted net interest income by SEK900 million. The mortgage margin was more or less unchanged at 105 basis points in Q4 compared to Q3, and we recognized from our customers an increased demand for advice also in this field.

Onto slide 9, similar to net interest income, the fee and commissions also grew by 5% in 2018 or by more than SEK500 million. On this slide, we show that in the past two years, our success in the savings business, including the mutual funds and private banking, explains more than the full increase in fee and commissions which grew by almost SEK1.1 billion. In our asset management operation, we have a very small degree of performance-related fees. This means that the fees relating to the savings business tend to be more stable than in a system with a large performance-related fee component.

Onto slide 10, when we sum up the development of our Swedish mutual fund business, we can again see that we had the largest net inflows of all players in the Swedish market. With 11% market share of the outstanding volume in Sweden, the bank in 2018 attracted 24% of all net inflows, which corresponds to what we have seen since 2010. Again, the combination of good digital support and our investment advice and our local presence explains the growth in market share in this field. But we don’t stop here. We see interesting opportunities to improve the offering further by adding more services in to our digital tools.

Please move on to slide 11, here, we see that the development also in the rest of the Nordics has been good, and particularly in Finland. The net inflows during the year are the circled green bars and the blue bars show the opening and closing volumes in 2018 of funds under management. We also see the value change per country. And in Norway, it was positive also in 2018.

In Finland, the asset management operation has really reached a new level, as you can see. Net inflows in 2018 amounted to almost 50% of the managed volume in the beginning of the year. In Finland, the same digital advisory system is used as in Sweden. The number of advisor meetings in Finland has increased significantly during 2018 just like in Sweden. And here is one of the results, the strong development in the mutual fund business.

So we clearly see very good potential in this field in all our markets when we now continue to develop different digital tools and fit them into our personal service. Already today, we have funds under management exceeding SEK 90 billion in our whole markets outside Sweden compared to around SEK440 billion in Sweden.

Please go to Slide 12. And this picture will show the development in the UK and the Netherlands. In the UK, we have adjusted for the cost relating to transforming the operation to a subsidiary. I will revert to this topic shortly but just want to mention that this task was completed in 2018 while customer satisfaction remained at the top position and business growth continued just like before. We have talked about our investments previously but the income growth in 2018 makes us confident about our future possibilities in the UK 2018 was also for the UK a year with unusually high cost growth, which is not expected to return to the same extent in 2019.

In the Netherlands, we now have 29 branches and continue our strong development. We continuously see how our positions are progressing in that market. Together these markets continue to deliver a very nice growth with sustained very low risk and strong credit quality. The underlying annual profit has since 2013 grown from about SEK1.2 billion to SEK 3.4billion in 2018.

On to slide 13 please; since December 1, our UK operation is run in the newly established Handelsbanken Plc. A major and decisive step in establishing us in the UK is thus in place. The starting point was already prior to this very strong, with the highest customer satisfaction aiming both private corporates, a nationwide branch network, and a strong credit quality.

With efforts and investments we have made and continue to make in the UK, we have now the foundation in place for even further improvements in our development. To have a full scale, the UK headquarter improves our local capabilities. Our big IT investments will gradually lead to even better customer benefits and efficiency gains. Handelsbanken Plc is UK bank and we are therefore completely set to continue to grow, regardless of the outcome of the Brexit process.

Finally, since we managed to complete the transfer of the business before yearend, the UK operation will from 2020, no longer be burdened by the Swedish Resolution Fund fee, which in turn will improve the net interest income by at least SEK150 million, all else equal.

Please turn to slide 14 to see the drivers of the cost increase for the full year. You see that pick up year-on-year mainly relates to our investments in the UK including the subsidiarization, our increased investments in IT development, our work on further developing our control functions at least within the field of anti-money laundering which increased costs by SEK348 million, and a fairly significant FX effect as well.

These components accounted for roughly 8% of the total increase in costs of 10% during the year. Then as I mentioned earlier, there were some items of non-recurring nature In Q4. We can conclude that there has been a significant expansion of costs in especially the UK, and it’s not likely that the pace of these increases will remain when looking forward.

During 2018, more than 130 people were recruited to head office operations and such a build-up, we only do once. We have already guided for development cost up some SEK100 million to SEK200 million in 2019. The costs relating to the subsidiarization in the UK are expected to be somewhat lower.

So of course, 2018 was a year with unusually high cost increases which we should not get used in Handesbanken. The expectation is that the cost increases in 2019 will be meaningfully lower than in 2018.

Please go to slide 15 and a few words about the progress of the efficiency and business development work in the bank. What we have done during 2018 is to define 12 different key areas into which all development can be summarized and described. Each area has then created its long-term goal ambition as well as the different key activities and achievements that will get us to where we want to be. These are our roadmaps, which include all our planned development over the coming years, and that’s the IT development portfolio in total.

This includes all the activities that will provide increased operating efficiency and the improved business offering which is assessed to free up time equivalent to 1,600 FTEs that we spoke about in Q3. This work has strengthened the business focus and the development process. The areas and roadmaps have been structured in three different layers starting with basic infrastructure and support. There’s three different product areas and finally the customer meeting part, the interface with the customer.

In the first layer where we deal with the infrastructure, we make investments to better use and handle large amounts of data, improve core systems and make improvements to speed up the development process. In the product layer, we improved the product offering and the related services.

And finally, in the third layer, we adapt and develop our customer interfaces to support both the digital meeting and the face-to-face meeting. This latter part is of particular importance to meet and cater for customer demands from a holistic advisory perspective regardless of product and meeting place. But it is not enough to just define a plan for each individual area. What really matters is the coordination between the infrastructural parts, product owners, and development of the customer interfaces.

We have made improvements and have started to work in this way already. The changes have been successful, and we now take steps to adapt the organization to this approach. It is against this background you should see the announcements we have made today. The intention we have is not a big bang, rather to launch the improvements continuously over the coming years.

An example is the mortgage process which is being digitalized by the customer and the branch. Step-by-step we’ll see new features being introduced. The first deliveries have been made already. The same goes for our advisory tool where we recently added pension advice into the tool and further improvements will be made in 2019.

Please go to slide 16, as I mentioned initially, we have seen several signs during 2018 that were — and we are moving into a somewhat more uncertain period. This slide clearly illustrates one of these signs. It shows that the spreads in the funding markets for banks generally in Europe increased gradually during the year and then sharply rose towards the end. This is why we chose to be fairly active early on in the market and issued significant larger volumes done in 2017.

We increased prefunding and somewhat extended the average maturity of our bond funding. At some occasions, this means double interest cost for a period but when entering into 2019, it feels good that we were active early on and took cost over the NII already last year, since the funding cost levels today are quite far above the levels we saw in most of the 2018.

Please go to slide 17. In the long credit boom experienced for a few years now, credit losses in the banking system have been generally low, with a few exceptions. It is highly likely though that if the environment becomes more challenging, then differences in credit quality will start to show more clearly again. This picture shows the outcome of the EBA’s transparency exercise from late 2018. The graph shows the share of problem loans in comparable European banks. Handelsbanken is where we should be, all the way out to the right, with the lowest share of problem loans.

Now please go to slide 18, as you all know, the risk weight for mortgages in Sweden has now moved from Pillar II to Pillar I, which is the main explanation behind the changes in the capital ratios compared to before. This means that the CET1 ratio at the end of 2018 was 16.8% compared to the anticipated FSA requirement of 15.1%.

The Board has decided to leave the target range unchanged at one percentage point to three percentage points above the FSA minimum requirement. In practice, this means that the buffer between the floor of the interval and the FSA requirement increases by some SEK1.6 billion, which represents a slight move in a conservative direction. Mathematically, an unchanged floor level of the target range would have meant 0.8% above the FSA minimum.

In terms of the upper end of the target range, it is only a matter when the bank will communicate to the market how we view our capitalization. Furthermore, the Board has decided to adjust the policy for the dividend. The policy means that the dividend level shall never lead to the capitalization ending up lower than one percentage point above the capital requirements communicated by the FSA.

The Board has submitted a proposal to the AGM of an unchanged ordinary dividend of SEK5.50 per share. As we have communicated before, our approach to capitalization is to make sure that we are compliant and to have the capacity to grow. Today, we see signs of increased uncertainty as well as continued growth opportunities. What we also have experienced in the past is that we often have been able to attract new customers and to grow in more uncertain periods. We want to have the capacity to grasp such opportunities.

So in order to summarize, on to slide 20, 2018 was another year of stable profit growth in the bank. Our pre-traded and more and more unique business model has continued to deliver good business development throughout our home markets. During 2018, we have increased the pace of investments in our growth markets, our IT development and control functions.

We transformed our UK operation into a subsidiary as of December 1. This has led to a higher than usual pickup of costs in the bank. Several of these cost increases will not be repeated in 2019 and it is therefore very likely that the cost increase will be meaningfully lower in 2019. We move into 2019 in a position where we have all the potential to capture the opportunities that the bank usually faces in weaker market conditions. This is also the background behind the proposal from unchanged dividend of SEK5.50 per share.

With that, I conclude my presentation and open up for questions. Thank you.

Question-and-Answer Session


Thank you. [Operator Instructions] And we go to the line of Jan Wolter of Credit Suisse. Please go ahead. Your line is now open.

Jan Wolter

Yes. Hi, Jan Wolter here, Credit Suisse. Thanks for the presentation. So first looking at the costs and starting on slide 14, where you very helpfully show us all the components of the cost increase. So my question is what of these costs could fall out in 2019?

I think you highlight in the fourth quarter more than SEK100 million of various costs which was more of one-off nature. Or alternatively if you could give more color on what level of cost growth that we should be looking for in 2019? I know that the bank doesn’t make a Group budget but still if we look at the 10% cost growth, and I think you highlight it will be meaningfully lower in 2019. What that would mean?

And secondly, I wonder the management buffer range, 100 to 300 basis points, that is very conservative, I think, range and now it’s upped a little bit by the decision to keep it unchanged. If you could give some color around that, why keep — or rather why increase it a little bit? One could expect that the buffer would have been lower given that you know how much more visibility on among other things the Pillar 2, the mortgage floor impact on the bank?

And my third question is related to capital. Why not pay a special dividend this year? I guess it has to do with where you are in the target range. But if you just could confirm that or give any further color around that, since it looks like the bank could have at least paid out SEK1 or so as special dividend without breaking the SEK100 million buffer, the lower range of your buffer that is. Okay, thank you.

Rolf Marquardt

Hi, Jan. And thank you for your questions, and I will try to cover as good as possible. So starting with the cost question, yes, we try to be detailed in this to make it possible for you to make assumptions and estimation for the future. And as you correctly stated, we don’t make forecasts, but to give you some guidance.

So starting on the left-hand side with the first red bar and of cost we have in the UK. So we have recruited slightly more than 130 people to populate our head office. And that’s something we have to do because we have to build up head office-like functions locally in the UK as a consequence of the subsidiarization. So — and that buildup is not something we will repeat, might need to recruit a few new additional people but not that much. So you could expect that increase to be much lower next year.

And then secondly when it comes to Brexit-related related costs, and that’s more – that costs are more directly linked to Brexit preparations and the subsidiarization, we have communicated before that we expected it to be SEK300 million this year, and it ended up at SEK314 million. So that’s an increase by SEK209 million. For next year, we expect the total cost to be slightly down from what we have seen this year. So that bar would go away as a consequence next year, that’s the expectation.

And then when it comes to AML-related costs. So the cost increase of SEK348 million this year is quite significant and we expect it to increase slightly next year but not to the same extent. So that is also something you should expect to be growing much less than it has done this year.

When it comes to development costs, we have already guided in Q3 that we expect that the increase from this year was spent slightly above SEK2 billion and costs next year are expected to be between SEK2.1 billion and SEK2.2 billion. So an increase of approximately SEK100 million to SEK200 million next year in costs.

And then is the FX effect, can’t do much about that. And then finally, we had the items that did show up in Q4 and that was very unexpected for us and exceeding SEK100 million, SEK109 million, or SEK135 million as stated in this bar. And that was quite unusual events and quite unfortunate. But — and for sure, we hope not to see that repeated again but it’s hard to know in advance, of course.

So I think that gives you a guidance on what you could expect from us going forward even though we don’t give any exact forecast. And then moving over to the question about the buffer and the target range for the level of capitalization to be — which we have left unchanged one percentage point to three percentage points above the Swedish FSA communicated capital requirements. And I mean, technically speaking, if you just make a technical recalculation, the floor level would have ended up at 0.8% instead of 1%.

So this is in a way not exact science. When we introduced this target range, the capital requirement levels or ratios were lower and then they have increased over the years, and we haven’t adjusted the target range. And now, goes back again — and now it drops quite dramatically, obviously, as a consequence of the move of mortgage risk — risk weight floor. But we have decided to stick to that.

And when it comes to — what it means in reality is that as you correctly also stated that it means — it is a slight conservative move, because it did add some SEK1.6 billion in terms of buffer, and we think that is maybe a conservative thing to do. But we would like to have a buffer that makes it certain for us that we will stay compliant and have a capacity to grow.

So we think that has been the right thing to do. And when we have made the decision also about the dividend which is your next question, but it sort of relates, it has felt good at this point to be a little bit on the conservative side. And then, when it comes to the upper part of the target range, that’s more when we decide to communicate about our actions when it comes to the market.

So from a financial stability point of view, it’s the lower part of the spectrum that is interesting, I would say. So we have decided to stick to it and it’s a slight move in a conservative direction, but not dramatic. And then when it comes to the decision about the dividend, I think it’s — so I’d like to start that the payout ratio is 62% of the profit. So we keep 38%. And the 38%, we do keep because we think that is a good thing to do at this point. It’s not that we foresee a new financial crisis or anything like that, but we can conclude and see that that level of uncertainty has to some degree increased.

We have some changes also in the economic forecasts in our home markets, and there are some uncertainties out there. So we want to be well prepared. And we also we want to be able to grasp growth opportunities, and it might seem like a contradiction to both sort of keep capital in order to be able to deal with a more volatile situation, and to believe that you can grow. But we actually see it that way because we do see continued growth opportunities.

We do continue to grow at a quite high pace. We did grow lending volumes on average. Average volumes grew by 5.7% last year, slightly less in the second part of the year, but we are still growing well. And we also know from the past that when we enter into more uncertain times, it is often a good opportunity for us to add on new customers, and that’s what we want to be prepared to do. And we have actually also seen some signs in some of our home markets, also competitors that have introduced lending restrictions.

So we see opportunities there. And that’s the background to the decision. But the money is not gone. We keep it in the bank and want to use it in a good way to continue to do good business.

Jan Wolter

Many thanks for that clarification. If I may just a quick question, if you could give any color on the rate sensitivity of the bank now, post the Eric’s Bank [ph] 25 bps hike there late last year, please? Thank you.

Rolf Marquardt

Yeah. So we — as usual we don’t give — make any forecast about that. And I think when we talk about the asset side of the balance sheet I think it’s quite easy for you to make estimations and calculations and you often do that in a quite good way, I think. What we have done is to adjust our internal rates both to reflect the interest rates hike, because it means also that we have a funding cost and I will — that has increased and I will come back to that. And we have also adjusted for the fact that credit spreads and funding spreads have also widened during 2018. And that is also something that we now introduced into our internal pricing and also in relation to customers.

So we have taken action. And I think what’s also interesting to note is that all the players in the Swedish market for good reasons have acted in the same way. And I think that gives some guidance also on what this could mean from sort of the competitive point of view because that is the outstanding question mark. We don’t know to what extent this could be passed on to customers when you also take competition into consideration. But all payers have the same reasons to act in the same way and they have.

And then a few words also on the other side of the equation. I mean, we have market funding. Not all of our funding is market funding but part of it is. And when we found long term and swapped that down to three months SEK or local currency, and especially in Sweden then, we have of course had a positive impact in the swap. And that has been reduced as a consequence of the interest rate hike.

Jan Wolter

Okay. Many thanks for that.


Okay. We now go to the line of Robin Rane at Kepler Cheuvreux. Please go ahead. Your line is now open.

Robin Rane

Hi. Thank you for the presentation and thank you for taking the questions. Back on the capital, your more — slightly more conservative stance now with regards to the buffer, is there any — so should we interpret this as you want to take — be able to take all the lending opportunities that might occur should your competitors be more restrictive? Or is there any worries about potentially negative rating migrations or rising cost of risks that you take into the equation?

And secondly, as you increase your mortgage rates at the end of last year, or beginning of this year, have you seen any differences in customer loyalty compared to previously? Yeah, thank you.

Rolf Marquardt

Thank you, Robin. So regarding capital, I think when we — no, we have not made that decision because we are worried about credit migrations. We haven’t seen any significant changes in that respect. The credit quality is rather stable and could also be seen in the loan loss levels. And so we have no expectations or worries about any significant changes in that respect.

And what you should also note is that the new IB models we introduced back in 2017 on the corporate side, they mean — meant that we ended up with slightly higher average risk weight, but on the other hand more stable ones. So even if we have credit migration in terms of PD, that will be calibrated and more stable in the future than they were a few years back. So that is not the reason.

But what will happen during 2019 is that the capital requirements will increase slightly as a consequence of the increased accounts cyclical buffer requirements in Sweden, Norway and Denmark. And it’s not major but it is there. And we also have an impact from introduction of IFRS 16, which in our case, and I think we have communicated the impact haven’t we? No, we haven’t, okay.

But there is a slight impact. So, it’s a small impact. But that also comes into the equation. So — and we always, of course, try to assess what happens in the future with capital requirements when we make this assessment. So we don’t expect any major changes, but we have taken account of the things we know about.

And then when it comes to mortgage rates and the increased mortgage rates, we haven’t seen any — and it’s hard to tell whether there will be any changes from a customer loyalty point of view. But we don’t know, but it is not my expectation that it will have a big impact on our customer relationships, because they are long term and we really try to manage that in a good way.

And I also think that what this is about is actually that the funding cost has increased. So — and, of course, that has to be reflected in pricing for us and for all other players. And it was interesting to note that when this happened, all players — actually all major ones and also some of the new entrants that have a different funding model than we do, acted in in the same way actually, and for good reasons because the funding cost has increased. So I wouldn’t expect any dramatic changes, but it’s too early to tell.

Robin Rane

Okay. Thank you very much.


We are now over to the line of Jacob Kruse at Autonomous. Please go ahead. Your line is now open.

Jacob Kruse

Hi. Thank you. Could I just go back a little bit to the cost side? So just to be clear I understand, you’re basically saying there’s something like a SEK100 million of positive flow-through in the next year from the reduction of cost to the UK and the length of the increase of development cost, maybe a little bit less than SEK100 million, and then you get another SEK135 million back from the Q4 one-off effect. And then from that base, we should just basically look at the underlying cost inflation in your various markets.

You’re not seeing scope for example for reductions of staff from these IT process improvements you are making or any other kind of movement that should filter into that customer. Thank you.

Rolf Marquardt

Thank you, Jacob. So yeah, I think you got it correctly regarding — and I won’t confirm the exact figures on when you calculate this, but the tendencies I think you got right. When it comes to reduction of staff as a consequence of the efficiency measures we are introducing and taking. So yeah, that is ongoing and we have already delivered some of the improvements and we will continue to do that gradually over time.

And I also think that when you look at the number of employees we have in different parts of the bank, you will realize that then you see the clear tendencies we have. We have had a buildup in UK in particular during the year ’18. You can also see that we have increased the number of staff in other operations and that is mainly related to ML.

And then we also have increased the number of staff in our development departments. And then in the UK, we talked about this. So we don’t expect to have the same increase as next year. AML is about the same, some increases but not the same. And then when it comes to development, we will develop more next year. And that’s what is behind the increased cost level. We have communicated about the 2.1% to 2.2%. And we are making some investments that we will capitalize as well.

So we’ll do more of that increased staff to some degree. And we also replaced consultants by employees that also sort of impact. But then on the other hand, we have been making improvements that has a positive impact also and that is something you can see, especially I would say in the Swedish operations, and that continues. So a number of staff has been reduced in that end.

So we gradually meet some of the increased needs by improving efficiency. But it’s also quite natural that when you define these roadmaps and sort of increase the phase in development, it takes sometime before you start to see bigger impacts, but it will gradually come.

Jacob Kruse

Okay. Thank you.

Rolf Marquardt

Thank you.


We are now over to the line of Matti Ahokas at Danske Bank. Please go ahead. Your line is now open.

Matti Ahokas

Yes. Good morning. Two questions, please. Firstly, Rolf, you mentioned that the funding costs have obviously increased which we all can see, but it looks to me like your lending margins have kind of come down especially in Denmark and Finland and probably as well in the Swedish corporate business. Do you see this kind of a lag thing or should we expect that the margins would improve in 2019 from current levels?

Then a more broad question regarding the UK and Brexit. Obviously, we’ve all seen quite a lot of estimates to what kind of potential impacts they would have on the UK economy. What’s your kind of plan and contingency plan on that? What do you expect to happen in the UK? Thanks.

Rolf Marquardt

Thank you, Matti. Well, so first of all about funding cost, and something I’d like to comment about is some of the increases we’ve had in the funding cost is related to the fact that we did prefund subordinated debt, and we did that in two pieces. So we issued two instruments in early last year and another one in EUR750 million and then EUR750 million also in August. And we repaid that two weeks ago, January 19.

So we had double interest rate costs during that period, and nondeductible ones, by the way. And then we have also increased our issuance of senior bonds compared to the year before. That’s also for conservative reasons. We want to be well-prepared and we found reason to start doing that quite early last year, and we are now happy that we did this. So we are well prepared and have to some degree free finance maturities we will have later on this year.

So we are in a situation where we can relax and move when it’s a good time to do so. We have no stress in that, but it has to some degree impacted net interest income, of course. So regarding the margin levels in Denmark and Finland, well, yeah those are the two toughest markets margin-wise where we are present.

Generally, the trend when it comes to net interest or margins is quite different and diverse between individual margins and corporate margins. So we have seen corporate margins actually improving in almost all markets during 2018. So the corporate margins are moving in the right direction. The only exception is Denmark where it has been slightly downwards but it’s on — in total it goes up.

And it has been the opposite when it comes to private margins and it’s not dramatic but it has been sort of sliding slightly downwards, trending in those markets. In Sweden, we have kept it more or less, still 105 basis points. The mortgage margin was 106 earlier during 2018, so it has been quite stable.

So for next year, it’s really hard to assess but I think generally when you look back on margin development, in total for the bank and for our profit, margin levels and changes haven’t been that important. It’s really the growth level volume growth that really impacts, I would say.

And then secondly, to your question about Brexit, well so first of all, we are happy that we have subsidiarized in the UK. That will really improve our capabilities locally. It has to come with a cost, of course, but we also now have strong local capacity which will benefit us. And also, it feels really good now considering the uncertainty around Brexit, that we have subsidiarized. So we know that we have a full-flavored UK presence. So we will be able to, business-wise, to service market in a way that without any kinds of disruptions because of legal reasons or anything like that. And that’s really good.

And then, the economic forecasts are obviously, I mean there will be an impact, if there is a hard Brexit. No question about it. It will impact the UK economy, that’s our expectation. And what we have done to prepare for that is to, I mean, that it’s too late to start preparing now, and it was too late a year ago as well when it comes to credit quality which is really the most important part.

So the conservative approach has been important and something we have stick to. That’s a good start of the day. There’s a strong foundation. But then of course, if there is a disorderly divorce between Britain and EU, it could potentially also mean something to us when it comes to credit quality to some degree. But we start with a strong credit portfolio, and that’s really a good start. So, we have no worries.

Matti Ahokas

All right. Great. Thanks.


Okay. Before going on to our next question, which is Adrian Cighi at Royal Bank of Canada [Operator Instructions] And Adrian Cighi, please go ahead with your questions.

Adrian Cighi

Hi, there. Two questions from me please. A follow-up question on capital, I’m afraid, on the credit risk migration, which was 30 basis points in the quarter and 40 basis points during the year. Can you give us any more color if this is broadbased or driven by a certain geography? And then a second part of this question, have you seen any impact from TRIM program or do you expect any of that to come through in 2019?

And lastly, the UK subsidiarization, you mentioned the SEK150 million benefit to NII from the low Resolution fee in 2020. Do you see any impact from the UK tax surcharge in 2019, any guidance on that would be very helpful? Thank you.

Rolf Marquardt

Thank you, Adrian. So regarding credit migration and I — no specific geography that is related to that. So that is underlying. It’s quite evenly spread between the different countries and no source of concern. We have made some changes internally actually related to, I mean, raising instructions and processes. And so on and to some degree that affects more than the underlying credit quality, but that’s the basic foundation.

And the migration, we have seen is also related to very strong risk classes. So it’s not in the sort of the bad part of the rating scale, which I think is the most important thing. And then when it comes to the TRIM exercise. So that has — part of that and those discussions happened in 2016 actually because then our corporate models were reviewed.

But then going forward and the EBA has published new requirements on LGD estimations and so on, and that is something that will be introduced from 2020 and we are very early in that process. So it’s too early for us to tell whether that will have an impact or not. So it’s too early to tell.

When we have been in discussions with the Swedish FSA about this, what they have signaled is that, yes, it could potentially lead to some increases in risk weights but it’s too early to tell how much and if that is the case. And their starting point is actually also that they think we are well-capitalized and they don’t intend to make any change as to the capital requirement levels in total. That’s sort of the basic thinking that they have, as I understand it. I think that gives you at least some guidance maybe.

And the resolution fund fee and the potential UK part of that, so they estimate that SEK150 million is the sort of net estimate we have made. The resolution — a similar fee in the UK is there but it is much — it is smaller than in Sweden. And I don’t have the exact figure. Do you have that, Lars?

Lars Hoglund

So it’s Lars Hoglund here. Well, actually, I mean the UK number is based on the size of the entity. There’s a threshold and that is really what is determining whether we will have any fee at all initially. But to Rolf’s point, it will be at least very small. So the SEK150 million is the net impact.

Adrian Cighi

Okay. Thank you very much.

Rolf Marquardt

Thank you.


Okay. We now go to the line of Riccardo Rovere at Mediobanca. Please go ahead, Ricardo. Your line is now open.

Riccardo Rovere

Thanks. Thanks for taking my question. Just a quick follow-up on the previous question on capital again. Just — I apologize, I had to connect with a little bit of delay. Do you expect any impact or any material impact from IFRS 16? And on the back of what you have just stated on TRIM from your sentence, what I understand is that if risk-weighted assets had to go up in 2020 because of TRIM, you think that the capital requirements will remain unchanged and I imagine in billions of kroner, meaning that the capital requirement as a percentage of risk assets would go down. Is that the right way of thinking about your previous statement?

Rolf Marquardt

It is actually too early to really know the outcome of that. We will go through the review of models, particularly the LGD models that we and all other banks have, and that is what the Swedish had to say [ph], we will do during the year. And it’s too early to tell that. So what I was referring to was more what they have stated.

And what you can conclude from that is that they think that the level of capitalization in the Swedish banks is at a good — is where it should be. And then, of course, there could be some deviations from that, but maybe not dramatic ones. But when it boils down to each individual bank and also in our case it’s too early to tell actually what the outcome will be.

And then, when it comes to the impact of IFRS 16, that is expected. The increase in assets is estimated to be SEK4 billion which will increase risk-weighted assets in accordance with that. So it’s a quite small impact.

Riccardo Rovere

Okay. Thanks. Very clear. Thanks.

Rolf Marquardt

Thank you.


Okay. Our final question for today is over the line of Richard Smith of KBW. Please go ahead. Your line is now open.

Richard Smith

Yeah, good morning, guys. Thanks for taking the question. I just had a quick follow-up just on the wholesale funding side of things. And given your comments around spreads, I wondered if you could just comment as to how much your funding expectation is for this year, and against that kind of where you are so far. And broadly, if you could just give us a sense of how you saw the costs yourselves having evolved versus where your average historic costs would be, that will be very useful. Thank you.

Rolf Marquardt

Thank you. So the expectation about the funding during 2019, we don’t make forecasts about exactly what we intend to do but — and guide about that but what we — to give you some color, we will continue to steadily fund ourselves. We have some maturities that we have prefunded already. We feel no rush. So we will do that in a cool and nice manner. And the plan so far is still also that we will start using senior non-preferred instruments during the year.

So we’ll do that nice and easy during the year. That’s the plan. But we feel no rush and we are well prepared. And then regarding cost development, compared to what we had expected, and I would say, so my view on that has been all the way through since Q2 and all the way through Q4, has been very much in line with our expectations, with the exception of the SEK135 million that unfortunately did turn up unexpectedly quite late in the year.

But apart from that it has been moving steadily and in the way, quite calm way that we had expected. And I also think that when you adjust for the end you look at Q4 alone and adjust for the one-offs we had unexpectedly, you will realize that the change between Q3 and Q4 was in line with what you normally see in normal year or slightly below that. So it’s quite different compared to what you saw last year in Q4.

Lars Hoglund

If I may add one point there on the funding cost, I mean what we did see gradually in the second half primarily was that the differential between different banks increased again. And that remains to be seen where that goes for this year, but it was clear during the fall that we funded ourselves cheaper than other banks, with a bigger differential.

Richard Smith

Okay. Thanks.

Rolf Marquardt

Okay. So with that, I conclude this session and thank you very much for attending. Bye-bye.



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