Executives: Rolf Marquardt – Chief Financial Officer Lars Höglund – Head of Investor

Relations
Analysts: Jan Wolter – Credit Suisse Kim Bergoe – Deutsche Bank Jeff Dawes – Société Générale Willis Palermo – Goldman Sachs Jacob Kruse – Autonomous Paulina Sokolova – Barclays Nick Davey – Redburn Vivek Gautam – JPMorgan

Rolf Marquardt: Good morning, everyone, and welcome to this conference call for the First Quarter 2018. Joining me today I have Lars Höglund, Head of Investor Relations; and Annika Engler, Head of Group Accounting. The slides used in my presentation are as usual available at handelsbanken.com. I will start off by making some comments to an article in the Swedish paper Dagens Industri today. Dagens Industri is quoting a letter sent to Handelsbanken UK from UK FCA in August last year regarding our UK anti-money laundering prevention procedures where they point to areas where we need to improve.

Already before this letter was sent to us, The Bank intensified further our work in improving systems and routines in this respect and that work is continuing. We take this matter very seriously and we have ongoing dialogue with FCA and we have committed substantial resources to further improve our processes to prevent financial crime. The requirements from regulators in general in this area have increased a lot over the last year as you know. As this matter is subject to confidentiality, this is all I can say about this process for now. The increased effort in this area is also a part of the additional resources we committed to control functions, which we also commence in the report.

Let’s start with Slide number 2. During the first quarter, the stable value creation continued with an average growth rate of 15% in equity per share and dividends. Much of the Q1 report is about growth. We could continue to see good growth in our business operations across The Bank. This amounts we used to invest in creating an improved offering to our customers, increased operating efficiency in preparing for the next step in the UK and further adopting to regulatory requirements.

So now please turn to Slide 5 and the income statement for the first quarter compared to the fourth quarter of 2017. Net interest income decreased by 2%, but adjusted for the increased Resolution Fund Fee it increased by 1%. This is mainly explained by increased business volumes and increased deposit margins outside Sweden. Net fee and commission income decrease by 2%, mainly due to seasonally lower paying on for commissions. The net result of financial transactions is as you know relatively small revenue item for The Bank compared to our peers.

This quarter result was partly affected by negative effects in the valuation of derivatives used for hedging The Bank’s funding. Other income during Q4 included the dividend from VISA Sweden of SEK 576 million, which explains the difference. In total revenues fell by 7%, but adjusted for the dividend from VISA Sweden and increased Resolution Fund Fee decrease was 1%. Staff cost increased by 3% when adjusted for the quarter’s higher allocation to Oktogonen and the changed pension plan in the UK. The explanation is found in an increased number of employees in our growth markets and within our IT operations as well as accentuate effects, but also annual salary review.

Other expenses including amortizations and depreciations followed a relatively normal seasonal pattern and decreased by 5%. As we have explained before, we have increased our eye to development capacity in order to support our growing business and to improve efficiency to make preparations for the subsidization in the UK and to continue adapting to new regulations. These various investments are reflected in our cost level this year. Loan losses amounted to SEK 153 million corresponding to a loan loss level of 0.03% according to the new IFRS 9 standard. The underlying credit quality remained stable.

In total, operating profit increased by 3% between the quarters. Adjusted for non-recurring items related to the VISA dividends in the previous quarter and revised pension plan in the UK, the increase was 14%. Adjusted also for the increased Resolution Fund Fee and the increased Oktogonen allocation the increase was 20% between the quarters. Now moving to Slide 24 and net interest income developments. During the quarter, net interest income decreased by SEK 129 million, or 2%.

The main drivers were the fee to Swedish Resolution Fund that increased this year to 12.5 basis points from nine basis points in 2017. This led to an increase in government fees of 191 million. Increased, lending and deposits volumes in our home markets, which together added 77 million. Increased, margins that added 49 million, mainly driven by higher deposit margins in the U.K. Currency effects, which added 4 million to 6 million, two days less in the quarter reduced net interest income by 69 million.

And finally, other impacts amounted to minus 47 million including a negative benchmark effect of 28 million. In Sweden, the mortgage margin was changed at 106 basis points. The, overall lending margin development was slightly positive for corporate customers and slightly negative for retail customers in most countries outside Sweden. Moving to Slide 7. When we take a closer look at the net interest income development over the last years, we can once again conclude that when adjusting for the increase in government fees that the bank reports the highest level so far.

The Resolution Fund Fee in Q1 amounted to SEK 617 million. We have seen a very positive trend the last two years compared to Q1 2016, the reported net interest income has increased by SEK 853 million or a third in the sense. Adjusted for government fees the increase was 1.2 billion or 17%. The growth in our home markets outside Sweden has been very strong when we look back. And, the contribution to the group’s net interest income has been increasing steadily.

Today, home markets outside Sweden account for 40% of the groups net interest income compared to only a very marginal share a few years back. After a few years, of weaker development in Sweden, the trend changed in early 2016. Now to Slide 9. When we look at an aggregate net interest margin in the group expressed as net interest income in relation to total assets, we see a significant recovery since Q2 2016. The seasonal pattern that started to occur in 2015 is explained by the shrinking balance sheet at year-ends, which has a positive impact on the margin as well as few days in the first quarter, which adversely affects the margin.

Nevertheless, the net interest margin trend has been positive since Q1 2015. When we compare the net interest margin in Q1 2018 to Q1 2017 we see an increasing by five basis points. And that the level is the highest for a first quarter since 2013. The positive trend is mainly a result of the continued good volume developments in our growth markets, where margins are generally higher as well as lower funding costs. Please turn to Slide 10.

Improvement in net interest income in Sweden is largely driven by increasing lending volumes, for example in the mortgage market. As you can see in this slide the smaller institutions have taken a larger share of new lending over the past two years and new players have announced their presence in recent months. There has been a further tightening of the competition but this has been going on for quite a while already. Looking at the market shares of new lending we can conclude that Handelsbanken share in recent quarters has been more or less in line with our share of total outstanding volume around 23%. In the first two months in 2018 the share of new lending was slightly higher at 24%.

We’re obviously a leading player in the Swedish mortgage market and we intend to keep it that way. We have a high degree of efficiency in mortgage administration. The Swedish mortgage book is over SEK 750 billion and this is managed and staffed to protect by 80 employees. Then we also have more than 400 branches in Sweden that takes care of mortgage advice and distribution to a cost of more than SEK 500 million. In the distribution of mortgages we have a potential to become more efficient to digitalization and other process related improvements which will reduce cost over time.

Slide Number 11. Our development in the Swedish mortgage market shows that our business model is appreciated by our customers. This is particularly obvious today when the number of alternatives in the markets increase both in the form of new players and new types of mortgage offerings. At the same time new regulations regarding amortization requirements and debt to income ratios are really complicated and often difficult for customers to understand, this increase the need for advice. It is still clear though that there is a need to improve and streamline mortgage services, the mortgage process and the mortgage distribution.

This is a development that is ongoing and that involves both an increased level of digitalization and other process improvements. Over time, the mortgage process will most likely become fully digitalized not only in Handelsbanken, but also for the market as a whole. But a differentiating factor in our case is that we will continue to offer a personal meeting and personal advice. Much of the investments that we are currently making in the mortgage loan process will release significant time and capacity in the branches, time that instead can be devoted to customer meetings and advise, as well as reducing cost. This is what we have done in the savings business and what we aim to do also in the mortgage business.

Please go to Slide 12. Our solid development in the Swedish fund market continues. During the first quarter the bank got 54% of net inflows in the markets, which should be compared with 11% market share we have of the total outstanding fund volume. This suggests that there is good potential for continued growth. Since 2010 the bank has taken 23% of total net inflows in the Swedish markets and has been the largest player.

It should be noted that this has been done in a market that has undergone major changes over the past 20 years. Many new players have entered and the level of competition has increased. Slide 13. It is not only Sweden that is growing in this area, the asset management business in our other markets has also had a strong development. Since Q1 2017 net inflows in mutual funds outside Sweden were almost SEK 10 billion, which accounts for around the third of the total increase in the Group.

In Heartwood, in UK we have seen a further increase in net inflows, which is a consequence of us reaching out to an increasing number of customers around the UK with our wealth management offering. Net inflows in Q1 increased by 38% compared to Q1 last year. We are working to achieve the same in the Netherlands where we are increasing the level of integration between Optimix and the branch operations. In all markets fund volumes reached an all time high level in the quarter. Now to Slide 14.

The strong development in the savings area is an outcome of a few improvements over the last year’s. In particular, the advisory service process has undergone major improvements with the aim to offer a holistic advisory service. Our own funds have also had a strong performance and strong ratings. The focus in the branches on asset management advice has also increased. This is also why the number of advisory meetings has been growing rapidly during the last year.

In the first 14 weeks 2018, the number of advisory meetings increased by 4% to 5% compared to last year. Now to Slide 16, two years ago, we initiated a change in the Swedish operations and made a provision of SEK 700 million to enable the structural changes. Significant changes have been made during this process, many branches have moved from street level premises to the second floor, some have left high street location and changed office space to better support advisory business. A number of branch offices in particular in the major cities have been merged and the number of staff has been reduced. This has improved productivity.

Going back to 2013, we can see a sharply improved trend in Sweden since 2016, revenues per employee has increased strongly as well as profit per employee. At the same time, we have increased our level of investments in the bank and with this higher level. we get more business and revenues per employee today compared to two years ago. The investments we make now are expected to generate continued productivity developments throughout the bank. Please go to Slide 17.

In the UK, our good development continues, business volumes are growing steadily although we only open a few new branches in the past years. All branches still have a small market shares and therefore have good growth potential. In local currency, net interest income increased by 16% during the year while fees and commissions increased by 17%. In Heartwood, capital on the management increased by 300 million pounds in the first quarter of 2017, of which 350 million pounds were net inflows. The funds and management now amounts to 3.4 billion pounds, the average volume of household deposits has also increased by 32% compared to a year ago.

We now run at full speed in the creation of a UK subsidiary. The UK business has been growing significantly over the years and has the potential to become bigger. Creating a subsidiary represents the next step in the evolution of our UK business that means that we are improving local UK capabilities. We are investing in new systems and processes that will streamline the branches work and enable handling of more customers, improve customer on boarding, processes et cetera. The current efforts and investments in the UK comes with increased cost as we have previously communicated but it improves the foundation for continued growth and value creation.

Now to Slide 18, when we look at our youngest home market Netherlands, we also see a very satisfactory development. Operating profit rose by 35% in local currency, compared with the first quarter 2017 and business volumes developed strongly, lending increased by 21% and deposits by 41%. Also in the Netherlands, the bank has the most satisfied customers and the distance to competitors is high among both private and corporate customers. Optimix our asset management on which we acquired in 2016 greatly contributed to the shop increase in net fee and commission income. The return on equity in Netherlands was almost 40%.

Now please turn to Slide 19 and capital requirements. The CET1 ratio was 21.6% and we estimate the Swedish FSA requirement at the end of the first quarter to 19.5%. This means that we are just over 2% above the SREP requirement and that we are within our target range of being one to three percentage points about the SREP requirements. The decline from 22.7% in Q4 to 21.6% in Q1 2018 calls for some explanations. During 2017, the Bank has had a request on certain property management lending in the UK.

In 2017 this was supplied in Pillar 2, this floor has now been moved to Pillar 1 and that’s increased the risk exposure amount and reduced the capital requirement in Pillar 2. This reduces the CET1 ratio but has no impact on the amount of required capital. This change explains 0.4 percentage points of the change since Q4 2017. Growing lending volumes reduced the ratio by another 0.4 percentage points and net pension assets reduced the ratio by 0.3 percentage points. Accent rates improved the ratio by 0.2 percentage points.

What should also to be noted is that the level of accumulation of the quarterly profit in core equity is low, since a large part have to be deducted during the year. This is because of the regulatory requirements, which states that the dividend to be deducted is the hirer of last year’s total payout ratio and the average of the last three years total payout ratios. This means that we are now deducting more than 90% of the profits that we generate during the year. Having said this, we want to underscore that this is not a forecast for future dividends, it is purely a mechanical calculation based on regulatory requirements. But for Eastern, Swedish have to say published a proposal that risk with for mortgage loans in Pillar 2 shall be transferred to Pillar 1 starting December 31 this year.

This is intended to create a level playing field as Nordea moves its headquarters to Helsinki. The capital requirement in absolute terms is today SEK106 billion and this will not change. What it does mean however is that our CET1 ratio more or less equal would drop to 16.6% based on Q1 numbers from the current 21.6%. As a consequence, the required asset ratios will also drop. So the capital impact is neutral.

So to summarize on Slide 20, when adding another quarter we see, that the stable value creation continues with an average annual growth in equity per share including dividends of 15%. The first quarter showed a strong business development and we continue to see good growth opportunities. The project of establishing a UK subsidiary continuous according to plan as well as to work with IT development. Loan losses were very low and asset quality is stable. A common equity ratio was 21.6% and the bank is within its target range.

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

Operator: Thank you. [Operator Instructions] Our first question is from the line of Jan Wolter at Credit Suisse. Please go ahead, your line is open.

Jan Wolter: Hi, I’m Jan Wolter from Credit Suisse, just a couple of questions follow-up from the press conference in Stockholm. So first on the cost side there, could you just tell us what are the major regulatory and IT projects which are still running in the Bank apart from the UK subsidization, Pillar 2, and GDP or so excluding those three which would you highlighted previously will continue to run this year. Just curious about what the major projects are still to be implemented in this year and perhaps next year. So that’s the first question. And then the detail there whether or not the cost for the subsidization of UK, is that now in full in the P&L in Q1, so the delta there over around SEK80 billion, it means that the incremental cost in the coming quarters will be zero.

We will stay up at this level. So those are my two first questions. Thank you.

Rolf Marquardt: Hi, Jan, thank you. So first of all, you mentioned the major projects be at the two and GDPR that’s of course important to us and it does also this year and to some extent also next year.

And then we have projects ongoing to improve data quality and that’s something that I guess that most banks are involved in doing. So that’s related to HBS 239. And then we also have some remaining parts that are related to miss it too, that is being reduced, really reduced and will be finished this year. That is at least what we anticipate now. And then we have a product where we are changing a security system and that is something we have been running for many years and that still goes on, but that will continue at a lower pace so.

And I think those are the major ones and a part of course of the Brexit related things, what we have also mentioned in lot of UK is that previously is that we are building alone ledger and we also are improving the custom on boarding services we have and support for that. So that’s also important development that will have both a business impact, because it will improve operating efficiency. It’s really time consuming to onboard customers in the UK today. And it’s also good from a regulatory point of view, of course. But those are the major ones that comes to mind.

And then regarding Brexit cost, yeah, so the SEK300 million we communicated as an estimated cost for 2018 in Q4 that is base we’re running out now. So we don’t expect that to change. So you can expect to quite even development regarding that cost going forward during 2018. And then next year that is expected to slightly – go down slightly. But then in addition, we do other things in the UK as well, so for instance the customer on boarding product that I just mentioned.

So the Brexit cost we have communicated is the cost that we – that are tied to the preparations for creating a subsidiary.

Jan Wolter: Okay. Many thanks for those clarifications. And then just another question if I may different subject, in the quarter we did have in the U.S. market widening of the LIBOR spread, LIBOR OS spread and some changes there perhaps in the short-term funding market to CPCD market.

Did you see any impact in the P&L on the NII from either extra cost or extra gain from this volatility. And number two related to that, have you changed your behavior in the way in terms of how your issue CPs or CDs in the U.S. market. I – you’re growing shorter or longer, so focusing more – this or moving out of the U.S. market and ensuring shortened up in another currencies.

Thank you.

Rolf Marquardt: So the impact we have had some impact, but we estimate that the impact is approximately SEK10 million and that is what shows up in the treasury line in net interest income. So it’s not a major impact, but we have had some impact. And I – when it comes to the funding strategy, we have not changed that. We have seen margins being changed to some extent, but I mean we have very low risk in that portfolio.

We haven’t changed behavior on strategy in that respect.

Jan Wolter: Okay. Many thanks for that.

Operator: Our next question is from line of Kim Bergoe, Deutsche Bank. Please go ahead.

Kim Bergoe: Hi, it’s Kim Bergoe. Just I think most of it is – most of my questions have been answered. But just one question about you previously you’ve been linking sort of the more strength of the bank to being – to having a high customer satisfaction both absolute and relative to your peers. Can you tell us a little bit about where that’s moving or if there’s any indications of that moving or is that still the case are you keeping that level. Thanks.

Rolf Marquardt: Thank you, Kim. Yes, definitely. I mean, that’s really our key focus. And I think, I just go that you to bring this up, because I think when we look at the value creation that we are able to make and what we see going forward and the strategy we have. It is really to – I mean we stick to be to run branch offices and to see that as the focal point of the bank.

We are digitalizing and we have a good digital offering and we continue to develop that obviously. But we will keep our branch offices. And that is because we think that customer satisfaction being close to customers and building relationship will become even more important in the future when as many banks become more purely digitalized. And so the customer meeting in many cases will be really important. And so we expect that this could very well be differentiating factor in our case in the future.

So the ambition we have and some of the changes we have been making recently in this branch operations is certainly moving in that direction, where we in some cases have left the street level and moved to second floor and so on. So we want to transform the business in the direction of a more complete advisory service, where we take account of them for economic picture of our customers both corporate customers and private individuals. And what is the differentiating factor in our case is that, we will – if you’re a Handelsbanken customer, you should be able to go to your branch, when you want to when you feel a need to. And then you will meet the person in flesh and blood and that will be full response for all of them based into you have all the bank. So satisfied customers and keeping costs low and being efficient is really still a core business model and that will not change.

Kim Bergoe: Okay, thank you very much. Just maybe a follow-up to that. Did you see that – so did you see a risk to, I guess, it’s really the differential between you and the peers in terms of satisfaction. Do you see a risk of that differential reducing as more and more of the interaction with the customers goes online, goes mobile and less is physical or do you expect that you can keep the differential to your peers. Can you keep that? Will you be able to keep that in a more digital banking world?

Rolf Marquardt: No.

On concrete actually because, so first of all the most satisfied customers we have is the ones that use both. And I think it’s really, really key to us to keep the closeness that we do two customers, when we off a both. So I don’t see that contradiction is something that is working in our favor. And I think when we look at the way we are giving advice now and the direction we are moving, and I think one interesting example is what happens now in this way this mortgage market, when we see new players entering the market. And when they do – they in some cases at least they offer a slightly different mortgage product.

That differs from the normal standard mortgage products we have in Sweden and have been offered historically about by bank. And then in addition, we also have the newly introduced amortization requirement and we need to calculate, that income ratios which we haven’t done before and now customers haven’t done it before and that’s really, really complicated. So that will increase the need for advice and we see that in our branch operation. So we certainly think that this moves in our favor and that we even in a more digitalized world to offering this will benefit in terms of customer satisfaction.

Kim Bergoe: Okay.

That’s very clear. Thank you.

Operator: And we’re now over the line of Jeff Dawes at Société Générale. Please go ahead. Your line is open.

Jeff Dawes: Yes. Hi, good morning everyone, it’s Jeff Dawes here from Société Générale. Just a couple of questions on the UK operations. I expect the operational costs, but you’ll see a few things are changing as well like subsidiarization for yourselves but also a change in the government funding schemes, change in the base rates and so on. Can you talk about your funding cost going forward with all that taken into account? Is it going to go off, is it going to reduce the competitiveness of the bank? And how are you going to manage that situation? So that’s the first question.

And then a follow-on from that, do you see any similar processes required outside of Sweden, or outside of the UK any subsidiaries or any other operations. Thank you very much.

Rolf Marquardt: Thank you, Jeff. So regarding operating cost in the UK and what we can see going forward obviously that is impacted by the Brexit preparation from the subsidiarization and also some other costs we do take in order to improve that business and to prepare. And that is something you have seen coming through the P&L now and that will continue doing this year as we have communicated before.

And this year in general when it comes to development needs in the bank in total but also in the UK we’ll be a peak here, I would say especially when it comes to preparation for operating a subsidiary. Regarding funding costs we don’t expect that to be impacted actually by us forming a subsidiary. So first of all, the funding strategy we have – from a real a centralized funding operation that will continue. So the responsibility for long-term funding and so on will still be the by the head office and coordinator here. And then short-term funding to some extent it’s being done in the UK already apart from the deposit, stable deposit in the UK and that won’t change that will continue the same but we will then start using short-term in the suburbs.

We don’t expect that to have any impact funding cost. And then the final question about subsidiarization in other countries. No, we have no plans at this point to make any changes. I mean running the operations through branches is something that is efficient and it has been working well also in the UK. Now Brexit means that we – sort of decided the point when we needed to make a change in the UK.

Two things that makes UK different compared to our other home markets outside Sweden. And the first one is that we would have been forced to do this at some point anyway because of the rules in the UK about doing some banking for retail activities. At some point we would have come to that point anyway. But more importantly, we see our business in the UK long term. I mean, it is a business that has been growing at a very steady and a fairly high pace for a long time.

So we have become quite big actually and we have no reason to think that the development will change in a significant way. So we have the potential to become bigger in the UK. And then it means something to have more capacity locally to deal with things. It also comes with a cost obviously because we do have to put more emphasis on local governance and so on so many regulatory things that comes to play when it comes to forming a subsidiary. But it will also be beneficial to have greater capacity locally in the UK.

And that’s why we have taken the step there. But, no plans to make any changes in other markets.

Jeff Dawes: Okay. That’s really clear and helpful. Thank you.

Rolf Marquardt: Just to mention, I forgot to mention the funding for lending scheme, which is standing in the UK on the impact that we could expect that might have on margins and so on. And I can say that at this point, we haven’t seen any impact from that, if you look at the modern development in the UK, it’s positive – slightly positive ground when it comes to corporate lending about the – still slightly negative trend when it comes to retail lending.

Jeff Dawes: Great. Thank you.

Operator: Okay.

Our next question is the line of Willis Palermo at Goldman Sachs. Please go ahead. Your line is open.

Willis Palermo: Hi, good morning. Thanks for that the presentation.

I have two questions. The first one is on the volume growth in the quarter especially on the mortgage side in Sweden. Should we expect the same pace over the coming months and year or have you seen any change in momentum between different months in the quarter perhaps related to the new regulation introduced in March?

Rolf Marquardt: Okay. Hi, Willis. So about volume growth in the mortgage market, we saw actually – if you look at the numbers and you are seeing it.

We had an increase that was slightly higher than we normally have each quarter, this quarter. And so I would say that the development we have seen during this quarter has been slightly higher than we often see. And that also happened when the amortization requirement was introduced in 2016. So what happens is that sometimes people try to get that loan before the new system entering before us and so I think, it’s part of the development side. So I think what we conclude is that has been a stable development.

And then in addition – some additional volumes coming in and I think that what we should have in mind when do you move forward.

Willis Palermo: Thank you. And then outside of the mortgage market in Sweden have you seen any stronger activity among SME outside of the property management sector.

Rolf Marquardt: I think we can say – and this is more anecdotally on what we see in terms of business in flow. It is looking good.

I think so the best momentum is good and what we hear on that totally and also see that we will get more and more business. So times are good in that respect. So it’s not a dramatic change but positive signs still. So it’s like it has been during the last quarter I would say.

Willis Palermo: Okay.

Thank you. And then second question just to come back on your comment about competition in the Swedish mortgage market. How do you see the branch managers reacting to the other players reducing their prices? How are they – what are they doing although to maintain the market share?

Rolf Marquardt: So what we see – first of all, we are seeing that Swedish mortgage margin has been stable during the quarter. So very small change in that and we also see when we look out the published margins, average margins that each bank publish and after publish, we see that we are still – we have – are pretty modest rates we have the highest margin. So that is still the case.

So it’s quite small changes and also if you look at the market share we have been getting that also tells you that we are getting our market share and they are able to do business to defend customers. So it has been generally stable, I also think that when you have a customer relationship, it’s you want to defend that and we are competitive. I think even though, we have new players and we do not neglect that kind of competition definitely not, but we are competitive and we can offer terms that are good. And especially to the customers that also have offerings from other new players that are mainly targeting more wealthy customers and so on. Then we are competitive and we can – we also want to defend our customer relationships.

Willis Palermo: Thank you very much.

Rolf Marquardt: Just want to add one thing that I think. So because I think the development that we’re see in this Swedish mortgage market is interesting and I – some players are alluding or using other funding sources. But I think what you should keep in mind when you look at this is that we have a really strong foundation for meeting that kind of competition, because the Swedish fund covered bond system is a really efficient funding system. And we also have efficient operations in administering the mortgage loans we have.

But some of these players have in favor – in their favor is that they are not facing the same kind of regulations obviously and I think the total sums has been good for us.

Operator: Okay. We’ll now over to Jacob Kruse at Autonomous. Please go ahead. Your line is open.

Jacob Kruse: Hi, thank you. Just two questions I guess. First you may have commented on it earlier, but the discussion in the press today about the Swedish FCA sorry the UK FCA and putting parts of the bank virtually they call it on the administration. Could you just give me an update on what is heal there and what is the current state of that. And then secondly on the cost side.

As I understand it your IT cost us what’s mostly drove the increasing cost in this quarter especially the clean basis extract pension issue. Did I understand correctly that you say you expect these development cost to peak in 2018. Would you just mean that development cost including the Brexit expenses peak. And how should I think about that for 2019. Yes.

I guess that’s all I have. Thank you.

Rolf Marquardt: Okay. Thank you Jacob. So first of all about the FDA investigation and I want to firmly deny that we are under any kind of administration to underscore that and get that right and so that it’s completely wrong.

And then I think FDA approached us and made an investigation and made 2017 and they found some weakness in our International Crime Prevention routine and we have taken significant action to correct those deficiencies and to improve our handling of that. We take this very seriously and we also spend a lot of resources in this area. And I also – when it comes to cost development and then slightly moving away from the FCA issue about more general comment on the cost of element and regulations and so on so. When it comes to the development capacity we have developed now. We communicated in Q4 and we have increased our capacity in that end.

And then in addition we have Brexit that’s where we communicated it in Q4. And that is also what we have seen now materializing in our cost numbers. And we have now reached the level of development capacity that we think we need going forward. And when you look at what we use that development capacity to do is to, of course to improve the offering to customers and to prove -- improve operating efficiency. It is also to make the preparations for subsidization in the UK.

But it is also a very significant degree a question of continuing to adapt to regulations. And when it comes to regulations that is something that it doesn’t only create costs in terms of development and IT development. It also means that further development and build up all the control functions and all different control functions, that’s both internal audit, it’s a risk control, and its compliance and so on. And also routine in across the bank and this is something that is we have in common with all banks. But this assessment in our case is also that we have increased our resources in the control functions and that goes across the bank actually.

So that is also one part of the cost development we’ve seen and the increased number of employees in more -- in support units in the bank. And when it comes to the level of capacity we have built now both when it comes to development and also the control functions. I would say when it comes to control we have reached the level where we want to be when it comes to development. And when it comes to control functions we are nearly there, so not so much more to expect in that end. For everything we can know at this point.

And I think -- and then when we look at about Brexit and what we can expect going forward. We expect to stay at this level when it comes to capacity and also when it comes to Brexit costs as we are seeing in Q1 and also the other quarters during 2018. And then when we look at the expectations for 2019, when it comes to development needs and that are tied to regulations, we see that for everything we know now that this is the peak year when it comes to regulatory related development that will go down next year. We will have to develop a lot related to the regulations next year as well, but not at the level that we are today. So that gives us some room next year.

When it comes to Brexit cost next year that is also supposed to be slight reduced and even more so in 2020.

Jacob Kruse: Okay. And just the in terms of does that mean the declining cost on development cost, you step from a group cost point to you, does that mean you can stay more in line with peers keeping costs flat or is that too much like a guidance or budget?

Rolf Marquardt: I think, we don’t give that kind of guidance as you know, but I think the way you can think about that is that I mean, if we have less – slightly less pressure to carry out regulatory related development then we can choose, and then we can choose to use that’s a business development, and we can also choose to use that partly because to reduce cost. But it would also comes into the cost calculation is that we are doing things now to become more efficient to increase operating efficiency that we are taking steps to improve efficiency in our mortgage process in Sweden in particular, and that that is a very time consuming and exercise in our branch offices in Sweden, so that that’s an important point. Then we are using our robot techniques and so on to improve efficiency, so we are taking many measures also to reduce costs becoming more efficient.

So that is also something that takes time for that to feed through, but that’s also part of the expectations for the future.

Jacob Kruse: Yes, thank you.

Operator: We’re now over to Barclays and Paulina Sokolova. Please go ahead. Your line is now open.

Paulina Sokolova: Hi, most of my questions have been answered actually, but maybe just one small question on net gains and losses this quarter, so they’ve hit a low if I look at the last two years, could you maybe give us some more color on what’s behind this and if you would expect this revenue line to move back up in the coming quarters? Thank you.

Rolf Marquardt: Hi, Paulina, I think, well this is an item where which is always quite small in our case compared to our peer and that’s because we have a subsequent conservative view on the market risks and related. And that also means that when we have some negative changes or positive ones, they have become really obvious, and this time we had some impact related to derivatives that we’ve used to manage our risks when it comes to our funding. And that’s where we do not supply hedge accounting, so it’s – it is actually simple as that. And that’s the sort of a onetime effect impact, so that’s the way it is, and I think no reason to expect us to move away from the average we’ve had in the past.

Paulina Sokolova: Okay, thank you. Very clear.

Operator: We now over to Nick Davey at Redburn. Please go ahead. Your line is now open.

Nick Davey: Yes, good morning everyone. Two questions please. The first one on capital. A word from Slide 30, it looks like in the quarter retain profits were worth about 10 basis points to capital lending growth took about 40 bps off, so you’re running it around a 30 bps negative organic capital generation. If it carries on to the rest of the year, it’s over the levy slightly tight by the end of the year relative to your range.

So could you just address that within your centralized business model what can you do to prevent that being your capital trajectory? And then my second question please, just coming back to the discussion around cost. Difficult from the outside – rough estimate would be that you’ve spent about 15% or 16% of your total costs on IT, both in maintenance and developments in personnel. We should look slightly the lower end of the range relative to European peers. So could you just talk to that and if you recognize that 15%, 16% number, I understand you’re more branch lead than some peers, but it does seem quite a big gap relative to some of your Swedish competitors. And do you think that is a steady run rate or is it a time that might need to drift up? Thanks.

Rolf Marquardt: Thank you, Nick. So first of all the capital generation capacity and so in Q1, we say that we had strong lending growth. But it looks really positive and then you have the question of capital generation and to what extent that can balance the growth rate and yes of course, that could be the case if we continue to grow at a very high pace and we don’t have captive generation during the year to meet that it could mean something. but we are within our target range. So we are not at that point.

In addition, we also have – and that was announced yesterday that we have our intent to sell our share in what is called the – you see what’s the Credit Information Bureau that we kind of – I mean that will have slightly positive impact on our equity Tier 1 when that happens and expecting it to happen in Q1. what would it could also do, of course is to the board could always announce a payout ratio strategy and that would also change things. and I think what is the most important part of this is the captive generation we have. And then we have to follow the rules. So if the board has not made any formally-decided payout ratio strategy, then we have to apply the rules, and those are the ones we are buying now.

As we are within the target range and we have a capacity to deal with the situation. And then when it comes to the cost ratio and the spending we make on IT, and I can’t really answer about the levels, because then I would need to see the comparison. And so I can’t provide to those numbers exactly, but what I can tell is that we are – as you have seen, we are spending more on development and that is of course beneficial, unnecessary to improve our IT infrastructures, and that is something we do step-by-step all the time and then in addition when we need to, we take bigger steps and some of those steps are the steps we have been communicating about. So for instance, loan ledger in the UK is one of them and also the security system we have been investing in – for a number of years in our capital market division is another example of that. So we do what we have to.

and I would say that we have the same needs as other banks when it comes to, I think keeping a good infrastructure, so just the fact that we have branch offices and so that doesn’t really change that picture. that is something that helps us to create value and to build strong relationships that we still need to and make sure that we have a good infrastructure.

Nick Davey: Okay. Thank you.

Operator: We now go to Vivek Gautam at JPMorgan.

Please go ahead.

Vivek Gautam: Hello. Hi, two questions from me please. very small ones. Firstly, you mentioned earlier on the call about your three-month rates being higher than the rest of the market.

in March, it was 1.62%. Can you tell us what is the average rate for the low LTV customers, anything like below 50% LTV or below 60% LTV? that’s the first one. and the second one is what percentage of your lending is mortgage lending is getting impacted by the new amortization requirement in March and if you do some backward looking data crunching, what was it in January and February when the amortization requirements were not implied? Thank you.

Rolf Marquardt: Hi. Yeah, okay.

So about the low LTV and the margins we showed that is not something we have disclosed. So, I can’t really answer that, right, and when it comes to the number of customers or part of the customers that are impacted by the new amortization requirements. I will pass the question on to Lars Höglund if he knows.

Lars Höglund: So hi, I mean the number that the Swedish FSA talked about earlier was around 14% of the borrowers that were affected and our share is roughly the same ballpark.

Vivek Gautam: That 14% percent was for 2016 as I believe.

Is there any updated number that you can provide us or is that the right ballpark number?

Lars Höglund: No, but it’s – I mean this doesn’t change dramatically with workers.

Vivek Gautam: Yeah. Okay.

Lars Höglund: So you can assume it’s in that ballpark.

Vivek Gautam: Got it, got it.

Thank you.

Operator: Okay. As that was the final question we have time for today. Rolf, I’ll pass it back to you for any closing comments.

Rolf Marquardt: No.

thank you everybody. Bye-bye.