Executives: Rolf Marquardt - CFO, Group Finance Mikael Hallaker - Head of

IR
Analysts: Willis Palermo - Goldman Sachs Matti Ahokas - Danske Bank Anton Kryachok - UBS Geoff Dawes - Societe Generale Brajesh Kumar - Societe Generale Riccardo Rovere - Mediobanca Jacob Kruse - Autonomous Research Jan Wolter - Credit Suisse Yafei Tian -

Citigroup
Operator: Ladies and gentlemen, welcome to Handelsbanken Q1 2017 External Conference Call. Today I am pleased to present, Rolf Marquardt. For the first part of this call, all participants will be in a listen-only mode, and afterwards, there will be a question-and-answer session. Rolf, Please go ahead.

Rolf Marquardt: Good morning everyone and welcome to this conference call for the first quarter 2017.

Joining me today, I have Mikael Hallaker, Head of the Investor Relations; Lars Hoglund, Head of Debt Investor Relations; and Annika Engler, Head of Group Accounting. The slides used for my presentation, are as always, available at handelsbanken.com. So, let's start with slide number 2. The business activity in the bank was strong in the first quarter and lending grew in all our home markets, in local currencies. The bank has continued to generate capital and annual average growth rate in equity per share, including dividends, once again, a steady 15% when adding the first quarter.

A common equity tier-1 capital at the end of the quarter was estimated to be 50 basis points above the target range. As we said already after Q4, we see a good potential for growth of the bank, at least in the home markets outside Sweden. If the capital level remains above the target range, the board intends to distribute the excess to shareholders. [Indiscernible] using share buybacks, extra dividend or a combination of the two. On slide number 5, you can see that P&L for the first quarter compared with the first quarter 2016.

Operating profit increased by 8%, net interest income grew by 4%; business volumes continued to increase in the quarter, and this more than compensated for the doubled fee to the resolution fund. Net fee and commission income increased by 8%, driven primarily by fund management and payment fees. There is an increase in all home markets, which is a result of the high activity in our branch network. Staff costs fell by 20%. However, there are some elements that need to be adjusted for.

In Q1 2016, the Bank did set up a reserve of SEK700 million as you know [ph]. This quarter in Norway, the pension plan has been changed into defined contribution, which means a one-off positive impact of SEK239 million. And finally, as communicated earlier, the bank has resumed allocation to Oktogonen. During Q1, this amount was SEK243 million. Adjusting for these items, the staff cost decreased by 2%.

Other expenses increased by 11%, mainly driven by higher IT development costs. We see a lot of opportunities on the back of the reutilization, and therefore we intend to increase the ambition further, and we expect that IT development costs will increase by approximately SEK200 million this year. Loan losses were virtually unchanged at four basis points. As you know, from this year, interest expense from subordinated debts are no longer tax deductible. As a consequence, we assess the full year impact of this to be SEK280 million in increased tax expense.

On page 21, you can see the quarterly development of net interest income. From this year, lending and deposit margins are defined as the difference between the customer rate and the internal rate charge from or given to branches. The main reason behind the SEK280 million in net interest income in the quarter is the doubling of the Resolution Fund fee applicable from this year for Swedish banks. Paid fees in total increased by SEK207 million. There has been some decline on lending margins, and primarily in the household segment, in some home markets, again in Q1, but nothing dramatic.

The exception is no way, where margins have improved during the quarter. Negative currency effects and fewer days in the quarter, all in all reduced NII by another SEK100 million. The benchmark effect, which over time is zero, and which gave a positive contribution in Q4 was SEK45 million lower this quarter. Looking at the business, there has been good activity in the quarter and where high lending volumes added SEK75 million in our home markets. Lending margins dropped somewhat, which reduced NII by SEK29 million.

Mortgage margins in Sweden rose 106 basis points rounded, which means it declined by slightly less than one basis point, quarter-on-quarter. Now back to slide number 6; where we show the net interest income for the Group, since 2009. Here on the green bar, you can see the impact of state fees on net interest income, and that the underlying trend in NII is increasing. We have adjusted NII for currency effects here, and highlighted state fees over time. As you can see, during the first quarter and considering these adjustments, the underlying NII was the highest ever.

On slide number 7, you can see net interest income for the last five quarters, we have adjusted numbers for currency effect, and again, highlighted state fees. As you can see, in fixed currencies, the underlying net interest income has increased by 7% or close to SEK500 million, compared to the first quarter last year. In the same period, state fees have increased almost SEK200 million on a quarterly basis. The underlying improvement in net interest income, is a reflection of the bank's organic growth strategy. And the activity in our branches is high, and we have seen new customers and higher business volumes, also in the corporate segment in Sweden during the first quarter.

Slide number 8, shows the lending growth in local currencies since 2012, in our various whole markets. Sweden has shown a very stable growth, even thought it has been slightly high lately. In the U.K., growth has also been very stable, but naturally much higher. During these years, our branch opening pace has varied quite a lot. During the last year, we only opened a small number of branches in the new whole markets.

The growth in business volumes have been unaffected though. The branches in the U.K. have continued to grow their business and customer in a stable way. In Finland, growth has slowed during the last couple of years, but we must keep in mind, that the economy in Finland has been very weak. But despite this, we have been able to grow the business.

Norway made a jump in 2016. Our branches always have a list of prospect customers that they want to do business with, and towards the end of 2015, several of these opportunities did materialize. And finally Netherlands, where growth has been very strong and is continued. As we have said already after the fourth quarter, we see good growth potential for the bank, at least in the home markets outside of Sweden. Slide number 9 shows the development in our Swedish mutual fund business.

You have seen this slide before, and it's very encouraging to see that the positive development continues. During the first quarter, the Bank's mutual funds business in Sweden had a net inflow of SEK6 billion, which represents 23% of the total net inflows in the Swedish market. Our share of the total stock is still only around 11%. The trend has been positive for a number of years, and since 2010, the accumulated net inflows in our Swedish mutual funds has been SEK137 billion, which compares very well with the other large banks. During Q1, asset management in our home markets also had a good growth, adding SEK2.3 billion of net inflows.

Several of our home markets had all time high volumes under management. Now to slide number 11 please, in Q1 2016, as you know, we took a provision for primarily early retirements in Sweden. Since then, the number of employees in Sweden is down by 449 people. At the same time, we have continued to grow outside of Sweden, with some more branches and more employees in existing branches. Interestingly, for the first time now, we have more employees in our home markets outside Sweden than in Handelsbanken Sweden.

The bank also continues as before, to invest in IT development, which explains staff increase in other units. All in all, the number of staff is now 236 fewer than at the end of 2015. The adjustment work initiated in 2016 continues according to plan and the target remains. All else equal, cost should be lowered by SEK600 million to SEK700 million from 2018. On slide number 12, we summarize the main focus areas for IT spending.

We have a high ambition to be local and digital. These are four main areas, where we focus our efforts. Within the savings business, we are in the final stage of installing a new securities platform, where investments have been made for a number of years. This, in combination with the massive improvement in the support for advisory services will provide an even better offering in the savings area. Digital meeting places are gradually adjusted for new modern frameworks that can be used in our various home markets.

This enables the customer to get the same experience, regardless of meeting place. We can also use video for customer meetings to a larger extent than before. Technologies within robotics and artificial intelligence will enable more efficient processes within the bank. And finally of course, PSD2 will enable the bank to provide a whole range of new digital opportunities for our customers. On slide number 13, you can see our development in the U.K.

during the quarter, which continues to be strong. Operating profit in local currency improved by 7% compared to Q1 2016. So there was a good business development, and growth was achieved entirely in the existing branch network. No new branches were opened in this quarter. In local currency, net interest income increased by 6%, while fees and commissions increased by 30%.

Assets under management in Heartwood grew by GBP200 million in the quarter, and were GBP3.1 billion at the end of Q1, their highest level ever. At the same time, household deposits increased by 60% compared to one year ago. And all of this illustrates that our branches have been successful in gaining larger share of the customer's total business. One important reason, of course, is the fact that the bank has the most satisfied customers of U.K. banks and the gap to peers is meaningful.

The loan loss level fell to two basis points for the quarter. On the back of Brexit, there is a scenario where we may need to term the U.K. branch into subsidiary. We still don't know if that will be the case. But of course, we are making all the necessary preparations to be able to do that.

Slide number 14 shows Netherlands, where the development has also been very good. Operating profit increased by 73% in local currency compared to Q1 2016. During the first quarter, we opened branch number 26. Business volumes grew strongly and lending was up 38% and deposits 84%. On the corporate side, most of the growth is within the SME segment.

Also in Netherlands, the bank has the most satisfied customers and among corporate customers in particular, the gap to peers is substantial. Optimix that we acquired last year has EUR2 billion under management and contributes highly to the increase to the fee and commission income. Cost income ratio fell by 4.2 percentage points and return on equity was 12% in the quarter. The loan loss ratio was two basis points. As you can imagine, we have high expectations on our Dutch business also, going forward.

Slide number 15, shows the capital and liquidity position. During the first quarter, the Swedish FSA approved our new fee demands for corporate lending and using these new models, the bank had a common equity tier-1 ratio of 23.8% at the end of Q1. This represents an increase of 1.1 percentage points compared to Q1 2016, in spite of the high risk raised for corporate lending that the new models generate. Total capital ratio was 29.7%, up from 28.8% a year ago. The bank assessed that the common equity tier-1 requirement from the Swedish FSA was 20.3% at the end of Q1, taking the new models into account.

The target of being one to three percentage points above the requirement for common equity tier-1 remains. The actual common equity tier-1 ratio was therefore 50 basis points above the target range, as set by the board. As we have said, we see good growth potential for the bank, and this can be expected to consume some capital. At the same time, the bank is continuously generating capital as we have seen. If the capital position remains above the target range, the board intends to distribute the excess capital to shareholders.

This can be done by activating the share buyback program, and/or paying an extra dividend. As you can also see on this slide, liquidity continues to be very strong for the bank. LCR was at 148% and the NSFR was well above the expected upcoming minimum level. So to summarize, on slide number 16, the first quarter was another stable one, where operating profit increased by 8% from one year ago. Equity per share, including dividends again grew within annualized rate of 15%.

The business activity was high and the bank had lending growth in all home markets. Net interest income grew by 4% year-on-year in spite of higher state fees, thanks to increased business volumes. Fee and commission income also grew in all home markets, and the strong development in asset management continued. The cost income ratio improved to 44.8%. The digital development provides many opportunities for the bank, and we have decided to ramp up the ambition to be local and digital even further.

Meaning that, IT development spending will increase by SEK200 million in 2017. Loan losses were four basis points in the quarter. The common equity tier-1 ratio was 23.8%, being 50 basis points above the target range. We see good growth opportunities in the bank. However, should the capital position remain above the target range, the board intends to distribute the excess capital to shareholders, by share buybacks, extra dividend or a combination of those, take the capital back into the target range.

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

Operator: [Operator Instructions]. Our first question comes from the line of Willis Palermo from Goldman Sachs. Please go ahead.

Your line is now open.

Willis Palermo: Hi, good morning. This is Willis Palermo from Goldman Sachs. I have two questions, the first one is on capital; when I look at the impact from the model changes this quarter, it was below the estimated impact you provided during the last quarter. And I was just wondering, if you could elaborate on the differences and confirm if this is the final number approved, so there is nothing more [indiscernible] that should change in the capital and capital requirements, just minor changes? And related to that, when you state that you will use the flexibility of special dividend or buyback, if the quarter one remains above the target, could you elaborate a little bit in terms of timing and what target we are talking about? Thanks.

Rolf Marquardt: Hi. Thank you. First of all, regarding the corporate risk rates, we have not changed -- what we have communicated before is not the change from what we see today. So the estimation we have done is about the same. The total impact of the new PD models is reduction of core equity tier-1 ratio of 1.8 in total.

That should be within this dimension we have given, really last quarter. And then, regarding the flexibility, regarding buybacks. We -- the reason why we have communicated clearly here is, the first one, we want to be clear about the fact that -- the target that we have to be, one to two percentage points above the SREP requirements, is something that we stick to. So that remains. And we think that is well suited for -- first of all the growth we want to be able to have, and that we see.

And also, to take care of some of the volatilities that we experience in the capital and now depending on external factors that we can't affect. And I also want to be very clear on the fact that we want to grow. So now we find ourselves being above that target range, and as we have communicated before, the first, well we want to be compliant of course, and secondly, we want to be able to grow to the extent that we -- and take all the opportunities that we have in the market, when we got on board new clients. And what is then left, is something we will distribute back to shareholders and that is something we can do through using the share buyback program or paying extra dividends. And we will use those tools to calibrate ourselves back into the target range.

But we see still very good growth opportunities, and during Q1, we have also seen a slight pickup in lending to corporate funds and that is something that is normally -- is slightly more capital consuming than lending to, for instance, property management companies. So now, we are above the target range. That is to some extent, also explained by the change in the asset values in pension assets. So that is something that is [indiscernible] explanation to the change compared to Q4. Now we will follow the development and then, in the long run, we will calibrate ourselves back into the target range.

So that is the message. But we don't communicate any specific point in time, when that is going to happen.

Willis Palermo: Okay, thank you. And related to the growth opportunity that you are seeing, and specifically in the -- you mentioned, the corporate client side, could you give a bit more detail in term of geographies, and if you see some in Sweden, in which sector you would see them, and talk a bit about the competition as well?

Rolf Marquardt: Yeah. So regarding growth, we are growing in all home markets, but we are seeing, lately, a change related to Sweden.

So we have some positive signs here in the corporate market. And then, regarding competition and margin development, on the corporate side, margins have been quite stable during Q1. So no major changes. I mean, we see, of course, fierce competition, but no major changes. And that goes for most of our home markets.

So the margin pressure we have seen is mainly on the private side, and particularly so, in the U.K.

Willis Palermo: Okay. Thank you very much.

Operator: Our next question comes from the line of Matti Ahokas from Danske. Please go ahead.

Your line is now open.

Matti Ahokas: Yes. Good morning. Two questions from my side as well please. Also on the excess capital distribution, you write in the report, that if the current situation remains, is it dependent on the outcome of further regulatory issues, or is it clearly the current state in terms of the buffer to the 300 basis points? Then on slide number 21, you have the SEK47 million negative margin impact in Sweden.

Could you break that down into corporate and mortgages please? Thanks.

Rolf Marquardt: So I will take the first question and then I will pass the second on to Mikael Hallaker. So regarding regulatory issues and the potential impact of that one -- the estimation regarding the capital situation; that is not the main reason why we communicate the way we do. I mean, what will happen regarding changed regulations is still very unclear to us, and that is -- and it will remain so for the rest of the year. We expect we are at least a couple of months, especially in the Basel process.

And we also feel that we have really a good starting point, when we have to adjust to that, depending on the outcome. So that is not the main reason, and that is not the basis for the conclusions we have made. That is rather based on the market opportunities we have and growth opportunities we do see. And then regarding the margin question, I would pass it on to Mikael.

Mikael Hallaker: Mikael here.

Hi Matti. Looking at the Swedish lending margins, it's really -- on the mortgage side, we report a drop from 107% to 106%, really to be honest, decimals of a point, when you look at the decimals. A small part of that is on the mortgage side. Then -- so the rest is on the corporate side. But let me add, we also have gain from this [indiscernible] start to measuring lending margins at the rate paid by customers, our internal prices that we charge the branches, and it turns out that that was a positive excess in NII and the pressures on that would indicate, maybe that our internal price was a little bit too high, and that has seen some excess pressure that's really emerging.

So the internal prices have really been a little bit higher than what we have actually paid to the market. I would say that maybe, I wouldn't exaggerate too much, but most of it would be corporates.

Matti Ahokas: Great. If I just may have a quick follow-up on -- I also see that you have increased the allocated capital to the business unit, it's quite a lot. Is this related to the PD model approvers or is it something else, and what's the reason behind it?

Rolf Marquardt: The allocation -- first of all, we do allocate all the capital we have to the different systems units.

And we have started to change the allocation based on the PD models, but that has been done in the first step and particularly to the U.K., and then it will be finalized during -- in the next quarter.

Matti Ahokas: All right. Thanks a lot.

Operator: Our next question comes from the line of Anton Kryachok from UBS. Please go ahead.

Your line is now open.

Anton Kryachok: Good morning and thank you so much for the presentation. Just two questions please, one, on NII and one on capital. Just on net interest income, continuing on the seam of mortgage margins, I understand that you have set prices centrally, but when you talk to your branch managers, say in Sweden, how do they view margin development in Q1, when we had basically, for the first time in many years, STIBOR rising on average Q-on-Q rather than falling -- are they looking to pass that funding cost increase fully on to the consumers, or are they looking at it in aggregation with improved deposit spreads that they are seeing? So that's my first question please. And then the second question is on capital; it seems that you are emphasizing the buyback, rather than the special dividend that you have relied on in recent years.

So can you please remind us, what is currently within your mandate for a buyback in the AGM, if there is one? And also, do buybacks needs to be approved at the end of the year, or can those be launched earlier, if required? Thank you so much.

Rolf Marquardt: Thank you, Anton. So regarding net interest income and how the branch managers view the fact that that market rates have moved somewhat in the short term. And I'd like to say that we -- so first of all, so we do not -- that is not reflected. The external movements in short term rates are not necessarily passed on in the internal rates applied; because the internal rates we do apply, and that is what the branch managers do phase.

It is something that is dependent on the mix that we have in the funding mix, we need to have to fund mortgages and that is much more long term debt behind us. So that has -- that number and the internal rate haven't been affected, and then also as a consequence, branch managers haven't been affected by that. But what we see, when we look at the trend in the mortgage margins, it has been fairly stable. I mean, it has been down one basis point during the quarter, but that in reality, it's more, half a basis point. So it's really a small, small change.

Regarding capital, and share buybacks and us preferring that, that is not the case. The intention is just that we want to be -- what we tell is that, if we have excess capital and we continue to see the situation we have today, if that will remain, we will calibrate ourselves down into the range. And when we do that, we have two tools that we could use and that is share buybacks and its dividends. And so, we don't have a particular preference, I want to underscore. So that's also not the intention to send that signal.

And regarding the circumstances, regarding share buyback program, is that first of all we need to -- if we would want to use that, we have to ply with the Swedish FSA to do so, to get a permission. And if we would do that and when we have filed a full application, the Swedish FSA will have 60 days to give an answer, and if they -- when they have approved it from that particular day, we would need to deduct the whole amount from capital at day one, no matter if we would have bought anything back or so. But we haven't filed an application and we have no immediate intentions to do so. So we just want to underscore that this is one of the tools. So we have no preference, but we wanted to communicate.

Regarding the size of the potential share buyback program approved by the annual meeting was 120 million shares at a maximum.

Anton Kryachok: Thank you. This is very clear and very helpful. If I may just circle back to your answer to the first question on the margin, I remember that a couple of quarters ago, you used to show a slide, which indicated lost net interest income from lower interest rates in Swedish operations on deposits and equity. I guess my question on the mortgage margin is linked to that.

Do you think that, in a rising interest rate environment, you will be able to get back that lost income that we have seen on that chart, or do you think that your branch managers kind of -- when you pass on the funding costs, they will think in aggregate about the mortgage margin and deposit margin? Thank you.

Mikael Hallaker: Hi Anton, it's Mikael here. I mean, obviously on the deposit side, it will all depend on -- I mean, we are currently paying basically zero on deposits and I guess most banks are. And run rates start to go up. I am sure all banks would like to stay at zero, as long as possible.

So it's really going to be the competition that determines, how much market rates will be able to go up, before you start seeing somebody start raising the deposit rate. But it's no doubt, that as long as deposit rates are not tight [ph] at the same pace as market rates go up, it is no doubt that we are going to start regaining some of that lost deposit margin.

Anton Kryachok: Got it. Thank you so much. Very helpful.

Operator: Our next question comes from the line of Geoff Dawes from SocGen. Please go ahead. Your line is now open.

Geoff Dawes: Hi, good morning everyone. Geoff Dawes here from SocGen.

A couple of questions for myself, and one quick one, on Danish credit quality, you had obviously a very big loan loss impairment last quarter, and then actually, a zero value this quarter. What was the cause of that? Was that from reversals from the losses you took last quarter? Is it just the ebb and flow of kind of loan losses, as they come through the P&L? Can you just give us a bit more color on that, because it's obviously quite a big swing from well above expectations to well below. And the second question is on the U.K., you said there is a scenario where you will need to subsidiarize in the U.K. Did it have any implications on your funding model? Obviously, you have run a very big surplus of loans over deposits, so would you need to issue locally or would you still just take the balance from the Group under a subsidiary model? And then finally, on the branch opening program, you did state and slowed down a little bit? I know you have spoken about this in the past. Is there any specific reason for that, and do you expect it to pick up as the year goes on? Now that you have got capital to commit to that? Those will be the three questions.

Thank you.

Rolf Marquardt: Hi Geoff. Thank you. So about the Danish credit loss, that was one major exposure that we had had on the books for a long time, and that had been a long time problem loan. And now, we have dealt with that through the loss we took in Q4.

And apart from that, the credit quality in Denmark is really stable. So it's not -- so what you see now is more normal figures that we could expect from Denmark. So it's low credit problem level. So we have a stable credit quality in Denmark, I would say. And then on the U.K.

and Brexit and what that might mean to us; so it is too early days to tell, what the impact would be, because we don't know for certain. We have discussions ongoing, both with Swedish and U.K. regulators about the potential impact and how we are going to face that. Today, we round operations through branch, and that is something we find very efficient. So we would like to continue to do it that way.

If that will be possible in the future or not, it's still unclear to us, and so we have those discussions ongoing. And if we will have to -- we are of course making the preparations necessary, to be able to set up a subsidiary and to file an application to do that, if need be. But we simply don't know at this stage, and I think also, the legal circumstances around that and so on are still unknown. But we are making preparations. And what the potential impact will be on funding and funding requirements, that is as a consequence, also too early to tell.

And then finally on the branch opening program, and the fact that we haven't opened as many branches in the U.K. last year compared to what we did few years back. So we have come to a point where we feel that we have a really good presence in the different local markets, and we have quite good footprint in the U.K. So we do cover very large part of the markets geographically. And so -- and the focus has, for the time being, shifted more towards, as you say, digging [ph] where we stand, and added on new employees and new business to the existing branches.

That does not exclude us from opening up new branches in the future, but we haven't felt the need to do that so far. So we have the footprint we need to continue to grow. And if you look at the development, when it comes to loan growth and deposits growth and also, fee and commission income and so on, that is, we are still growing quite steadily in the same pace from quarter-to-quarter more or less. So -- and that is a sign of us not being dependent on the exact number of branches we do have. So although we have a strong branch focus, I shouldn't overemphasize the number of branches as a good proxy for that potential development we have going forward.

And that also goes for Netherlands, where we have added now one new branch office. But new branches opening haven't been that many, but we -- well if that is the case, we would continue to grow in that market as well.

Geoff Dawes: Great. Just to quickly follow-up on the second question, within the scenarios you are looking at, is there the possibility that you might need to fund entirely in the U.K.?

Rolf Marquardt: I mean, that is too early to tell actually, because that depends on the outcome, and there are different potential outcomes. And since we don't know, it's too early to assess.

If you look at the formal requirements, I mean the most demanding formal -- is if you have a ring fenced activity. But we are looking at also the balance sheet and so on. We are quite far away from being that corner so far at least. And that is where you would find the most requiring demands, regarding local funding. But once again, I think it's actually too early to actually know, exactly at this point.

Geoff Dawes: Okay. Thank you for your answer. Thank you.

Operator: Our next question comes from the line of Brajesh Kumar from Societe Generale. Please go ahead.

Your line is now open.

Brajesh Kumar: Hi. Good morning Rolf. Brajesh from SocGen Credit Research. Just one question from me on 2017 funding plan.

Have you guys given any thought yet on issuing of non-preferred senior? And what about sub-debt issuance? Can we expect some this year, or are you guys happy with the current 81, and tier-2 levels? Thank you.

Rolf Marquardt: So first, on the plans to -- plans for Emerald instrument -- issuance of Emerald instruments. No we don't have any immediate plans to do that during 2017. We still are in a wait and see mode, when it comes to getting greater clarity in the legal circumstances in Sweden in particular. So we'd like that to change, or at least know what will [indiscernible] before we start issuing.

And we also think, that we have a really good position, since we have a lot of maturing senior unsecured debt, that we could start replacing, when we know that it will result in a [ph] gain. So I just think we still have time to wait a bit, until we move. And regarding sub-debt issuance, we have no immediate plans to make any.

Brajesh Kumar: Okay. Thank you.

Operator: Our next question comes from the line of Riccardo Rovere from Mediobanca. Please go ahead. Your line is now open.

Riccardo Rovere: Yes, good morning to everybody. Just two, three clarifications from my side.

On the excess capital, and correct me if I am wrong, my understanding is that, you want to go first for growth opportunities, if there is anything left, you will go for capital distribution. You have no preference between extra dividend or buyback. What is not clear to me, in this equation is, where you put the regulator issues. Something like IFRS-9 and in the special case, if you are in the position now to say, whether you have a guidance, [indiscernible]. My understanding is that you are kind of sick of waiting for clarity on this topic.

So am I getting it right in, let's say, condensation of the message you have been giving so far? And still -- this is my first question, the second question is, when you talk about excess capital, you say you have arranged -- kind of managerial range, between 100 and 300 basis point. But the range is pretty wide, should we -- my understanding is that, we should be using 300, rather than 100, but I want to be 100% sure that I get it correctly? And the last thing I wanted to ask you is, a follow-up on exactly on the first question, whether the corporate risk weight on PD models or something like that is -- the impact is over, because the corporate risk weight on IRB advances still 27%, just want to be 100% sure of that? And lastly, and literally lastly, four basis point risk cost, if rates remain where they are, do you think this is a sustainable level? Thanks.

Rolf Marquardt: Okay. So first question, yeah, if you had -- you did get us right when it comes to the communication on capitalization. Yes.

You have understood it completely the way we want it communicated. And are we sick and tired of waiting for the outcome of Basel-IV and so on? No, we are waiting and we will see where it will end. It's really hard, when it comes to Basel-IV and potential output for us to know what that exactly will mean. And what I refer to them is still the uncertainty. Not around maybe the calculation as such, but which buffers that would still count, when you use that measure, or -- and which ones that will not count.

And that is really important to understand the impact. That is something that will be quite far away in the future, several years from now. So we will have time to adjust to that. So that has not impacted our way of thinking around today's capitalization, I must say. We feel that we have really strong position.

So we are very well capitalized. And we have a great -- or a good capital generation capacity, and we have also the possibility to manage that situation, if that was to become a binding requirement. Regarding IFRS-9, we haven't communicated the impact in our case. We are working on that of course, and building -- developing models and adjusting models and so on. And so -- and we will come back later with guidance on that, what it will mean to us.

But what I can say about that is that -- I mean, considering our credit quality and how stable that is an entity over time, that is something that also impacts the outcome of IFRS-9. So you shouldn't expect any major disruptions in our case. We have a good starting point, considering our credit quality. And then regarding the target range of us being one to three percentage points above the SREP requirement, and that being a wide range. Yeah.

Well, compared to some other banks, its wider. What is the thinking behind this, is that we won't have this buffer, because we have a growth strategy. And credit growth is capital consuming, and we want to be able to catch the opportunities we get, when we get them, and without any restriction. So that's why we want to have a buffer. And yes, that's correct.

If I am to prioritize capital, the first thing, is of course to make sure that we are compliant. But secondly, we want to grow the business. But if we then have excess capital -- more capital than we need, considering our growth, considering capital requirements, and considering also potential volatility in the capital requirements related to issues that we can't control. Then we will distribute that back to shareholders, and carry [indiscernible] ourselves back into the target range. So do we have to be -- should we think about this a 3% target or a 1% target, or somewhere in between? Well, we have this buffer.

For us to be able to deal with some volatility, and also growth opportunities we have. And we should be in that range, and that also means that we should be in that range. That is if we see growth opportunities, it's of course good not to be too close to the limits. But the range is the buffer we want to have. And then, corporate risk weight, is the game over for now? Yeah I would say so.

You never know, and it's really hard to know exactly what will happen in the regulatory arena, and how regulators will actually act in the future. So I can't forecast that. But from the things we know today, and the work of -- and requirements that were raised a year ago, for the Swedish FSA, that has been dealt with now through the approval of the PD models we have just introduced. And then finally, the question regarding the loss level, loan loss level of four basis points, is that it's a sustainable level, and I would say, yes it is. If we look at the credit losses and the loan loss levels, we have add over the last years, the underlying credit quality has been very strong all the way through.

And we have an underlying low loan loss level. And then we have had, on top of that, a few major cases that actually explains a very big part of the total loan losses we have seen. Those -- I would say so.

Riccardo Rovere: Very clear. Thanks.

Thanks a lot.

Operator: [Operator Instructions]. Our next question comes from Jacob Kruse from Autonomous. Please go ahead. Your line is now open.

Jacob Kruse: Hi, thank you. Just two questions; firstly, on the mortgages. Could you comment at all on the back and front look dynamics in Sweden, where your front book stands relative to your back book? And also, on the whole issue of fixed rate versus floating rate mortgages, how the margin looked there, and what outlook you see there? And my second question was just on your digital plus local strategy; does that basically mean that you keep your entire branch network more or less unchanged, and then you also have a competitive digital platform relative to the other banks? And if so, do you see that as creating a problem in staying competitive on cost, or can you kind of merge these two strategies together without having to pay out twice? Thank you.

Rolf Marquardt: Okay. So regarding mortgages and the front book and back book, if we look at that, we are actually seeing very similar margins, both on the front book and the back book.

And regarding the question of fixed rates and variable rates, I will pass than on to Mikael Hallaker.

Mikael Hallaker: We are closer to a 60% variable on three months rates now, 40% on the fixed side. But this is a sum that tends to change very rapidly, when rates start to move. But currently, slightly more on the variable than on the [indiscernible].

Jacob Kruse: But is there a margin difference between the product?

Rolf Marquardt: And then on the topic of the branch network and keeping that.

So, we -- the branch is the bank. The branch has the way of being close to the customer, it will continue to be the case. So that's the ambition, and we haven't changed that. We want to be local, and be close to the client, so that's really the core of our business model, to be local and build strong relationships. So that will remain the case.

If you look at the number of branch officers, on meeting places we have in Sweden, that has been reduced by 10 branch officers, during the quarter. And that is something, it has not been a target from our side. To be honest, the fact that -- yeah, we realize that when we concluded the Q1 report, it has not been important to us. What is important to us, is that we are cost efficient, and run a good business. And that is something we can do, also keeping branches.

And branches as such, are not the big cost base in the bank. The cost base in the bank is namely headcount and IT systems. So we will stick to that. We want to be local and digital in good combination, and that also means that we -- and the message we want to send around this, is that we -- us being focused on brand, running the operations through branch office, this doesn't mean that we neglect IT and digitalization. On the contrary, that is something that will add on and has already today, added to our offer to clients, and that is something we feel that we have to develop and we want to improve, what we have today.

We have a good offer, but we need to, of course adjust that and improve it, and take the different business opportunities that the digitalization also gives to us.

Jacob Kruse: Okay. I guess my question is just, are you not then running both distributed distribution networks? And I appreciate the rent of the branch is not a big cost. But clearly, you also have people in the branches, and they have systems etcetera. And you are also then running a centralized distribution in the digital form.

So wouldn't that put you at a cost disadvantage, to somebody who decides to go much more firmly down one of those two strategies?

Rolf Marquardt: No, we don't think so. And if we look at the development so far, what we can conclude is that, that we are an efficient bank. So we -- the cost to income ratio we run at is low compared to many other banks. And we also see opportunities in improving that. So far, that has not been the case.

And also, if you want to serve clients well, no matter if you do that from a sample point or you do that being present locally, you need people to do that, and you need IT systems to do that. So -- and that's the reason behind it. We want to have the people local, because we have the experience that that is good for business and building relationships and also getting business and make a good return out of that; because if you are close to the clients, you can do more business, and you get a service. So that is our starting point, and that is also our experience, that we are able to do that in an efficient way and a cost efficient way.

Jacob Kruse: Okay, thank you.

Rolf Marquardt: Then I'd like to add one thing, and that is -- I mean, the business model we have is flexible. So we do all the time, adjust the way we work, the way we approach the clients and so on, to move with the tide.

Jacob Kruse: Okay. Thank you very much.

Rolf Marquardt: Thank you.

Operator: Our next question comes from the line of Jan Wolter from Credit Suisse. Please go ahead. Your line is now open.

Jan Wolter: Yes, hi. Jan Wolter here, Credit Suisse.

A couple of questions from my side, I joined late, so apologies if they have been asked already. So first on the liability margin, and STIBOR, three months is up around five basis points in the quarter. When we look at the breakdown in the presentation, around the NII, why don't we get positive impact from high year liability margins, just in principal, if you could elaborate on that, so that's my first question. And the second one is one, I think you mentioned, Rolf, the cost savings of SEK600 million to SEK700 million kicking interest 2018 from the program. Can you say anything, how much of that could flow to the bottom line? I am aware that salary inflation, as well as IT investment will eat up some of the savings, but still, any color there, whether or not that could hit the bottom line, or to what extent? So those are the two first questions, please.

Rolf Marquardt: So I pass the first question over to Mikael.

Mikael Hallaker: Hi Jan. Looking at it, we stated in the report, that we are exchanging it with the way that we calculate the margins of this quarter, moving away from STIBOR as the benchmark rate, and that we calculate margin as the customer rate less the rate -- our internal prices that we charge or credit the charge for loans, and credit for deposits over to the branches. And that hasn't changed, so that has an impact on this, because obviously, we are living in a positive rate environment with zero on deposits, and we still charge on the asset side, where STIBOR is so far outside that range. So that's how we made the change.

But it's true in the sense, that of course, as long as we keep zero on deposit rates, and the part of the loan book that is funded by deposits, obviously have an increasing margin, when STIBOR goes up. But despite of that [ph] we change from this quarter, the way that we calculate margins.

Jan Wolter: Okay, thank you. And just to follow-up quickly on that answer, Mikael. Then did the bank materially change deposit rates in the quarter? So if we look at the retail deposits in Sweden, if we exclude corporates?

Mikael Hallaker: The answer is no.

We don't see a change in the rates, no.

Jan Wolter: Okay. Thank you.

Rolf Marquardt: [Indiscernible] stable. And then, regarding the cost savings program, well that is running according to plan and what we have communicated before, is that we will, all else equal, reduce the cost by SEK600 million to SEK700 million per year, on an annual basis from 2018.

And although, we don't communicate how far we have come in that, and we are still -- it's amazing that that would be the case. So it's running according to plan. I think you can see that, although we don't disclose the exact figures, I think you can also get a notion of how far we have come through looking at the staff numbers we do communicate. So we are 449 people less in the Swedish bank operations in Swedish regional banks. We also have made some reductions in some other countries, the other markets outside Sweden, and not big ones, but some.

And then also, in head office. But on the other hand, that is -- we have recruited new people and added on people in the IT development side, to be able to increase the development base. And so I think that gives -- so that is feeding [ph] through the numbers today. But on the other hand, of course, we hen growing outside Sweden, particularly in the U.K. and Netherlands, and we also invest in IT.

So that would of course, move in the other direction. But I don't know if that is clear enough.

Jan Wolter: No -- that's very helpful, thanks. And just the final question on [indiscernible]. Have all the applications been approved now with Swedish FSA, regarding the adjustments for higher corporate risk rates.

Or is any application still pending?

Rolf Marquardt: No. We got the approval by the end of Q1, and that covers all the corporate risk weight models.

Jan Wolter: Okay. So we shouldn't see any type of RWA inflation coming from that side really, even though -- and you have in your -- the SREP ratio, you communicate in the report, the so called -- or the effects from the higher corporate risk weight order is included in that one, that you state in the report, 20.3, I think?

Rolf Marquardt: Yeah. So that is the complete history around the corporate risk rates.

But then, I mean, we never know what will happen in the future when it comes to regulatory discussions. But from everything we know now, that has been dealt with, when it comes to the PD models.

Jan Wolter: Sure. Okay. Thanks for that.

Rolf Marquardt: Okay. Thank you.

Operator: Our final question comes from the line of Yafei Tian from Citi. Please go ahead. Your line is now open.

Yafei Tian: Thank you. I just have a quick question on the resolution fee contribution starting from 2018 onwards. And given the increase in the contribution rate, how much higher contribution fee [indiscernible] [64:44] do you expect to see in 2018 numbers? And if you have to move U.K. to a different structure, obviously we don't have to make the contribution for the assets that are in the U.K., so how much savings can you get from moving U.K. to a subsidiary? And then a quick follow-up question, specific number question on the operating costs in Sweden banking; this quarter, it's relatively higher, and in your comments, you have mentioned around SEK100 million higher of costs from internal budget services.

Is this something that would be considered as ongoing, or is it just specific to this quarter? Thank you.

Rolf Marquardt: Okay. So regarding the Swedish resolution fund fee for 2018, so you need to keep in mind that, the increase is just a proposal. So it's early stage. That might happen.

If it happens, and it will be increased then to 12.5 basis points. That would mean on an annual basis that, the total costs would be SEK2.5 billion per year. Now it's estimated to be SEK1.8 billion, so it's a SEK700 million, if that happens. Now that hasn't been finalized, so we don't know if that would be the case, but we certainly see the risk with that. So if we have to put up a subsidiary in the U.K., we don't know if that is the case.

But potentially, it would be. Yes, then we don't have to pay the resolution fund fee for the U.K. book to the Swedish resolution fund. So that would of course reduce the amount, and I don't know if we have communicated that.

Mikael Hallaker: I mean, clearly we have said that increasing cost obviously, for a subsidiary will partly be funded by lower resolution fund fee.

So that will help some. Of course, for our new subsidiary, it will be more costly than running a branch.

Rolf Marquardt: And the number is in the range of SEK200 million that we would save. But on the other hand, we would have some costs of course in transforming the branch into subsidiary. And then finally, operating cost increase in Sweden, is that ongoing? And that is related to development products we are running, both for business development purposes, but also to very large extent to compliance related products.

Okay?

Yafei Tian: Okay. Thank you.

Rolf Marquardt: Thank you very much everybody.