Rolf Marquardt: Good morning, everyone, and welcome to this conference call for the first quarter 2019. Joining me today, I have Lars Hoglund, Head of Investor Relations; and Annika Engler, Head of Group Accounting. I want to start off with Slide two and reiterations of the summary of sections and comments made recently by our new CEO. This picture illustrates that our business has some care

core areas: mortgages, property-related financing and financing of SMEs, often family-owned, with or without property as collateral. We also have our asset management operation, including private banking.

These businesses are run with a high-efficiency, low risk and high customer satisfaction. And the relations are built and developed successfully in our branches. Apart from these core areas, there is, in the red part of the boxes, a much more complex business, where we historically also have had a high risk on our credit portfolio. Customer satisfaction is also not standing out here. What our CEO expressed was an ambition that Handelsbanken should strive at becoming a more straightforward bank that should work towards becoming even better and more profitable in the businesses where we really have the preconditions for a very profitable growth.

This also means that we will step away from businesses, and hence, products and services, where the conditions are more challenging. What this will mean in practice, we will come back to later. Let’s go to Slide three and look at the numbers for the first quarter. When the Board has made a total assessment of the bank’s performance in 2018, they have come to a conclusion and taken the discretionary decision that there will be no allocation to Oktogonen for 2018. The provisions done in 2018 have therefore been reversed in Q1.

The reversal of the SEK 827 million obviously affects the key numbers quite a bit. With that in mind, the operating profits increased by 18% to SEK 6.1 billion compared to last year. Adjusted for Oktogonen provisions, FX effects as well as the positive one-off item last year relating to changed pension plans, the operating profit was more or less unchanged compared to last year. Net interest income increased by 5%, commissions by 2% and loan losses amounted to 5 basis points in Q1. During Q1, and in particular towards the end of the quarter, the bank had a strong growth.

We have had a total lending growth on quarter-end basis that we have not seen for long. This is partly explained by a few short-term bridge financing deals, but the underlying lending growth to corporates was also good. The CET1 ratio amounted to 16.4%, which is 1.3 percentage points above the estimated FSA requirement at the end of the quarter and is within the target range of 1% to 3% above the FSA requirements. Please go to Slide five which shows Q1 compared to Q4 2014. Net interest income increased by only 1% despite our strong volume growth, reduction of the resolution fund fee from January 1 and the rate hike in Sweden in December last year.

This is explained by the short lag between the matching of customer aids and funding costs. I’ll get back to this later on in the presentation. Net fee and commission income fell by 4%, partly due to seasonality but also to the day count effects as Q1 had two days less than Q4. Looking at the costs. We can see that adjusted for Oktogonen and currency effects, they dropped by 2% compared to Q4.

There is an element of seasonality in the number, but one should also bear in mind the annual salary revision in most countries in January each year. For Q1 2019, no provision to Oktogonen has been made. Operating profit increased by 60% but was more or less unchanged adjusted for Oktogonen and one-off items also compared to last quarter. Now to Slide six and a closer look at the net interest income. Here we have split up the SEK 62 million increase in NII in the quarter into different parts.

Firstly, business volumes increased and contributed with SEK 91 million to net interest income. The loan resolution fund fee show government fees down by SEK 135 million. Two days less in Q1 reduced net interest income by SEK 75 million, and the weaker SEK currency increased net interest income by SEK 42 million. Out of the remaining SEK 131 million negative NII affect, SEK 56 million is explained by the fact that the change in funding costs were temporarily larger than the positive impact from changed customer rates. This effect stems from the market-based funding, mainly covered bonds, where changed interest rates immediately impact funding costs.

Three months stagger rates decreased during the late fall and then increased sharply in late December. At the same time, mortgage rates in Sweden were increased in January, and that increase will gradually filter through also into Q2. So there was a slight mismatch during Q1 that impacted NII. Furthermore, the implementation of IFRS 16 lead to a negative impact on the net interest income of SEK 18 million since we book interest expense on our commitments for rental contracts for properties. Please go to Slide 26.

On this picture, we have tried to illustrate the sequential net interest income drivers in even more detail and go back all the way to Q1 2017. It is clear that volume development is the key driver both for net interest income growth and NII stability. What you see to the far left in the blue bars is the sequential NII contribution from volume growth in home markets. The quarterly contribution has been rather stable around SEK 90 million to SEK 100 million per quarter and is a token of our successful and well-tested growth model. The second bar from the left, the one in red, shows the net of customer rates and the funding cost for the group.

As we have mentioned earlier, the impact from this was minus SEK 66 million in Q1. This part of net interest income is occasionally rather volatile in between quarters. One key explanation is the benchmark effect in our funding, which, over time, is more or less a zero-sum game. In terms of the positive development in 2018, it was partly driven by expensive legacy funding maturing. Due to a few years of very strong deposit inflows, there was a relatively low need to be as active as before in the funding markets.

This turned around in 2018 when the bank became more active again in the funding markets. As we have communicated in the past quarters, the bank chose to take a more conservative approach given the market volatility and extended the funding profile. This, combined with the fact that we prefunded the €1.5 billion Tier 2 bond that matured in the beginning of Q1 2019, led to a negative net interest income contribution in these buckets. Then the result of the liquidity portfolio. The result of the liquidity portfolio shows up both in the net interest income and the NFT lines, and the two parts usually offset each other.

That was also the case in Q1 as the negative effect in the NII of minus SEK 33 million was more than compensated for in the NFT line. When we look at the other parts stemming from day count, government fees and currency effects, I don’t think it’s too much to comment on since you are all well aware of the dynamics, but there have obviously been some major moves lately. In the blue bar, you have the previously mentioned negative effect of SEK 18 million due to the implementation of IFRS 16. And then finally in terms of other NII effects, that is the sum of several small components not attributed to any of the other buckets. Please go back to Page 7.

As I’ve mentioned earlier, we have had a strong lending growth in the bank in Q1. On this slide, we illustrate this by showing the average lending volumes in the different home markets in local currency. New customer inflow has been particularly strong in Sweden and the UK. And the main growth comes in the corporate segment. Towards the end of the first quarter, we had some substantial increases in corporate volumes.

Some of that was short-term bridge financing, so we don’t expect a new level of growth to have been established. At the same time, the mortgage market’s growth in Sweden has slowed down a bit more in the first quarter. We have had a share of new lending somewhat below our market share and competition remains high, especially in the big cities. Please go to Slide eight. The net fee and commission income has shown a steady growth in the past years.

As you see to the right in this graph, the main driver has been the asset management operation. During the first quarter, the growth in asset management fees was somewhat lower year-on-year than we saw earlier. The main reason is a mix change towards funds with lower fees. Also, the total volume of inflows in Swedish markets is somewhat lower compared to last year. Having said that, it is, of course, a business that we continue to focus on and want to develop further.

Please continue to Slide nine. And Sweden is, of course, our biggest market in terms of asset management. When we look at the net inflows into mutual funds in Sweden, the trend seen over the past several years continues with Handelsbanken taking roughly 23% to 24% market share. Our digital advisory tool was developed further during fall with advice around pensions. This has led to a substantial increase in a number of customer meetings dealing with pension and insurance advice, and we see that in our inflows, too.

Last year, we launched our digital savings guide, which has also been very well-received by the customers. Already now, more than 10% of new savings in Swedish funds from the mobile app is generated through this new guide. Please turn to Slide 10. On this slide, we see another very interesting explanation behind the strong development in net inflows. Our private banking operation in Sweden, which we perhaps have not made too big fuss about, has a model that is very appreciated by customers.

It’s run from a number of different locations in Sweden in connection to larger branches. And the customer inflow is strong. The statistics on this slide speak for itself. The assets that customers entrust us are, of course, managed in different ways, not only in mutual funds but also a fair share in discretionary asset management. In this field, we see strong potential for further development and growth.

And this is, of course, not only done in Sweden, but also in all our markets. In Norway, our private banking operation was initiated during 2018, and the start has been very promising. Please go to Slide 12 and our growth markets. Here, we illustrate the positive cost income jaws in UK and Netherlands. At the moment, the UK situation is a bit special due to the Brexit discussions.

On the back of that, we are, of course, very happy to be where we are in the UK with our subsidiary up and running, very satisfied and good customers and the position of strength to keep growing from. In the UK, costs connected to the subsidiarization work resulted in an unusually high cost growth last year. It is also worth noting that we continue to grow our income in the UK very well despite markets becoming tougher due to Brexit and the fiercer competition, especially in the mortgage area. The fact that we can achieve this without opening new branches illustrates how well we can grow where we stand and through deepening our customer relationships. In The Netherlands, as you can see, the trend is even more positive.

The acquisition of Optimix in 2016 boosted the income, and the bank continues to be very optimistic about the potential from deep integration of Optimix with our branch operations. Please now go to Slide 13. In the Q4 report, we stated that we expect the cost growth in 2019 to be meaningfully lower than the cost growth in 2018. When comparing the costs in Q1 2019 with those in Q1 2018, they were up by just over 3%. Development costs are SEK 65 million lower.

These costs are lumpy in nature and depending on several different ongoing development projects. In Q4, we told the market that our best assessment was for those costs to increase by around SEK 100 million to SEK 200 million for the full year of 2019 compared to 2018. That is still our expectation. In the UK and The Netherlands, the costs increased by SEK 47 million compared to Q4. Then we saw a fairly large increase, which, to a large extent, is related to staffing up in conjunction with the subsidiarization.

Also, one should not forget this is a growth area for us. As illustrated in the previous slide, we will also continue to invest in the UK in order to expand the cost to income jaws. Also, in the UK, our expectation is that the cost growth experienced last year will be lower this year. Then on to AML costs. This is a very important item not only for us but, obviously, for all banks.

Although these costs increased materially in 2018, we expect an increase also this year but not as much as last year. Please go to Slide 16. Today, the mortgage administration in our branches is fairly extensive and time-consuming, and customers are also, to an increasing degree, asking for more and easier digital tools for mortgage interaction with the bank. During the summer last year, we announced a plan to fully digitalize mortgage products over the coming years. Since 7 out of 10 customers, according to EPSI, still want a physical contact in conjunction with the mortgage, we will, of course, continue to be available physically close to the customers just like before.

But a full digital onboarding process is also planned to be available in the coming two years. We have come quite a bit in this process, and we are continuously rolling out improvements and features that not only facilitates and free up time for our employees, but also improve the digital services and tools for our customers. There is still some way to go until reaching the goal, but the product is running according to plan. On to Slide 35, and let’s talk about capital. Earnings in Q1 contributed positively to the CET1 ratio by 0.6%.

But due to the accounting rules, we deduct 66% in the form of anticipated dividends, which means a net contribution of earnings after anticipated dividends of 0.2%. In the quarter, we saw a very strong loan growth, as previously mentioned. Increase lending volumes had a negative effect on the CET1 ratio of 0.4%. 0.1% of this is explained by unusually high and temporary exposures to credit institutions. IFRS 16 led to an increase in risk exposure amount of SEK 4 billion, which had a negative impact on the CE T1 ratio of 0.1%.

Other parts such as currency effects, credit risk migration and net effect of quality difference in, in and outflows as well as IAS 19 pension effects were all neutral in the quarter. The remaining effects were minus 0.1% in the quarter, which meant that the CET1 ratio dropped from 16.8% at year-end to 16.4%. Back to Slide 14. As you see, to the left on this slide, we estimate the FSA requirement for Q1 to be 16.1% and the bank CET1 ratio of 16.4%, which means that we are within our target range. The liquidity position remains strong.

So to summarize. The CEO has expressed a clear ambition that Handelsbanken should strive for becoming a more straightforward bank and more profitable, focusing more on the businesses where we really have the preconditions for profitable growth. Q1 earnings included an Oktogonen reversal of the 2018 provisions. But adjusted for that, earnings were stable. Net interest income increased by 1% compared to Q4 but was burdened by a lower net of margins and funding costs.

Part of these are likely to reverse going into Q2, all else equal. The bank continues to grow lending volumes in our home markets as well as growing business in the asset management operation. Underlying costs increased by 3% compared to Q1 2018, which is well below the cost increase we saw in 2018. With the CET1 ratio of 16.4%, the bank is within its 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 Chris Hartley from Redburn. Please go ahead.

Chris Hartley: So my first question, I was just thinking about the impacts of price rises on your mortgage book. How are you finding translating list price rises into the prices actually paid by customers? And have you seen any changes in customer behavior perhaps in terms of price sensitivity, increase churn, et cetera? And – Or do you have any changes on the parts of your competitors? And then second question was actually on Oktogonen.

Now I appreciate the lack of payments in 2018 was a Board decision, but could you give us a little bit of color on why that has perhaps happened, please? I mean is there maybe a message being sent here to the staff in terms of what reward worthy performance now looks like? And have you got any thoughts on how that might impact employee morale? And also, is there a reason for capping it in 2019? I think you said SEK 850 million. And is that a permanent cap or something you’re going to look at each year? Thanks.

Rolf Marquardt: Chris, thank you for the questions. So first of all, when it comes to the behavior of mortgage customers, and I would say that we – I mean competition has been fierce in this market for some time as you know, and customers are active. I think that I can’t say that the change – the behavior has changed recently.

It has been about the same for a long time, but the competition is there. And then if you look at some of the advertised average margins in the market, that is based on information, which is – covers a very small part of the market. So there are – there is some volatility in that number. So I wouldn’t say that, that 3% is a shift. And when we now have increased rates as a consequence of the Swedish Central Bank hike in December, it’s – I think we cannot say that it has caused any change in consumer behavior.

Then when it comes to the Oktogonen decision made by our Board, so I’d like to spend a bit on that to explain how it works. I mean the bank has a corporate target, which is to have a higher return on equity than the average of our peers. That’s the corporate goal. It also says that this should be achieved through having more satisfied customers than our competitors and also through higher cost efficiency, low cost. And cost efficiency is a key element and the tool which we should use to reach this target.

And then during the year as we normally make provisions for this based on the calculations we have and the development. And then in the end, a decision will be made by the board. And that is being done when they can conclude the complete performance for the bank during the year. And that’s a discrete decision the Board makes. And this year’s decision is based on the total assessment of the bank’s development during 2018, taking into account also how we have been doing when it comes to cost efficiency and cost efficiency development.

And when we look at 2018, we had a situation where costs did increase by approximately 10% and income increased by 5%. And that spending and the cost we had, I mean we spent what we needed to, and there are good reasons behind that. But when you make the total assessment, the conclusion is that the development was in the wrong direction. So we have to improve our cost efficiency. And that is the explanation to the decision.

And it’s also important to underline that – underscore that the decision is a discrete decision made each year by the Board this year, and that is what happened. So that’s the explanation. And when it comes to morale, of course, the Oktogonen system, I mean it remains in place, it’s very important, it’s a key part of our culture, the way the bank works. So it is a very important component for the bank. And it will continue to be also going forward.

And when it comes to morale, I think it is quite clear to everybody that the cost efficiency development we’ve had in the bank during 2018 had a path that cannot continue. So we will focus on changing that. And some of that work and the impact of that you have already seen, but we need to continue that work. And I think in the long run, it’s also – and that’s also part of the system that it needs – it’s a really long-term system and a long-term approach to it. And that is something that everybody that works for the bank understands.

Regarding the SEK 850 million that you also mentioned and what it means is that we have always – for a very long time, we’ve had a cap, and it used to be related to the dividend. But the problem with relating that to the dividend is that dividends increase as a consequence of the growth of the bank. So therefore, it has, over the years, been adjusted at several occasions. And we have now changed that to instead decide about a level that is – represent the maximum potential allocation going forward.

Chris Hartley: Okay.

Excellent. So I just want to ask a tiny follow-up on the NII points. You mentioned, as we know, you’ve had an increase in funding costs in Q1, and then the benefit from increased product rates come through the rest of the year. You couldn’t be tempted to give us a sort of sense of the shape and scale of that progress, could you?

Rolf Marquardt: Well, okay. I will try.

And I also think you have some slides that do shed some light on that. But I – what it means is actually that we have a very short-term mismatch between funding and funding costs on the one hand side and on customer rates on the other side. And so what happened during – and I – which I also said in my presentation, what happened in late 2018 was, first, a drop in interest rates, in short-term interest rates. And then a sudden increase late in the year, in late December, which means that when the market base funding we have, especially through covered bonds, that when we swap that down to three-month money there, we immediately have to pay the new higher rates. And we increased customer rates.

And that was something that was done in the whole Swedish market. That happened during January. And then we have – quite a large part of the lending we have in the mortgage area is three months oriented. So 57% of the book is three-month interest rates. So – and then every month, a third of that portfolio will be actually rolled.

And that means that this impact is something that is significant, of course, during Q1. And then it will remain, to some degree, to a small degree, in the first month of the second quarter. But then we should be back to where we should be again.

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

Matti Ahokas: Yes. I’d like to continue on the Oktogonen issue. Now that there seems to be this other variable, i.e., the cost side in this equation, if we assume that the cost growth in the coming quarters of the year is in line with the first quarter, should we expect that there will be an allocation to Oktogonen? I know it’s difficult to state, but obviously, this is a huge, kind of, variable in the cost equation, and it might be one close to SEK 1 billion higher or lower than in the previous years. The second question is regarding the NII in Denmark and Norway. It was down quite a lot.

I guess the Norwegian NII is explained a bit by the LIBOR movement. But the Danish one was down quite a lot. Any light on that would be really appreciated.

Rolf Marquardt: Thank you, Matti. Well on the Oktogonen, what I think is important to underscore is that the cost side of things has not been added.

It has always been an important part of how we define the corporate targets. I mean as I stated, so it should be higher return on equity than our peers, and that should be reached through more so, it’s the side of the customers and a higher degree of cost efficiency than our peers. And when we look at 2018 alone, we can see that the development was not as we want it to be, and that’s the reason behind the decision. So – and the Board obviously make an assessment of the total performance when they make that decision. So it is something that has been embedded in the system all the time, so it’s not new.

And I think that’s important to underscore because this system is so important to us and how the bank works. So – and it will remain when it comes to that. And when it comes down to potential allocations further on this year, well, yes, if you look at the cost development in the first quarter compared to Q1 in 2018, obviously, things are better because then we had a much higher cost increase than we have seen this quarter. So of course, we have moved in the right direction. But it’s a bit too early to comment on, and we – so we have to wait and see.

But if we have reason to, related to our performance, to make allocations and provisions done for Oktogonen, then we’ll continue to do that, of course. But we – this is too early stage, I would say. Then a comment on NII development in Denmark and Norway. So the Danish – the reason for the development in Denmark is related to margin pressure in the private side, I would say. So – and that’s something we see in some markets.

We’ve seen it also consistently during 2018 that margins were declining slightly in the retail area. And that goes for Denmark and the UK in particular, I would say. And about the reason for the Norwegian change, I would pass over to Lars Hoglund to see if you could shed some light.

Lars Hoglund: Yes. No, I mean it’s basically similar picture as Denmark.

It’s a margin pressure on the lending side in Norway both on corporate and on household. And then of course, in Norway, you do have the lag impact. So there have been announced rate hikes vis-a-vis the customer coming into effect in the second quarter, but they come with the lag. So we haven’t seen that in the first quarter yet. So margin pressure on the corporate and household side for lending in Norway.

Matti Ahokas: Thank you for just make.

Lars Hoglund: Sorry. And then of course, which goes for all the markets, the day count effect if you look at the quarter-on-quarter.

Matti Ahokas: Is it possible that you would actually, kind of, give an extra allocation on Oktogonen for Q1 2019? Since it’s apparently possible to take out, is it possible to add on, kind of, retrospectively at the end of the year if the Board decides to do so?

Rolf Marquardt: I don’t want to make any forecast about that, honestly. We have just made the decision not to make another – or a provision for Q1.

And that’s where we are.

Matti Ahokas: But in theory, it’s possible to, kind of, reverse this in a year’s time?

Rolf Marquardt: Of course, it is. I mean this is based on the performance that the bank is doing. And if that improves significantly, then as in the past, that would also mean something to Oktogonen provisions.

Matti Ahokas: Great thanks.

Operator: And the next question comes from line of Johan Ekblom from UBS. Please go ahead.

Johan Ekblom: Just two questions. Can you comment a little bit about the growth in the UK? I mean it’s been decelerating for some time. And to what extent is that the maturing of the network? To what extent is it concerns around Brexit? Or is there anything else we can and should read into that? And then sorry to keep on coming back to Oktogonen.

But the – should we read into this that there is a discrepancy between what management thought was a reasonable allocation for last year and that the Board’s took a different view? And if it’s all about cost growth, why was in – why wasn’t Oktogonen allocation made for 2017? I’m just trying to sort of understand the decision-making process between management and the Board on a quarterly versus an annual basis.

Rolf Marquardt: Okay. So let’s start with the – and hi, Johan, by the way. And thank you for the question. So regarding growth in the UK to begin with.

What we have seen is, of course, that growth numbers have come down, and especially in the retail area. And I think there is a mixed picture in a way because – I mean the growth levels have been affected by the Brexit situation, so I think that’s sad to say. We see that as well. So that is something that do impact lending demand. So – and we have seen that especially in the past in the London area.

So that’s one part of it. A second part of it is the very intense competition when it comes to retail mortgages, and that also impacts. So we can see that. So that also impacts to some degree, or does impact growth numbers. But I also think that we feel that we do really have a good foundation for continued growth, and we have – still, it’s very easy for us to attract new customers, and we had a nice inflow.

So business conditions are still good. But I think that’s sort of the broad picture. And when it comes to Oktogonen again, so why allocations in – during 2018? Yes, we – what we do is to look at the distance we have to the average of our peers, and that has been the basis for the calculations during 2018 of provisions for Oktogonen. And that is being done gradually during the year, quarter by quarter. But then it has always been the case that a decision – a discrete decision is being made by the Board when they have the total picture and could take everything into account, including both how the bank has been doing but also how our peers have been doing in developing in different countries and so on.

And that is something that happens in early the following year, and that is also what has happened now. And when we made those allocations – or sorry, the provisions during 2018, we did it based on the facts we had then. But with them, we didn’t have the full picture. We did when the year had finished and when we had all the numbers from all our peers and so on. And with that in their hands, the Board has made a decision.

So I don’t see a split. And we are fully behind – the top management is fully behind this decision because we think it’s really important that the bank remains cost-efficient, and we are working hard to improve cost efficiency. As you know, we have been talking about that a lot in the past and with the efficiency programs and the business development program we have. And also now when we have added to that the increased focus on our key areas where we can really add something. So that – and that’s the way we are going to deal with the situation.

But certainly, we want to improve cost efficiency.

Johan Ekblom: And just a final question on that. When we look at your performance relative to peers in terms of cost growth, should we be excluding all forms of profit share and variable comp?

Rolf Marquardt: I think – so I – I mean I think I commented on this before in the previous question, but I – I mean now we have made an assessment for Q1. And then the future performance will actually decide what we do. And so I don’t want to make any forecast.

I think it’s too early to do that though.

Johan Ekblom: Thank you.

Rolf Marquardt: Thank you.

Operator: And the next question comes from the line of Riccardo Rovere from Mediobanca. Please go ahead.

Riccardo Rovere: Good morning to everybody. Yes. Three questions, if I may. The first one relates to the increase in loan losses in Sweden, if there is anything you can say about that. And then I also noticed a fairly high increase in stage III loans at group level.

But in your commentary, in your interim report, you say that the asset portfolio is stable. So I’m just wondering whether you see any kind of deterioration in the portfolio, especially in Sweden but across the group in total. And then the loan growth that we’ve seen in this quarter has been particularly strong, and this is – are all the good parts of the capital. Is what we have seen in Q1 something that you think it can be replicated over the next few quarters for 2019? And then again, sorry to get back one second to Oktogonen. But I understand what it is you are – what is your position in 2019.

But when we look at 2020 and 2021, let’s say, how should we see this? Is it something that is going – so SEK 800 million, SEK 900 million, that can appear and disappear anytime? Or is it something that in a theoretical world, in an ideal world when the cost base, let’s say, relax a little bit, is something that you want to pay? It’s something you want to pay or something that you do not want to pay? Thanks.

Rolf Marquardt: Thank you, Riccardo. So first of all, loan losses in Sweden. That is related to one single exposure, and that is also what explains the change in stage III loans. So – and that is not something that represents a change in the credit quality and the portfolio as a whole.

We – the credit portfolio and the quality of that is very strong, and it hasn’t changed. And then when it comes to loan growth in the first quarter, I – what we have seen, I think it’s also embedded in the report. When you look at the growth numbers and the average lending growth we have seen during Q1, it – volumes grew by – if you adjust for currency effects by SEK 22 billion, that is approximately slightly below 1%. So if you annualize it, it would be less than 4%. So that is sort of the underlying growth level you can see.

And then on top of that, we had two things that contributed to lending growth and also had an impact on the CET1 ratio. And the first part of that is a number of quite large lending transactions with corporate customers. And what I think is important here is that a few of these are very temporary, and this is not a reflection in our mind of a changed level when it comes to lending increase – increases in the corporate sector. So underlying credit growth in the corporate sector was the one I mentioned, more in the 4% area. But then we had these big deals that were temporary in character, at least a number of them.

Secondly, we also had increased exposures against other credit institutions. I know that’s quite unusual, but sometimes it happens. So that is something that was also very temporary in nature and shouldn’t be expected to be at the level you see, and it’s quite easy for you to see where we normally are. So that was a temporary change. And then finally back to Oktogonen.

And so – and I think when it comes to 2020 and 2021, if the bank performs well and we are back on track, for sure, we want to pay Oktogonen. I mean that’s the idea with the system, and that is really important. So that has not changed. So our attitude to Oktogonen has not changed at all. It remains to have the same position in the bank as it did in the past.

And that’s also why we – I mean we have also communicated how it’s going to work going forward when it comes to the maximum amount and so on. So no change in strategy when it comes to Oktogonen allocations going forward.

Riccardo Rovere: Okay, okay. Thanks.

Operator: And the next question comes from the line of Richard Smith from KBW.

Please go ahead.

Richard Smith: Yes, good morning, thank you for taking my question. I’ve just got two quick ones, please. Firstly, I wondered if you could just give us an update on where you are in terms of your issuance plan for the year, particularly on the MREL side of things and what you’re thinking is there at the moment. And then just – I mean coming back to costs, just in terms of – you’ve spent a lot with, sort of, in Oktogonen a fair amount here.

But aside from Oktogonen, in terms of phasing for the year, if you’re looking at the AML investment continuing to increase year-on-year, I mean it was up about sort of SEK 350 million last year, I think, and up another SEK 40 million in the quarter. I just wondered how you thought that might progress for 2019 and how much you’re planning to invest there, please? Thanks.

Rolf Marquardt: Thank you very much. So about the issuance of MREL instruments, so we don’t communicate exactly when we are going to issue and if and so on. What we have communicated in the past is that we see that we’ll start to issue in 2019.

What remains a bit uncertainty in the Swedish – uncertain in the Swedish context is how the new CRD – or sorry, the banking package will be implemented into Swedish legislation and what that means to the MREL requirement for us. So that is something we have to bear in mind. And we don’t know exactly how – the proposal will be available in October. So there is a bit of uncertainty in this regard. But – and I think that is as far as I want to go now on that.

So we are considering what to do and when to act. And for sure, we will, of course, in the future, act, but we haven’t decided. And then when it comes to costs related to AML. Yes, you’re right. We increased the standing or rather the cost level by SEK 348 million last year compared to 2017.

And we also expect that we will increase spending on AML also in 2019, but not as much as we did in 2018. So – and I – so I think that’s where we are.

Richard Smith: Okay. Great, thank you.

Rolf Marquardt: Thank you.

Operator: And the next question comes from the line of Jacob Kruse from Autonomous. Please go ahead.

Jacob Kruse: Hi, thank you. Jacob from Autonomous. I guess I have two questions.

One is on your convertible debt that is outstanding that converts, I think, between May and November. Are you expecting to see to see the staff convert that with Q2 and get that capital? And is it right that, that’s about SEK 100 million NII uplift for you but then offset by the extra shares? And then secondly, on the asset management side. The margin compression you talked about, is that just product switching? Or is there also margin compression on a like-for-like, product-by-product basis? Thank you.

Rolf Marquardt: Hi Jacob, thank you. So regarding the staff convertible, we – this – I don’t know.

I mean it’s up to the employees to start converting, so we can’t really forecast that. So – but what it means in terms of NII effect is it is more or less a zero gain. When it comes to margin compression, when it comes to – or regarding of mutual funds, that is related to switching. So it’s not margin compression. It’s rather a sign of more people buying our multi asset funds.

So that’s the reason behind it.

Jacob Kruse: Okay, thank you.

Operator: And the next question comes from the line of Magnus Andersson from ABG. Please go ahead.

Magnus Andersson: Yes.

Hi, Just a follow-up on Oktogonen. I mean previously this was all very transparent that if you were more profitable than the average of your peers and you did not lower the dividend, there was a provision to the staff. And this was also the case that the incentives to the staff was in line with that of the shareholders through the links to the dividend sum and thereby to the net profit. Now it’s obviously the case that there is a more – more of a Board decision on the discretionary basis and that the only requirement is a minimum requirement. So my question is on the dividend, since the maximum, the cap, the sum is no longer aligned to the dividend or the net profit, actually, in absolute terms, does it mean that you can lower the dividend and still pay out Oktogonen? Or that’s still stands that the dividend has to be flat, at worst, for there to be an Oktogonen provision?

Rolf Marquardt: Magnus, thank you.

Well first of all, I think the system, and as I stated before, the system remains as it has been in the past. But what has been quite special for 2018 is that we had cost increases marked at a much higher speed than income did increase, even though we did spend on things we needed to. That is where we sort of ended the year, and that is the reason behind it. And I think when you look back in history, that is a quite rare situation, actually. So I would say, that’s the reason behind it.

And then when it comes to relating the maximum amount to a fixed number instead of the dividend, it means – technically, it means, yes, that we don’t – since we don’t have that connection, it could technically mean that it would be possible to make an allocation even in a situation where we would lower the dividend. So technically, yes. But once again, and that is something we – that has always been the case. This is a discrete decision that is being made by the Board when they have the total performance assessment situation.

Lars Hoglund: And Lars here.

If I may add just to remind everyone. I mean it’s not the first time in history. It’s always been a discretionary decision by the Board. So in 2016, the board also decided not to do any provisions to Oktogonen. So it’s not the first time in history.

Magnus Andersson: But it’s the fourth time since 1973. So it’s not – it’s quite rare.

Lars Hoglund: But it is still a discretionary decision.

Magnus Andersson: Okay, thank you.

Rolf Marquardt: Thank you.

Operator: [Operator Instructions] As there are no further questions, I’ll hand back to the speakers.

Rolf Marquardt: Okay. So that seems to be it for this time. So thank you very much for attending. Bye-bye.