Operator: Hello, and welcome to Handelsbanken Q1 Report 2020. [Operator Instructions]. Today, I'm pleased to present Carl Cedersciold, CFO. Please go ahead with your meeting.

Carl Cederschiöld: Good morning, and welcome to Handelsbanken's Q1 telephone conference.

My name is Carl Cederschiold, and I am since a few weeks back, the CFO of the bank. For obvious reasons, we will not be traveling in conjunction with this interim report. But I look forward to meeting you all in person once the situation becomes more normal again. Joining me today, I have Carina Akerstorm, CEO of the bank, Lars Hoglund, Head of Investor Relations; and Annika Engler, Head of Group Accounting. I want to start off on Slide 2 by summarizing the key messages in today's report.

Our branches have maintained a very high degree of availability for our customers. In all our 6 home markets, they've been open and have had a tremendous amount of advisory meetings with customers with a sharp increase in remote and digital meetings. P&L wise, one can summarize the quarter as stable, with increased net NII and commissions, while the growth rate in expenses has continued down. We continue on our path of becoming a more focused and efficient bank. We further expanded our liquidity buffers and have a strong capital position.

This means that we have all necessary prerequisites in place to continue to meet our core customer demands. Our credit quality, as we described a little bit extra in Q4, continues to be strong. So in sum, the quarter started very strong. We entered the crisis in a very strong position, and we have maintained -- managed to pursue the crisis with good standards. We are, of course, very humble about the way forward and the ongoing crisis, but we will try our best to keep being Handlesbanken.

Please go to Slide 14, where we touch upon the different impacts seen so far from the COVID-19 outbreak. The full and final impacts from the pandemic are at this point, of course, very difficult to assess. But it is clear that it will have historical effects on life, health and the world economy. No one knows how long and deep the crisis will be, but we do all we can to make sure that we are prepared for a difficult outlook. As mentioned, despite the start of the outbreak, where we had a stable quarter in activity, mainly done from remote locations, and our activity was very high in our branches.

Business volumes increased sharply in March with a sharp pickup in corporate lending, while retail lending growth slowed somewhat. Fee and commission income held up well despite the sharp drop in the markets halfway through the quarter. There were, however, a few direct impacts, equaling SEK854 million that struck the P&L. First, on the NFT line, the market turbulence triggered a negative impact of SEK262 million, due to increased CVA and DVA. Second, weaker returns in Handelsbanken Liv triggered a deferred capital contribution of SEK152 million.

And third, in line with the IFRS 9 framework, we increased general credit loss reserves by conducting a management overlay of expected credit losses. This resulted in the booking of an extra SEK440 million on credit losses. On the cost side, our previously announced initiatives remain unchanged, and there were no material impacts from the pandemic outbreak. In terms of our funding, we were fairly active early in the quarter. And with the exception of a couple of very turbulent weeks, the access to senior and covered funding has remained.

Similar to that we saw in the financial crisis, there has been a sharp increase in deposit inflows, which, in turn, has led to significantly higher liquidity reserves on central banks. Finally, on capital. The sharp dropping in equity markets had a negative impact on pension assets and a sharp increase in corporate lending, which increased the risk exposure amount. However, since the countercyclical buffer requirements have been reduced to 0 in all countries apart from Norway, we end the quarter still some 70 basis points above the upper end of our target range. The most important thing for the bank is, however, that we continue to offer the highest level possible of availability and support to our clients and to be able to continue to operate the bank as normal.

Even in a scenario with increased social and societal restrictions in Sweden. Please go back to Slide 3. If there is a certain thing that the current situation has shown, it is that our business model really proves to be relevant and appreciated by our customers. As mentioned, our branches are open and local availability is maintained. We know our local customers and the different impacts and circumstances for customers in their different local areas.

Customers' demand for support and advice has been enormous, both in terms of financing, savings and insurance. Our local knowledge has enabled us to quickly commence discussions with customers based on the fast-moving changes in circumstances and conditions facing them. A fair share of the advice has also related to the different support packages offered by authorities and how our customers can use them in the best manner. At the same time, we have further enhanced our availability and ability in digital channels. One can say that the local and digital quickly has taken big steps to become even more integrated.

In particular, the personal aspects of the relation has been adopted in the digital meetings as the physical interactions have been more difficult in the past month. For example, the number of secured online meetings with customers has more than fivefolded between February and March. We have also continued to develop our offering with improved digital solutions and availability within, for example, the mortgage operation and with digital services for SMEs. Please go to Slide 8 and a few words on the business volume development during Q1. The average volume development in the quarter has shown a fairly normal growth.

But if you look at the monthly data, you see that corporate lending increased sharply towards the end of the quarter with a SEK29 billion pickup in March alone. The general picture is that the corporate loan demand has stabilized again when we enter into April. At the same time, there has been a sharp increase in deposit inflows, not least in March, both for private and corporate customers. On the private side, we have seen a positive trend for a long time. And the pickup in March to a certain extent relates to sell-off of financial assets, i.e., customers have sold mutual funds and placed proceeds at deposit accounts.

On the corporate side, a large share of the increase relates to short dollar deposits in New York, money that we in turn deposit at the Fed. The pattern is just the same as we saw during the financial crisis a decade ago. Generally speaking, though, the big increase in deposits is a token of the customer's strong confidence in the bank. Please go to Slide 4. On this slide, we show the main highlights of Q1 compared to Q1 last year.

In many ways, Q1 was a further step in the right direction. And in particular, the first part of the quarter was very strong. The underlying operating profit decreased by 3%, but increased by 13% if you adjust for 3 special earnings effects, which I will get back to. Behind this, Liv's growth in income of 4% as well as cost growth of 4%, clearly, we are on the path of closing the disturbing gap between cost and income growth that we have seen in recent years. A low underlying credit loss ratio fell even more, but in the quarter, we increased the reserves through general provisions.

I'll get back to that. Our CET1 ratio remains strong, and the gap to the SREP increased to the highest level seen so far. Please go to Slide 21 in a more detailed look at the quarter. As you can see, net interest income increased by 2%, driven mainly by the drop in the resolution fund fee. The impact of volume growth and margin developments were more or less offset by negative day count and FX effects.

Commissions were seasonally down from Q4 but held up quite well. On the NFT line, we saw headwinds of SEK414 million due to 2 specific items that, to a very large degree, were impacted by the pandemic outbreak and the following market turbulence. The first specific item was the SEK152 million latent capital contribution to -- that the bank made to Handelsbanken Liv as asset returns fell due to the market turbulence. This is related to the SEK7 billion part of the insurance portfolio that still provides guaranteed returns. Second, going into 2020, the bank adjusted the model for calculating CVA and DVA to one that is based on market pricing of credit risk, i.e., CDS contracts.

The change in model meant a onetime negative impact in NFT in Q1, but the absolute majority of the SEK262 million effect in Q1 is related to lower rates and widening of CDs levels. Going forward, the change in model means that this income line will become slightly more volatile than in the past. Total income decreased by 2%, but adjusted for the capital contribution to Liv and the CVA and DVA, the income increased by 2%. The third specific item was the SEK440 million additional credit loss reserve booked in Q1. I'll get back to the details behind this management overlay exercise.

Adjusted for 3 specific items, the operating profit increased by 6% compared to the report -- to the reported negative 10%. Please go to Slide 22 and a breakdown on the net interest income drivers in the quarter. As mentioned earlier, the volumes picked up towards the latter part of the quarter, in particular, for corporates. No major impact on net interest income, yet in the first quarter from this. Volume growth overall contributed SEK49 million to NII in Q1.

The net effect from margins of funding was fairly neutral in the quarter. There were, as you know, big moves in interest rate in the quarter with many central banks sharply cutting rates. At the same time, credit spreads widened. All in all, however, the development in the quarter suggests that the increase seen on the funding cost did not yet impact the margins. We can expect to see some more impact from this in the second quarter.

The resolution fund fee was lowered, as you know, to 5 basis points from 9 basis points, which added some SEK230 million in the quarter. And then we had one day less in Q1 than in Q4, plus a slight headwind on the FX side. Finally, on the other NII impact of minus SEK86 million, the liquidity portfolio accounted for SEK38 million. The impacts of NII from the liquidity portfolio are usually more or less neutralized by an opposing impact on the NFT line. Please go back to Slide 9 and a look at the net fee and commission income.

As you can see, the positive trend we have seen for a long time continues. The main driver in the past year has been savings related commissions, which today stands for around half of the commissions. The bank continues to gain market share in especially Sweden with a market share of net new inflows at around twice the market share of the back book. The sharp drop in equity markets in the second half of Q1 obviously had some impact on the savings related commissions. However, one should not forget that the stock markets are still at roughly the level seen early for last year.

Should stock markets in Q2 not recover entirely from the drop in Q1, these savings related commissions will, however, of course, come down next quarter. But I think it is fairly easy for you to do the calculations. As you see in the picture, commissions are always down in Q1, mainly due to lower payment fees. We have seen that also this time, but I would say that there is no drama there either. Our fee and commission generation is, of course, not unaffected by the disturbance we see in the economies right now.

But Q1 definitely shows a good underlying stability. Please go to Slide 12. This is an updated version of the slide we showed in Q4 and illustrate the progress of the initiatives communicated in Q3 last year. Our initiatives continue, even though, some of the closures were conducted in Asia are taking somewhat more time due to the current situation. We still expect to generate the cost savings in line with the previously communicated time schedule.

And just to repeat what we have said, geographic concentration outside of our home markets, a more focused product offering and internal rationalization. The Q1 numbers include a realized effect of the initiatives of roughly SEK40 million or differently expressed out of SEK1 billion of annualized cost savings expected by the end of 2020, SEK160 million have been realized so far, that's them, SEK40 million times 4. When it comes to all of the decisions and agreements that have been made, including such that have not yet materialized in the P&L, the annualized number is so far, SEK350 million, of which SEK160 million in Q1. Some more effects should be expected to be realized in the P&L in the coming quarters. So far, just over SEK100 million have been utilized of the SEK930 million of reserves set aside last year.

Please go back to Slide 11 and the cost development. You have seen this picture before, but now we can show a lower annual growth rate than we have seen for long, up 4% on an underlying basis. This includes the effect of around SEK40 million from the initiatives mentioned in the last slide. As you see, the main increase year-on-year has come from AML-related costs. For the full year of 2020, however, we still expect this number to end up in line with the full year figure for 2019.

The same goes for development costs. The full year 2020 is expected to be in line with 2019. Other costs, i.e., all costs excluding development, AML, the U.K. and the Netherlands, showed a growth of just over 1%. Hence, the cost development is clearly trending in the right direction.

Moving on to asset quality and credit losses, and please go to Slide 16. Before going into the credit portfolio and the reserves, I just want to remind you about this slide, which we also showed in Q4. The picture is from the EBA Transparency exercise of 2019, and it shows a very low share of problem loans, even compared to our Nordic peers. This is, regardless of whatever scenario to be expected ahead, a very good starting point when entering into a crisis like the current one. On to Slide 30, please, 30.

We have not seen any increase in stage 3 loans in Q1. There has been a certain negative rating migration among clients, but not in any dramatic way whatsoever, and it took place between the strongest risk classes. However, in accordance to IFRS 9, we have made special assessment of the credit portfolio based on changed macro scenarios. This has resulted in increased general reserves for expected credit losses of SEK440 million. 2% of our loan book, roughly SEK60 billion, relates to customers in business segments, which we today assess to be extra vulnerable to the current situation.

On these customers, we have assumed a sharp increase in probability of default. We have also calculated a rise in unemployment in our whole retail portfolio, which hence increases the expected credit losses also there from very low levels, one might add. We enter into this crisis with a strong portfolio, but will, of course, continue to monitor the development of the crisis very closely and adjust our assumptions and reserves accordingly. Finally, a few comments on capital. First, on Slide 31.

We entered into 2020 in a very strong capital position, as you might recall, with a CET1 ratio of 18.5%. During the turbulent Q1, our CET1 ratio dropped from 18.5% to 17.6%. And as you can see on the slide, this was mainly explained by reduced net pension assets and the risk exposure amount increase as a result of increased corporate lending towards the end of the quarter. And please go back to Slide 13, 1-3. While our CET1 ratio dropped to 17.6%, so did the SREP requirements as a result of removed or lowered countercyclical buffers.

We assess the SREP by the end of Q1 to be 13.9% compared to 15.8% in the last quarter. This means that we are 70 basis points above our target range. However, we realize that the countercyclical buffers requirements will increase again when the current crisis fades, and we take that into account in our capital planning going forward. We aim to have material capital buffers also going forward and not leased in order to be able to support our core customers with the funding they need. As has been communicated, the Board intends to invite an extra shareholder meeting later this year to decide on dividend during 2020.

In our 17.6%, the previously proposed dividend per share of SEK5.5 is deducted from the capital. The Board has now also decided that the anticipated dividend in 2020 should be 40% instead of the 75% that the ordinary framework otherwise would suggest. Thereby, we will have ample room to continue to support our customers and further strengthen our profitable growth. Our liquidity position continues to be very strong, as you can see from the regulatory ratios on the slide. So to wrap up on Slide 18, 18.

we continue on the path presented last year, where the local presence gets an even bigger pull from digitalization in order for us to further improve our offering to our core customers. We will have an even clearer sustainability profile in our work. This, we believe, creates the prerequisites for profitable growth in the bank's operation. Q1 was stable with growing income and costs not exceeding income growth. We are closing the gap, and we see tangible effects from our previously communicated initiatives.

The ongoing pandemic has, apart from three particular special P&L effects, not really had any major impacts on Q1 results. We have maintained our high service level and local availability and further developed and utilized our digital channels and meeting places. This has resulted in a very large number of advisory discussions with customers during the quarter. The bank has functioned as normal, although with most employees working from remote locations, and our business model has clearly attributed an extra value and appreciation in times like this. We are very humble about the impact of the pandemic and what might be ahead of us, but we are convinced that we continue to be in a very strong position even if facing difficult times ahead.

We will have a very good availability and ability to support our customers. That concludes my presentation. And with that, I open up for questions. Thank you.

Operator: [Operator Instructions].

Our first question comes from the line of Chris Hartley from Redburn.

Chris Hartley: Can I start with your provisioning, please? So 8 basis points, it feels like a very low number, given what's going on around us in the world and in comparison to your European and Nordic banking peers. Could you perhaps give us a sense of how kind of conservative or not, do you think you're being in that number? Maybe where you see further risk? And to what extent you're taking into account regulators sort of encouragement to maybe water down IFRS 9 a bit? And perhaps specifically, your property management lending as well, is there anything that you're worried about in that? And then secondly, just looking at net interest margins. There still seems to be a bit of pressure going on there. And given there are a lot of moving parts with sort of repricing, changing reference rates, you look like you've got a bit more liquidity now than you did before.

Can you give us a hand with the outlook for that, please? And perhaps how you see the current environment impacting that?

Carl Cederschiöld: Let me start off by the credit reserve then. What we've done, obviously, as you all know, there is a balance between how the regulators want us to do this and the way we do banking. So we have the macro scenarios where -- and out of these scenarios, we recalculate the probability of defaults. And yes, we do believe that we have a good underlying credit quality. We do see quite a high increase.

Out of the SEK538 million in credit losses, SEK98 million is just the pure underlying specific credit losses and the SEK440 million is the overlay. We -- obviously, we need to be humble about the future of it, and we will readjust our assumptions, if needed. But currently, when we look at the specific -- the specific exposures we have, we do believe that we are fairly well suited.

Lars Höglund: Maybe if I can add, it's Lars Hoglund here. I mean, as you've all noticed, we have seen actually a slight decline in stage 3 exposures in the first quarter.

So that in itself tells you that again, to Carl's point, the underlying credit quality is very stable. But then you need to be humble. And of course, what we could see happening during the course of Q2 and onwards, depending on the timing of these crisis, is, of course, that you could see individual exposures going into stage 3, but we haven't seen that at all in the first quarter on the contrary. So -- and I think, I mean, again, as Carl said, the starting point for our credit portfolio is obviously very strong. And I mean, a very low share of problem loans to start off with.

And that is, of course, also reflected in our assessment of what this could mean to the credit portfolio going forward. On your question on property management lending, in our macro scenario, so that the baseline scenarios we have in the model, we do take into account a certain price drop in that sector. But here again, I think in reality, timing is going to be very important for to what extent you will actually see problems in that sector. And then the second question on the NIM pressure and the outlook for...

Carl Cederschiöld: The net interest income pressure.

So far, we have seen in our mortgage portfolios, we have seen a slight decline in the prices to clients. And the second part of that one is obviously that, yes, from the financing cost, we see increased cost coming. So far in the Q1, they're not that dramatic, obviously. But we do believe that we will see pressure on the net interest income for the coming quarter.

Operator: The next question comes from the line of Magnus Andersson from ABG.

Magnus Andersson: Yes. Starting with capital, and you had showed it on Slide 31, where I see that lending volumes and credit risk migration was the main drivers quarter-on-quarter of your risk-weighted assets. You also mentioned that corporate lending demand, which we saw was very strong, particularly in Sweden, leveled off somewhat going into Q2. Can you give us some feeling or what we should expect going forward on these 2 items, i.e., volume growth, corporate lending growth and credit risk migration because if this continues, obviously, growth will be extremely high in 2020, please?

Carl Cederschiöld: Yes, one could say that if you look at Q1 and especially the corporate lending, we were roughly 4x the level for a normal quarter, and that obviously came in March. When we enter into April, that has at least halved.

So we're not down at normal levels. We're still a bit elevated, but much less than than in March. And obviously, the finance markets has opened up very nicely into April as well. Then when it comes to credit migrate -- sorry?

Magnus Andersson: Yes. Please go on.

Sorry.

Carl Cederschiöld: Then when it comes to credit migration, so far, we haven't seen much impact on the portfolio. We have some credit migration between Stage 1 and 2, but not that much yet to be seen in our figures.

Lars Höglund: And also, again, looking at the impact on the risk exposure amount there. I mean, a couple of years ago, we saw a similar kind of credit risk migration as we saw this quarter.

But again, this is, of course, something that could continue into second quarter. It's too early to say, but it's staying close to the customers and understanding their situation and doing the individual rating assessment from that. So that's what our branches do. So it's too early to have a view really. Again, as -- it's all about timing.

Sorry, Magnus.

Magnus Andersson: Yes. And the SEK5 billion then we are seeing, it's a quite small number now it could increase going forward. Is that how I should read it?

Lars Höglund: It could. It could.

But again, who knows how when this crisis will persist and so on.

Magnus Andersson: Okay. And then just continuing capital, I noticed that you accrued only 40% of in dividend compared to the 64%, you should have accrued according to our policy. I mean it's peanuts in terms of impact on your CET1 ratio. So the question is simply why? Is it politics? Or is it -- I mean, does it give us -- is there any forecast value for us in that number? Or how should we think about that?

Carl Cederschiöld: It's actually when we -- from the regulatory perspective, we needed to deduct 75%.

Because we had a onetime dividend a few years back. So we wanted to give a fair share for the market about how we view the 2020 results. And we believe that 40% is a fair amount to anticipate to support both capital growth but also lending to our core customers.

Magnus Andersson: Okay. So it's not unreasonable to expect the dividend for 2020 of 40% also as a proposal, if everything goes as you expect now?

Lars Höglund: It's Lars here again, Magnus, you remember that back in 2016, Q1, we did a similar exercise deciding to anticipate at that time, 50%.

So this is something that can be done from time to time when you think it's a proper timing to do that. Otherwise, we're completely bound by the rules of how much to accrue.

Magnus Andersson: Yes, I'm just wondering because 64% was mentioned earlier. Okay. Yes.

And then costs, just on Oktogonen you signaled clearly in connection with the Q4 report that you were on track for Oktogonen provision. And if anything, this is the kind of market where you excel relative to competition. So why didn't you do a provision in Q1? And is there any signal value here for the remainder of year? How you've changed your view there?

Carl Cederschiöld: No, I think you shouldn't judge that as a signal value. We think it's a very turbulent market. And it's too early to judge in Q1 how we stand vis-à-vis our peers.

So no dramatic signal today. But yes, we think it's unclear and we decided not to provision anything now.

Magnus Andersson: So it's more just to be prudent in Q1?

Carl Cederschiöld: Yes.

Magnus Andersson: Yes. And on asset quality, I mean without going too much into detail there.

But if I read this, correctly, unless anything changes in the macro outlook, are you changed your probabilities of the various scenarios or any more sectors running to deeper trouble, et cetera, the overlay -- IFRS 9 overlay you made now in Q1 should be sufficient? So if losses should remain at this level or even higher in Q2. Something must have changed in your probabilities of the various scenarios? Or you should have included more sectors, i.e., more sectors running into problem where you change your rating? Is that correct?

Carl Cederschiöld: Yes. Obviously, there are a lot of underlyings to these assumptions. And yes, one of them need to change for us to provision more credit losses.

Magnus Andersson: Yes, but unless something happens in stage 3, something really has to change in your current macro outlook?

Carl Cederschiöld: Yes, agree.

Magnus Andersson: Okay. And finally, just on the question on mortgage margins there. Have you seen any isolated back book repricing effect that you can communicate from the leased price hike you made in late December?

Carl Cederschiöld: No, we haven't seen anything yet.

Operator: And our next question comes from the line of Peter Kessiakoff from SEB.

Peter Kessiakoff: Just a few follow-up questions to begin with.

On Oktogonen and Magnus' question on signaling value, et cetera. Is there any correlation to the fact that you're accruing only 40%, and the fact that you're not taking any Oktogonen allocation? I mean, given how the -- or how the framework has worked historically, you've had to have an unchanged or increasing dividend in order to accrue for the Oktogonen, so does -- is that there is some there?

Carl Cederschiöld: Yes. No, that's not the reason. The reason for the change -- the 40% anticipated is that, we didn't want to anticipate 75%. That shouldn't be interpreted in any other way.

Peter Kessiakoff: Okay. Then just on the loan losses and the IFRS 9 related provisions. How -- I mean how will the internal work be structured kind of into Q2? Because I guess now it's taking more of a top-down view in terms of credit provisions, is there any element where perhaps the branches will be start doing an assessment of various customers or customer groups? And what they might see, which could result in additional IFRS 9 provisions in Q2 or Q3?

Lars Höglund: It's Lars here, Peter. So I mean, the branches continues to do what they always do also in Q2. I mean, they always assess how the customers are performing and if necessary, do changes.

So I mean, that is not impacting the overlay we have done this time on the portfolio. But as we mentioned, I mean, depending on what happens, of course, there could be rating migrations and there could be, of course, defaults moving into stage 3. But it's not something new for the branches. They keep tracking their credits all the time, as you know.

Peter Kessiakoff: And there is nothing in the working process.

That means that anything they do in perhaps Q2 could result in incremental increase in IFRS 9 provisions in Q2?

Lars Höglund: No. That's more if something sort of generally changes or if we see that there is an element of more sectors being affected than we have included in this stress. That will then be from a top-down perspective.

Peter Kessiakoff: All right. Then just on the margins and perhaps focusing a bit more on kind of the corporate margins.

What are you seeing in terms of margins there, given kind of the stress that has been both in the general market, but also in the bond markets. Are you seeing any improvements in terms of margins? And perhaps, do you see that there's any sustainability to that? Or is it just short term natured?

Lars Höglund: Peter, I think it's way too early to have a view about that. I mean, I should say, things have been moving around very quickly in March. And so it's really too early to have a view about that. Margins, in general, were more or less quite stable in the quarter, but as Carl mentioned, we can expect to see some negative impact going into Q2, but too early to see anything in Q1.

Peter Kessiakoff: But that comment was mainly mortgage related, if I understood it correctly. So on the corporate, have you seen any improvement?

Lars Höglund: No. I mean, that comment also holds for the corporate portfolio, I would say.

Peter Kessiakoff: Okay. Then just a question on kind of the payment side.

And when you look at net payments, it was down 1% year-on-year, and it's been up only slightly year-on-year in the previous quarters. Have you seen any material shift in payments activity in -- during the end of Q1? And particularly, are there any differences between kind of corporate cards versus households that you could perhaps share some light on?

Lars Höglund: Well, it's Lars again. I think, first of all, we always have a seasonal drop in card fees in Q1, but it was slightly larger-than-normal this year. And it's clearly attributed to lower volumes in both, I would say, private cards and corporate cards. So that started to happen in March.

No drama, but clearly, slightly bigger drop than normally in Q1, I would say.

Peter Kessiakoff: Okay. But there's no numbers that you can give in terms of how much card activity is developing during say, the later part of March and early April to give an indication of kind of the Q2 trend?

Lars Höglund: Not any firm numbers, no.

Peter Kessiakoff: Okay. Then just finally on the cost savings part.

I mean, is there -- are there any kind of risks to the cost savings in terms of, I know you mentioned that it's progressing according to plan and Asia is perhaps the area where it's lagging behind a bit. But are there no risks to the plan? And perhaps also, if I can add, how much of the cost savings in 2020 are related to staff reductions?

Carl Cederschiöld: Yes. No, what we -- the risk we see is that obviously, COVID-19 makes the time schedule a bit more at risk within Asia. When it comes to the cost savings, so far, the biggest impact is actually from IT and infrastructure cost side and the lower part is still from staff levels.

Peter Kessiakoff: Okay.

So and the IT, that would be more than consultants and that type of expenses?

Carl Cederschiöld: Yes.

Operator: And the next question comes from the line of Sofie Peterzens from JP Morgan.

Sofie Peterzens: Yes. It's Sofie from JP Morgan. So you mentioned, I can also see in your results presentation that stage 2 exposures declined by 3% quarter-on-quarter.

Given that bankruptcies in March were up 25% quarter -- month-to-month in Sweden. Could you just explain what drove the 3% quarter-on-quarter decline in stage 3 exposures? And does this take into consideration? Or did you take advantage of the new EBA for variance rules? Was this potential reason why you saw a decline in stage 3 exposures?

Carl Cederschiöld: Well, let me start off. Obviously, Handelsbanken is a very risk conservative bank. We do believe we have a credit portfolio of strong clients and also good collateral. So the 3% you see is obviously our figures.

And I don't have a comment on the average numbers for Sweden. But obviously, these are the numbers that came out from our procedure, both the regular procedure, but also the macro overlay.

Lars Höglund: And just to remind you, Sofie, that last year, we had basically one exposure where we booked better part of all the provisions, which was in Sweden. Which was obviously in stage 3. So of course, and we're done and dusted with that one.

So again, a good starting point into the year where you can actually see that sort of the underlying loan loss provisions have been meaningful, to some extent, it's in Finland and to some extent, in Norway, where you can see from the numbers that we had more, which was not IFRS 9 related. But again, stage 3 is when customers default. And we didn't really see a lot of that happening in Q1.

Sofie Peterzens: But basically, I mean, you saw an improvement, fewer customers defaulting, I guess, then given that the Stage 3 exposures declined quarter-on-quarter?

Lars Höglund: You can't draw any conclusions about the number of customers here since again, if you have one big exposure as we had in 2019, when that has been written off, it changes sort of the overall exposure. But I guess that the point we want to make is that we haven't seen a lot of new defaults from our customers in Q1.

Sofie Peterzens: Okay. And in terms of the Slide 30, when you have the probability of default value before stress than after stress. I mean how comfortable are you with these numbers? Because if I look, for example, at the oil probability of default, it's at 0.5%. But I mean, oil prices were negative the other day, most companies got to need oil prices to be roll about $30 a barrel to be breakeven. And when I look at the PD stress value, it's 2.6%, which is kind of in line and/or even below what we see for some of the other European banks in their kind of probability of default before stressed.

So could you maybe just give a little bit details around how you get to these before and after stress that value PDs because they just look very, very low to me?

Lars Höglund: I think when we talk about oil, we actually are a bit harder ourselves. So oil actually includes subsectors related to oil without going into too much detail what it could be, but it's not necessarily companies selling oil only. It could be other kind of subsectors. So that's the explanation behind the PD values.

Sofie Peterzens: Okay.

And, kind of when you have done this management overlay of SEK440 million, what kind of economic scenario have you assumed? Have you assumed a V-shaped recovery, a U-shape recovery? What kind of are the assumptions that you have assumed?

Carl Cederschiöld: No. We worked out all the macro scenarios we have, and we have increased to a high degree, the worst scenario.

Sofie Peterzens: And can you give a little bit more details around what your worst or kind of worst case scenario? Is it done? I mean if we look at GDP forecast, we saw around 9% GDP decline quarter-on-quarter in the first quarter in Spain, in Sweden, the most macro guys expect around 35% GDP decline in the second quarter. Given that your PD assumptions just look very, very low to me. I was wondering if you could give a little bit kind of maybe more detail around what kind of recovery you're assuming or assuming things are back to normal in 2021? Or do you expect things to normalize at the later point? Or how should we think about it?

Lars Höglund: It's Lars here again.

So I think there are 2 parts here of the macro scenario. So first of all, the basic underlying macro scenario used in IFRS 9 in our model. That's the one we talk about in the annual report with all the different assumptions. And that's obviously through the cycle scenario. And so there, we have increased the weight of the negative basic scenario, so to speak.

But the overall view on this crisis, I mean, no one knows obviously, what will happen. But what we have sort of used as a base assumption here in the management overlay, is that we will start to see some sort of normalization in Q3 and somewhat improvement in Q4 and then gradually improving conditions in 2021. So that's kind of the general view. And then also adding to that, I mean, of course, we have listened to what the regulators have suggested in terms of taking into account state measures and other measures to the economy when assessing the stress scenario. Which means that when you do an exercise like this, you do stress the part of the portfolio that you want to stress.

And just to remind you, we have also included the entire private household portfolio here in this stress. And you stress that and you come up with a number and then you assess the probability for this scenario to materialize. And that probability could be 100% or it could be lower. And in our case, we have assessed a 60% probability. And that is, again, to encompass the measures from the authorities to some extent.

So that's what we have done.

Sofie Peterzens: So just to summarize. So basically, if we will see kind of [indiscernible] expected outcome in the second quarter of this virus outbreak, it's fair to assume that you might have to take additional management overlay provisions in the second and third quarter.

Lars Höglund: Yes. Yes.

Since it's impossible to know how long this crisis will continue. That could be the case, yes.

Sofie Peterzens: Okay. And just my final question would be on capital. How should we expect kind of rating migration risk credit assets increase and got of mortgage risk rate -- risk rate starts to increase in coming quarters? So could you give any guidance on risk-rated asset increase? And any headwinds we should expect on capital in general this year? And if the Swedish banking package is still coming in the second half of the year?

Lars Höglund: I think, Sofie on mortgages, we are, as you know, with a floor of 25%.

And it takes a very, very, very harsh scenario to get up to 25%. But on the corporate side, as we said before, again, timing here is very important for assessing how much migrations we will see and what impact that will have on risk exposure amount. So we're not guiding for anything here. The only thing we're saying is that, obviously, we can see some risk migrations in the quarter. But it's not meaningful to try to come up with a number.

Operator: And the next question comes from the line of Andreas Hakansson from Danske Bank.

Andreas Hakansson: Sorry, just going to go back to asset quality a bit. You might have covered it, and I missed it. But we've heard from regulators that they have told banks to take it easy with assumption changes in IFRS 9. And could you tell us, if regulators hadn't told us that, would you have had a higher provision charge in the quarter?

Lars Höglund: I think I can start off that, perhaps.

One very sort of tangible thing is that mortgage customers who get amortization holiday typically would end up as stage 2 exposure because it is a forbearance measure, right? And one of the things that the authorities all of Europe have stated is that, that should not automatically be the case. Now in our case, that wouldn't have sort of changed the outcome a lot. But still, that's one tangible area. But other than that, I would say that it's more about the probability you assess to your stress scenario, which is trying to encompass what the authorities have expressed.

Andreas Hakansson: Yes.

Because when I look at the slide with PD assumptions, I mean, I just find it quite interesting that you bring mortgages from 0.1 to 0.3, while you lead corporate lending unchanged. Aren't you afraid that you're going to have to catch up with the corporate lending in the coming quarters?

Lars Höglund: I mean, this is actually the other corporate lending, which is sectors that we, at this stage, have not deemed being vulnerable to this crisis. And this will also change.

Andreas Hakansson: Yes. But I mean, I would assume, and of course, I'm an outsider that mortgage is still going to be more safe than any type of corporate lending.

And if you make such a big increase in mortgages, I'm surprised that you haven't done any change on corporate lending.

Lars Höglund: But this is going back to the beauty of modeling, Andreas. And we have assumed a fairly sharp increase in unemployment in the model. And the outcome really is seen across the retail portfolio, so including mortgages.

Andreas Hakansson: Yes.

Okay. And then if I look [indiscernible], yes, two questions on the other countries. One is in Norway. I mean, of course, we have the oil exposure, but given what's happening, we're quite worried about everything in Norway. And you've a quite large Norwegian real estate portfolio.

Could you tell us, is that mainly in the Oslo area? Or is it mainly on the West Coast where you're more oil-centric?

Lars Höglund: We are fairly well spread in Norway. I mean, of course, with a focus on the towns and cities, but it's -- we have, obviously, quite a bit in Oslo, but we also have quite a bit on [indiscernible]. And if you remember a few years back when we had the latest oil crisis or what you should call it, we didn't really see any impact in our property portfolio in Stavanger at that time. So -- but we are sort of more or less nationwide in Norway.

Andreas Hakansson: Okay.

And then finally, when it comes to the corona outbreak. We call it the Swedish experience where we keep things a bit more open than other countries. And when you see it internally, when you compare how corporates and households are performing in Sweden compared to Denmark, Finland, Norway and the U.K., do you see a difference? And when -- two quarters out, do you think there will be a difference in asset quality in Sweden and the other countries, given the difference in strategy?

Lars Höglund: First of all, we don't see a difference yet, no. And second of all, I mean, everyone is guessing around these figures, how the pandemic will strike, and we don't have any better guesses than anyone else. So I have to wait and see for the coming quarters, what will be impacted in the figures.

Operator: And that was the last question we have time for, so I'll hand it back to the speakers.

Carl Cederschiöld: Okay. Then I'll thank you all for taking a part of this presentation, and we'll meet another time. Thank you all.

Operator: This does concludes the conference call.

Thank you all for attending. You may now disconnect your lines.