Executives: Ulf Riese - Chief Financial Officer Mikael Hallaker - Head, Investor Relations Lars Hoglund - Head, Debt Investor Relations Jörgen Olander - Group Head,

Accounting
Analysts: Willis Palermo - Goldman Sachs Omar Keenan - Deutsche Bank Anton Kryachok - UBS Chris Manners - Morgan Stanley Andreas Håkansson - Exane BNP Paribas Johan Ekblom - Bank of

America
Operator: Ladies and gentlemen, welcome to the Handelsbanken Second Quarter External Conference Call. Today, I am pleased to present Ulf Riese, CFO for Handelsbanken. [Operator Instructions] Speaker, please begin.

Ulf Riese: Good morning, everyone and welcome to this conference call for the second quarter 2016. Joining me today, I have Mikael Hallaker, Head of IR; Lars Hoglund, Head of Debt IR; and Jörgen Olander, Group Head of Accounting.

And the slides used for my presentation are as usual available at handelsbanken.com. I will start, as so many times before, by showing our value creation on Slide #2. The 15% average annual growth rate in equity plus dividends continued also when the second quarter was added. Interest rates have continued to fall in Sweden and elsewhere, with more negative impact on deposit margins. But our robust business model has continued to handle these challenges very well as you can see from the chart and this report.

In the second quarter, the good business activity in the bank continued and we also saw some positive developments in lending margins, primarily in Sweden and Norway. Our good development in the mutual fund business in Sweden also continued. Our asset quality remained strong with loan losses on a low level, 5 basis points. And in the quarter also Fitch upgraded our rating now to AA flat with no comparable bank at the higher rating. Our capital position has continued to strengthen further with core equity Tier 1 ratio now at 23%, which means that we estimate that we are already compliant with the new higher Swedish capital requirements that are expected to come into force in the latter part of 2016.

And in spite of the strong capital situation, return on equity for the second quarter increased to 14.2%. Then on Slide #6, you can see the strong volume development of the bank. Lending has grown steadily quarter-by-quarter since the end of 2013. And as you can see, the activity level has increased further during the first two quarters of this year. Lending in the second quarter rose in all whole markets, except Finland and corporate lending in Sweden where the development was flat.

Elsewhere, the increase was seen in household lending as well as in corporate lending. And it is of course very encouraging to see the good level of activity in our branches and the way the bank is attracting new high-quality customers on the household as well as on the corporate side. Then on Slide #8, we show the return on equity in our different home markets. Again, for the first half of the year, UK was in top, now with 16% and this was achieved in spite of the fact that we have continued to open branches also in the second quarter. Norway, with its challenges in their economy, was at 14%, while Sweden, Denmark and Finland were over at 13%.

And finally, The Netherlands, which is expanding and also took some cost for the acquisition of Optimix, still delivering 9% return on equity. Now back to Slide #4, let’s look at the second quarter more in detail. Operating profit increased by 6% in the quarter, while net interest income was more or less unchanged sequentially with new lending volumes and margins offsetting lower deposit margins. Net commission income improved by 5% and this was achieved mainly through higher card fees and increased fees from our mutual funds. Net gains and losses on financial transactions adjusted for capital gains improved by 32% due to strong client activity in the FX business as a result of the volatile markets.

During the second quarter, our sale of shares in Visa Europe gave SEK81 million in capital gains. The Visa Europe transaction also gave us a dividend of SEK64 million in the quarter, and all in all, the transaction gave a result of SEK716 million, where SEK615 million is recorded in other comprehensive income. Revenues all-in-all increased by 2% adjusted for non-recurring items and dividends received. Personnel costs dropped by 1% if you exclude the provision made in the first quarter to enable early retirements. For the first half of the year, underlying stock cost increased by 1% compared to the same period in 2015.

Other expenses increased by 3% due to seasonal effects. And expenses all-in-all increased by 0.5% quarter-on-quarter and just over 1% year-on-year adjusted for non-recurring items. And finally, loan losses were 5 basis points, while impaired loans dropped to 17 basis points and credit quality remained stable. Now, let’s turn to Slide #7. And as you can see, the good business development in the group continued in the second quarter.

And all-in-all, lending increased by some SEK35 billion compared to the end of the first quarter. The positive NII impact from increased lending volumes was SEK83 million in the second quarter and this more than offset the decline coming from lower deposit margins in Sweden. We have seen this encouraging trend now for a number of quarters being a result of the strong activity in our branch network. And also I think it’s encouraging to see that if you look at the Swedish operation, the Swedish operations show an improved NII in the quarter in spite of even lower interest rates. And still, I think it’s clear when you see the slide that our underlying growth is still quite hidden by the fall in short-term rates.

Stibor in the quarter dropped another 5.6 basis points. Then on Slide #22, we dig deeper into the development of net interest income, which for the group was more or less unchanged from the first quarter. Higher lending volumes added SEK83 million in the quarter as I mentioned and higher lending margins gave another SEK41 million. In Sweden, the mortgage margin improved by 1 basis points. And also in Norway, lending margins improved in the second quarter.

The bank continues to have a strong inflow of deposits. In Sweden, interest rates continued to grow more negative and the negative rates meant that the increased deposit volume have a negative impact on NII. All-in-all, NII dropped by SEK69 million from the Swedish deposit business in the quarter. Outside Sweden, the deposit growth overall adds to NII, which compensated for the decline in deposit margins there. And finally, there were some other positive effects related to lower funding costs in the quarter that compensated for a negative benchmark effect in [indiscernible] and some negative currency impact.

Back to Slide #9, you can see our balance sheet, which again has continued to strengthen. Total capital ratio was 28.9%, up from 28.8% at the end of the first quarter. Core equity Tier 1 ratio increased to 23%, up from 22.7% one quarter earlier and that was in spite of a negative IAS 19 effect of 0.6 percentage points due to falling interest rates. The increase was mainly driven by profit generation, which gave 0.9 percentage points, including a dividend from Handelsbanken Liv of SEK1.8 billion. The second main reason for the increase was the conversion into equity of the 2011 stock convertible, which is up for conversion during the few remaining months of 2016.

The conversion in the quarter contributed 0.4 percentage points. Our leverage ratio amounted to 3.9%. The Bank of England in their recent stability report provided very good arguments for why cash holdings with central banks should not be included in the base for calculating the leverage ratio. And adjusting our leverage ratio for our huge central bank deposits, that’s more than SEK580 billion, the leverage ratio would be 4.9%. The Swedish FSA announced in May that they have now decided on the new methodologies for calculating corporate risk weights and the decisions were basically in line with the proposals from earlier this year.

The new methodologies imply average corporate risk weights to be at least around 30% in Pillar 1 and also maturity floor of 2.5 years to be added in Pillar 2. The more exact final capital requirements for Handelsbanken is not yet decided and hence, some uncertainty remains. Assuming average corporate risk weights of 30% and a 2.5-year maturity floor, we assess that the bank was compliant with the new capital requirement also at the end of the second quarter. On Slide #10, you can see our capital position over time since 2009. The core equity Tier 1 ratio, as you can see, has almost doubled since then.

At the same time, as you can see on the right hand side, our return on equity has been stable during many, many years. Since 2009, a lot of things of course have happened in the markets sharply falling interest rates, a number of financial crisis in Europe and regulation has kept changing all the time. In this period and with twice as high capital level now compared to 2009, Handelsbanken has continued to deliver a stable return on equity, which for the first half of 2016 was 13.7%. Then on Slide #11, we go back to 2007 to look at our return on equity over time compared with the long-term interest rates. Growing volumes is never a target for the bank, but higher profitability than the average our peers is our target, as you know.

But when we add the right type of business with high quality customers in our local markets, that of course contributes to profitability and long-term stability. Looking at our nominal return on equity, back in 2007, in the early days of the financial crisis, it was higher than today, but so was also the long-term risk free interest rate. When we look at the profitability premium over the risk free rate that the bank has delivered over time, you can see it has been very stable. In fact today, it is at 13% and actually higher than in 2007 when looking at the decimal points. This stability confirms the low-risk profile of Handelsbanken.

If a bank takes high risks in order to achieve short-term profitability, that bank would not show this stable return over time. Then on Slide #13, we look at credit ratings. Fitch upgraded Handelsbanken to AA flat in May, which means that we have the highest rating in Europe of all comparable banks from Fitch and also from Moody’s. If we then add Standard & Poor rating to the picture, you can see that there are three banks in the world with an equally high total rating from all three leading rating agencies. Two of them are banks from Singapore and one from Canada.

No comparable bank is higher than Handelsbanken. In times when the market is full of liquidity, such a high rating does not necessarily and automatically mean a lot to our funding cost advantage. But as soon as the market becomes nervous, just like a few weeks ago, the difference increases quickly to our advantage. Then very high total rating like this becomes meaningful for our funding cost and profitability. On Slide #14, we show the development in our mutual fund business in Sweden, which continues to be strong.

During the first six months of 2016, the market as a whole had a very marginal inflow, while we saw a net inflow in our funds of SEK5.5 billion. Naturally, we see a great potential here since our back book market share of the total mutual fund market in Sweden still is only 11%. It’s very encouraging, I think to see the good performance continuing in this business and as we have said before, we also see a very interesting potential in all our other home markets within the savings area. On Slide #15, we show an update about our Dutch business, which is developing very well. Operating profit in the first half of the year increased by 77%, the cost income ratio fell by 6.3 percentage points in spite of costs taken for continued expansion and also related to the Optimix acquisition.

And we expect that deal to close during the third quarter. We have had the most satisfied customers also in the Netherlands and lending volumes increased 28% year-on-year, with 39% growth in the household segment. Like in the UK, we are a niche bank in the Netherlands with very careful selection of customers that we lend to and our market share here is of course so low that it can hardly be matched. The asset quality is strong. For the first half of 2016, we had net recoveries of 1 basis point.

Then on Slide #16, let me comment our business in the UK also on the back of the referendum vote of the June 23. Our successful operation in the UK is done as you know locally from our more than 200 branches. We provide normal banking products and we are a true relationship bank for our customers offering a bespoke service. As you know, we are a niche player and very far from a mass-market bank. As everywhere, we are focusing on the customer and on profitability and not on volumes.

With no bonuses and no budgets, there are no incentives for the branches to chase the wrong volumes. We have a high-quality customer base and our branches really know our customers through the local preference. Our model was tested and stressed in the financial crisis also in the UK, where our loan losses peaked at 33 basis points in 2010. And since then, we have become even more geographically diversified with a more or less nationwide presence, including several small and midsized locations. Our growth in the UK has been achieved by attracting existing customers from other banks rather than growing with the market.

The market share is still very low, which means that there is still a large, large potential for growth in the UK for Handelsbanken in the years to come. And then on Slide #17, you can see our loan loss history in the UK. While our loan losses peaked at 33 basis points in 2010, as I mentioned, the UK peers on average peaked at about 2% in 2009. The average loan loss level for our sales between 2008 and the first half of 2016 was 18 basis points, which can be compared with average of 90 basis points for UK peers in the period up until Q1 this year. And still, our asset equality in the UK has improved further since the years of the crisis.

This is the same pattern that we see when we look at our history in the UK as well as for the group as a whole. Our loan losses have been considerably lower than in other banks. This has been particularly clear, of course, in times of stress and crisis. So to summarize, the value creation in the bank continued with an average increase in equity per share, including dividends of 15% per year. Return on equity in the quarter increased to 14.2%.

Operating profit increased 6% quarter-on-quarter and there had been good level of business activity in the quarter and lending margins in Sweden and Norway improved. Net interest income in Sweden rose this quarter in spite of even more negative interest rates and we continue to see a good development in our fund management business in Sweden. Our local relationship driven business in the UK still offers good potential for growth. The model is well tested in the latest financial crisis, where also in the UK our loan losses were considerably smaller than for domestic peers. Core equity Tier 1 ratio increased to 23%, up from 22.7% at the end of the first quarter and we assess that the bank is already compliant with the new higher capital requirements that are expected to be implemented later this year.

Credit quality remains stable with a 5 basis point in credit loss level and impaired loans decreasing to 17 basis points. Fitch upgraded our rating to AA flat, which means that no comparable bank has a higher rating. And with that, I conclude my presentation and open up for questions. Thank you.

Operator: [Operator Instructions] We have a question from Willis Palermo from Goldman Sachs.

Please go ahead.

Willis Palermo: Hi, good morning. Thanks for taking my questions. I have two actually. The first one is on Brexit.

So I understand very clearly how you are well equipped to face the situation and it’s probably a bit early to think about how the situation will change, but are there anything change for you in terms of how you see pricing development going forward in the UK? And the second question is on the capital side, on the numerator, I was wondering how much capital could still be formed, thanks to the remaining comfortable bond that you mentioned? And on the risk weighted asset side, could you give a bit more detail on the migration of the credit risk weighted assets dynamic that we saw over the quarter and how we should expect this to change going forward? Thanks.

Ulf Riese: Thank you very much. On the second question, I am afraid I didn’t hear the start of your question regarding capital. Could you repeat that, please?

Willis Palermo: Yes, it was about the convertible bonds by staff that were – that happened during the quarter and you mentioned there were still some to come by the end of the year?

Ulf Riese: Okay. Okay, thank you very much.

Yes, now I understand. On the Brexit, you asked about the pricing development and that is of course hard to say. But of course, in general, I would say that since we are in a unique position with our rating and our financial stability and the stableness of our business model, we know that every time that there are some sort of turmoil in the market, the differentiation gets wider. And that of course means also that our margin gets in the relative sense better. So, that is the only I think important thing going forward and then we can all guess on what will happen in the markets and so on.

I think it’s very important as you mentioned you already know that there is of course no change whatsoever in our long-term view of our UK operation and we are as enthusiastic as we have ever been on our long-term prospects. And then on the road, there will be up and downturns, of course, and now it’s the Brexit situation that can, of course, affect a lot of general things in the country. Second question on convertible bonds, yes the stock convertible 2011 is possible to convert and up until November. And I think that of the outstanding amount, about SEK600 million is still to be converted and it has to be converted before November, because it expires after that. So, it’s pretty certain that the SEK600 million will be converted.

You talked about risk weighted assets and yes, we have a small migration in the quarter. It’s a small one and it’s migration in very good risk losses, so they are going from ultra-safe to ultra-safe. So, it’s nothing dramatic with that migration.

Willis Palermo: Thanks. That’s very clear.

Operator: Next question comes from Omar Keenan from Deutsche Bank. Please go ahead.

Omar Keenan: Good morning. Thanks very much for taking the questions. My first question is on capital and then my second question is on Sweden.

So, my question on capital, the point around the Swedish corporate risk weights is understood. If I apply the SEK100 billion increase in RWAs that has been previously mentioned, I think mostly it’s related to the housing cooperative loans. Then on my numbers, I put the pro forma core Tier 1 ratio at 19% compared to the regulator’s requirement of something in 18.8%, 18.9%. And then we have another 10 basis points in the stock convertible coming through, other than the second half earnings, what other measures can we expect to be taken to rebuild the management buffer because currently it looks like on a pro forma basis, the management buffer is in the 10s of basis points rather than the 1 bps to 300 bps target that’s given? That’s my first question. Shall I ask the second?

Ulf Riese: Well, I can take the capital question first and then we can come back to your second question.

Well, first of all, I did not want to comment on your exact numbers. I think you should bear in mind that when talking about numbers, one has to make assumptions on whether things are coming in Pillar 2 or Pillar 1 and of course, we are – have done all sorts of calculations ourselves. And therefore, we come to the clear conclusion that the estimate that we are indeed compliant also after Q2. I think you should also bear in mind, looking forward that this has been an awkward quarter as you have seen from the figures. Since interest rates went down, we are of course being prudent, took down the discount rates when discounting pension liabilities.

So we are now using 2% for the quarter. It was down from 2.5% that we used in Q1 and because of falling long-term interest rates. And that had a negative effect of 0.6% in the quarter. So if that had not happened, we would have been at 23.6%. Just as an observation, I know that some banks do not change at all between Q1 and Q2 and I don’t – you have to ask them about that.

But this is a negative effect for us. So we don’t do any predictions, but I think it’s not rocket science if you put all things being equal and doing a forward rolling of that, that you will experience that it will not only be compliant situation, but also rather hopefully comfortable situation when the new rules comes into effect. But again, I am not doing any predictions but just thinking out loud.

Omar Keenan: Okay. And there is no other lumpy items that you expect to come through in the second half like stock convertibles are up-streaming anymore equity from the life business.

And I just I guess the point on the pensions as well, is there any more downside to the 2% discount rate, I understand the point on the earnings, but I am just – these other big moving parts, I just wanted to get to try to get a sense of your expectations for H2?

Ulf Riese: Yes. Well, we were talking about the discount rate you have to tell me what you believe will happen with long-term interest rates going forward, so that is the stand on that. But I am not saying when you compare banks of course it means a lot where the starting point is. And as you see, at the end of the quarter, interest rates happened to be very low because of Brexit, so that’s why we have this effect. Would we have calculated today, it would – the interest rates would have gone up, as you know if you follow the markets.

Again, I am not doing any predictions here.

Omar Keenan: Okay, fair enough. Okay. And my second question was on Sweden. I was really encouraged to see positive lending margin improvement in Q2, it’s the first time we have seen it in many quarters, it’s not explained by the 1 basis point of mortgage margin increase, so it feels like there is re-pricing on the corporates, is this the re-pricing trends that was heard about, can you give us a bit more color on the lending margin improvement, do you expect this trend to be sustained? Thank you.

Ulf Riese: Well, as you know, we are in our system, not the price leader but the price follower and it’s our branches that sets the prices for the clients. And that means that the answer to your question really lies in also of course in the strategies of our peers. And I think maybe there is what I hear is that there is of course, some wish from some other peers to compensate for the new capital rules that are rolling in here. So that, I think is an important effect behind this, because as you know, on the corporate side in Sweden, there is not much demand. I mean there are demand for highly leveraged deals and we do not participate in those.

But if you take ordinary companies, yes, you don’t see very high demand at all there. So I think this – one should look at this as a function of the new capital rules and the costs associated with that.

Omar Keenan: Okay, great. Thank you very much.

Operator: Next question comes from Anton Kryachok from UBS.

Please go ahead.

Anton Kryachok: Good morning and thank you for the presentation. I had a couple of questions, please. Firstly on the UK, I am looking at your Annual Report here where you showed the breakdown of exposure to property management companies in your corporate book and in the UK, total exposure stands at SEK116 billion, of that, SEK59 million is commercial real estate, while the rest is primarily made up of multi-family dwellings and residential property, I was wondering whether you can give us a little bit more color on what actually fits within that multi-family dwellings and residential property, is it lending to developers or is it lending to smaller corporates that use residential property to – as a collateral basically for their corporate lending, if you can share a little bit more color on that, that would be helpful. And the second question please, on net interest income, I was somewhat surprised by the negative development on NII in Finland, which has been under pressure for the last couple of quarters, were there any one-off elements in the weakness that we have seen, is it perhaps negative deposit margins that is impacting NII and can we expect an improvement from here, please? Thank you.

Ulf Riese: Thank you very much. There is, when talking about UK portfolio, the numbers you quote are right. So to put it in a group context, we are talking about 6% of our portfolio that you are talking about. And it is of course as you know, according to our policy, the decisions are made solely on the basis of cash flow and ability for the borrower to repay and we must feel absolutely sure on that note before we say yes, then we take the collateral as well. We have a good LTV situation and we have a very prudent thing – proper and prudent way of conducting our decisions.

That means that you will find extremely low volumes of property development simply because that do not fulfill the criteria of the cash flow and very little housing associations as they are defined in UK. So we see that we have a good position and strong position, good rating and so on in our portfolio there. You talked about NII in Finland. Then in Finland, you have negative margins, margin effect. And as you know, the Finnish economy is not in a terribly good state.

One might claim maybe that there are signs of improvement, but in general it’s not very good situation when talking about the country. This has been the case for quite some time. So the growth in the country is not there and that means that the competition of course is fierce and that means that margins have gone down. Also, it’s effect of course on that interest rates have gone lower and that you get negative effects when interest rates goes lower.

Anton Kryachok: Okay, thank you so much.

Operator: Next question comes from [indiscernible] from Citi. Please go ahead.

Unidentified Analyst: Thank you for taking the questions. I have two questions, one around capital and the second around the UK business. On capital, I noticed that you accrued dividend at 50%.

If we were to assume similar payout as last year, then the reported CET1 ratio would be around 20, 30 bps lower than the current level. So, are you comfortable with delivering the same level of dividend payout as well as meeting the regulators’ capital requirements? And along that line, you mentioned that the capital is going to be implemented in the later half of 2016. Is there any phase-in period for you to fully change your corporate risk weights to 30% or you have to implement it by end of 2016? And then on UK, there is wide expectation that the Bank of England is going to cut the base rate. In that case, how do you forecast the main development in UK going forward? Thank you.

Ulf Riese: Thank you.

First of all, on dividends, we were very clear already in the Q1 report that the fact that one has to deduct a certain payout ratio when calculating the capital, that’s not in anyway signal what the dividend decision will be at the end of the year. So, there is no signaling value in us using 50%. I think that’s very important to be very clear about that. So, our capital strategy, dividend strategy is very clear. First of all, of course, we want to be compliant with the regulation.

Secondly, we want to have enough capital, of course, to cater for the growth that we have, because it’s a very good growth and profitable growth, as you know and you can see from the CAGR. And thirdly, all capital that is left over after those two first items will be distributed to shareholders and we predominantly have used dividends as the way to distribute, although we also have a mandate of being able to buyback from the Annual General Meeting. So, we will have to come back at year end on the dividend decision for the year. You talked about phase-in I think that’s a very good question. I think it’s important to keep in mind that the number that the Swedish FSA is producing is a recommended number.

That means that there is no automatic effect if you are under the number. The only effect is that you will have to do some sort of plan how are you going to in the future take yourself to that number. So, it’s a very different number to what you have in some countries where it’s a very fixed number and a very dramatic number if you go below it. So, I think that answers really in the bigger context your phase-in question, what will happen if you are not compliant with the number. Then there is still some uncertainty as to the exact date when this recommendation will come into force, if you see what I mean.

But I think that is not maybe so important. I mean, we of course want to be compliant. And as we state, our best estimate is that we are already compliant in Q1 and now in Q2. You talked about UK and falling interest rates. I think that, as you know, we are totally matched when it comes to interest rate risk in Handelsbanken and the only exception is that when interest rate goes down, we lose on margins, on deposits when interest rates are sort of getting closer and closer to zero or even getting into the negative territory.

I would, if I were you, can just try to grasp the effect, look at the deposit volumes and look at the effects that we have had in Sweden when we have gone from very positive margin on the positive side of maybe 1.2%, 1.3% and now down to situation where we lose 50 basis points, because the Swedish Stibor is at about minus 0.5%. So, I don’t think the mechanics will be any different. But of course, the starting point in the UK is in positive territory.

Unidentified Analyst: Okay, that’s very clear. Thank you.

Operator: [Operator Instructions] Next question comes from Chris Manners from Morgan Stanley. Please go ahead.

Chris Manners: Good morning. It’s Chris Manners from Morgan Stanley here. Just two questions if I may.

The first one was on the growth rate in the UK obviously you have been growing very nicely organically. And when we look at the sort of latest credit conditions survey post-Brexit from the Bank of England, it does indicate that there is pretty quite big drop in loan demand. Maybe you could talk a little bit about those dynamics and also how we should think about the growth rate that’s sort of potential for Handelsbanken whether that might sort of faded a little bit? And the second one was on the cost base again, is it good performance on the cost base and I think beat the consensus there. And is there anything more that you can do? Obviously, you have the early retirement of the restructuring in Q1, will we expect more benefit from that filtering in, in Q3, Q4 and onwards? Thank you.

Ulf Riese: Thank you very much.

On the first item, the growth rate, I think it’s important to keep in mind that our growth is of course organic yet taking clients from other banks. So, we are not sort of just following what’s happening in terms of growth in the market. I mean, we have a market share of, let’s say, 0.4 in the UK. So, we have lots of growth to do regardless of whether the economy is growing or actually decreasing. The whole basis of our growth is that we do something very, very different to what we see our competitors are doing in the UK, the bespoke local relationship; extremely high service; individualized, personalized service or the whole Handelsbanken concept.

And that is the reason why we have so much more satisfied clients and such an enormous interest from really, really good clients. And we are not a mass-market bank. We focus on really the top of the segments both on the corporate side and on the private side. So on that ground, we are not dependent on the loan demand in the country as a whole. We are such a small portion of the total market.

And you can see that we have good growth. So, we are very confident when it comes to our basic idea behind our organic growth in the UK. Having said that, of course, there can be upturns and downturns in the economy and so on, but structurally speaking, we feel very, very confident. You talked about the cost base in Sweden.

Chris Manners: Yes.

Ulf Riese: Yes, we have this program. It’s not because of cost, but the whole effort now to make the branches even more competent and being able to focus more on the clients in light of the increased digitalization where sort of more basic transactions are nowadays made via mobile telephone and so on, so all of this process. And that includes that the number of personnel will go down and we have this early retirement program that we talked about in Q1, which we expect to give between SEK600 million and SEK700 million in improved result. And we have said that this effort where we are talking about that this should be done before year end of 2017. And in this quarter, the Q2, you see no effect of this yet.

The program and the efforts and this is as you know, Handelsbanken done totally locally and decided locally, but we see very high activity on these issues now, but you don’t see an effect yet in the Q2 numbers, so that is to come.

Chris Manners: Got it, that makes a lot of sense. Thank you.

Operator: Next question comes from Andreas Håkansson from Exane BNP Paribas. Please go ahead.

Andreas Håkansson: Yes. Hi, it’s Andreas here. Just to follow-up from the meeting in Stockholm this morning, I was looking at the increase in risk weightings on the large corporate side, which went from 43.4 to 45.9, so I guess that’s the rating migration we have been talking about, could you tell us any specific sectors or countries do you see that and would you expect that there could be a continued increase in the coming quarters? Thanks.

Ulf Riese: Thanks for that question. We have in Q2 done some and you can see that in the report, in the notes, some changes in estimates when it comes to corporate risk weights and that is of course part of the ongoing discussions that we have with the Swedish FSA.

So that has increased the risk weighted assets. The risk weighted assets are going up, as you see in the quarter by about SEK18 billion, in ballpark. So that is part of it. Then when it comes to and really the core of your question, a different corporate and how they migrate and so on. As I mentioned, when we were talking about the negative migration that we got in the quarter, we are talking about an effect mainly of corporate going from ultra-safe to ultra-safe, so to say.

And the mathematics of course, if we are talking about larger sums, it has an impact on the risk weights. So do I see any trend or can I make any conclusions out of this, no. I – there is no such elements, so those are, how I put it, random elements or events and so on. So I don’t think you can draw any conclusion.

Andreas Håkansson: Could you please tell us what country it’s coming from, is it driven by Norway, for example?

Ulf Riese: I can tell you so much that it’s not any oil related or related in that you can in other way when you are talking about Norway.

And I don’t think we give any more detail. And knowing the circumstances, you should not draw any conclusion from it because it’s not such an event that you can draw any such conclusion from that is meaningful.

Andreas Håkansson: Okay, thank you.

Operator: Next question comes from [indiscernible] from Allianz Global Investor. Please go ahead.

Unidentified Analyst: Yes, hello. I have few questions. First on the leverage ratio, on the exclusion of the central bank holdings, can you elaborate more on the effect on your banks, especially in terms of AT1 issuance, can we also think about reductions for all other regulator. My second question would be on the Pillar 2 rules, we expect the paper from the European Commission by the end of the year, what could be the response of the Swedish regulator with regard to the state of Pillar 2 on the calculation of MDA buffer?

Ulf Riese: Right. On the first question, yes I mentioned expansion that if you do what Bank of England proposes to take away cash balances that are held with central banks, our leverage ratio would go from 3.9 to 4.9.

And you can also see as an example, at year end, we deliberately took down the amount of cash balances held at Federal Reserve at the year end and you can see our leverage ratio went to 4.4. And this was of course, without having any deteriorating effect whatsoever on our excellent liquidity situation and liquidity risk situation [indiscernible] and the whole structure of our funding and so on. So for us, this is an important point. If leverage ratio would come into effect, it’s very easy for us to increase it. And then you can ask why do we have this money at the Federal Reserve if we don’t need it and have no use of it.

Well, the fact is that by accepting deposits from large international institutions, we are actually doing them a favor. And since its short-term money, we put it at Federal Reserve. And that means that these institutions credit departments look carefully of course into Handelsbanken. And then when we issue our funding that we use, the long-term bond funding that we use for our business, this creditor partners know us very well and are very eager to buy and participate in our issues. So it’s a sort of marketing effect.

We also have a small positive effect, a result effect, but it’s really very small. So on that side, the cost of improving the leverage ratio for us would be miniscule. You talked about the Pillar 2 in the euro context and I think one should see the Swedish FSA that what to do now, that’s what they said, as a fund run on what might come in the European context. So they have said that that they will look of course into this thing in total framework when the EU has decided on what they want to do. What I hear from EU and I am sure you have heard it as well from Brussels, is that there is a lot of talk now about the effects of Brexit and so on and maybe one should take a little bit more easy now with the new regulation and so on.

And I think that has been really more predominant after the Brexit vote. So that’s what I hear.

Unidentified Analyst: Okay. Thank you.

Operator: Next question comes from Johan Ekblom from Bank of America.

Please go ahead.

Johan Ekblom: Hi. It’s Johan Ekblom from Bank of America. Just quickly on the UK, I know you don’t give forecast in terms of growth, etcetera, but if we look at the pace of branch openings or hiring of branch managers, it’s a bit lower this quarter than it’s probably been on average if you look at over the past 1 year or 2 years, should we read anything into that, what do you think about your expansion plans, do you feel that you expect a slowdown and is that in any way driven by what’s going on in the UK or is it just that you reach sort of the network size you need?

Ulf Riese: Well, thank you for that and I hope that you really think that we have been a very transparent about capital and saying about all effects of capital, but thank you also for the UK question. When it comes to the UK and as you may know, it’s just not a natural the number of branches.

The thing is that the longer, the more branches we have, more and more of the expansion is coming from existing branches and that is of course structurally what happens. Then when it comes to the number of branches opened, that is something that is locally decided and it goes a little bit up and down in the quarters. And I don’t have any views of what our British colleagues are thinking about the future. It’s the way we work is not on having sort of long-term plans and the number of branches is not a goal in itself for us. The important thing is profitability and of course the growth when it’s the right kind of assets, low risk profitable assets.

So we – I am sorry, we don’t work like that forecasting the number of branches going forward. We don’t think that’s an important number.

Johan Ekblom: Thank you.

Operator: There are no further questions at this time. Please go ahead, Mr.

Ulf Riese.

Ulf Riese: Thank you very much for attending this conference call and please don’t hesitate to call us if there are any further questions and I wish you all a nice summer. Thank you very much.

Operator: Ladies and gentlemen, this now concludes our conference call. Thank you all for attending.

You may now disconnect your lines.