Executives: Rolf Marquardt - Chief Financial

Officer
Analysts: Magnus Andersson - ABG Matti Ahokas - Danske Bank Andreas Håkansson - Exane Bruce Hamilton - Morgan Stanley Johan Ekblom - UBS Riccardo Rovere - Mediobanca Paulina Sokolova - Barclays Jacob Kruse - Autonomous

Rolf Marquardt: Good morning, everyone, and welcome to this Conference Call for the Third Quarter 2018. Joining me today I have Lars Höglund, Head of Investor Relations; and Annika Engler, Head of Group Accounting. The slides used in my presentation are as usual available at handelsbanken.com. And I'll start with slide number 2, the usual starting slide, where you can see that our stable value creation continued also in the third quarter. First of all, as you saw last night, our CEO, Anders Bouvin has told the board that he wants to resign on August 31, 2019.

This means that recruitment process for a new CEO starts now, but obviously with Anders on board for another 10 months. This is a very undramatic announcement. He will then have been CEO for three years and will be 61 when he retires. On to Slide number 5 and the income statement for Q3 compared to Q2. Net interest income drop somewhat.

This is primarily due to the fact that we have chosen to extend our funding duration and to be more active in the funding market. I'll come back to that. If you look at the Swedish mortgage markets, we continued to have a good market position in Q3. Our mortgage margins remained stable, but when rounding the number, it dropped 1 basis point to 105 basis points. Net fee and commissions increased by 3%, mainly driven by savings but also payment commissions.

In total, income dropped by 8%, but adjusted for the sale of the credit bureau UC in Q2. The decline was 1%. Costs were down by 1% and it was the second quarter in a row with decline in costs in local currency. Load losses were 4 basis points in the quarter and the credit quality remained stable. Operating profit decreased by 14%, but adjusted for the sale of the UC in Q2, the drop was less than 1%.

Return on equity in Q3 was 12.1%. Please go to Slide 6. This slide describes our net interest income developments in a 20 year perspective. Average lending volumes continue to grow in all home markets in Q3, though at a slower pace than earlier this year. This is a common seasonal pattern, especially in the corporate area, but the tendency was stronger than last year.

It is too early to say whether this is the sign of weaker business cycle or just a slightly stronger seasonal pattern than usual. Lending to large corporate customers can fluctuate short term and this had a negative impact on the quarter end lending volumes. Our household deposits also continue to grow up 9% compared to last year. When we look at our different home markets, we see that there is a growth in all of them. Net interest income contribution from the U.K.

and Netherlands also continue to increase, adding close to SEK300 million in the third quarter since Q3 last year. Turn to Slide number 7 please. Fees and commission had a strong development in the third quarter. This is often a seasonally weaker quarter, but this year, will reach an all-time high level. Just as before, this is to a large extent driven by the savings business.

The card business made a positive jump in this quarter. We pay fees to the card companies and once a year repayment based on for example currency movements is made to us. This year, we got that repayment in the third quarter, while in 2017 it came in the second quarter. Adjusted for this, the net income on the card business was up by around SEK10 million compared to the second quarter. On to Slide number 8 please.

The increase in reported costs earlier this year is explained by the same factors as we've showed in Q2. And that is our growth markets in the U.K. and Netherlands, investments in business development and IT, the subsidization of the operations in the U.K. and by currency effects. We have also continued to strengthen our control functions which explains the increase in underlying costs.

We are continuously investing in our growth markets particularly Thing in our growth markets, particularly in the U.K. where we are closing in on finalization of the subsidization. The cost of the project is SEK200 million higher so far this year compared to last year and our previous guidance of a total cost of SEK300 million is unchanged. In 2019, these costs will remain largely at the same level, possibly somewhat lower. In terms of the development costs, our best assessment is that this will be in a range of SEK2.1 billion to SEK2.2 billion for 2019.

A few words about the development investments on Slide 29. So far this year, we have spent slightly more than SEK1.8 billion on development and out of this SEK1.5 billion in the cost line of the P&L. As you can see, we have increased investments in business development and in our growth markets, which is in line with previous communication. But could also be noted is a slightly lower level of investment relating to regulatory compliance. We also expect 2018 should be the peak year for these types of investments.

Back to Slide 9 and a few words on our U.K. operation, which we remain very enthusiastic about. This graph shows the underlying development of income and costs over the past decade. Here we have adjusted for the one-off effect in Q1 regarding the change pension plan as well as for cost relating to the subsidization which is SEK200 million so far this year. As you can see, the underlying jaws continuously increase as our branches mature and customer relations deepen.

And this development has continued, despite significant development costs on top of the subsidization costs. With our load growth slowing down somewhat in the quarter, it's related to [Technical Difficulty] it's very appreciated by our customers. Now to Slide 10 and the current change development in the Netherlands. We have 29 branches today and continue to roll out our presence as well our developing our product range. We're offering rent discrete application by our customers with a great box in the nationwide customer satisfaction review also this year.

The return on equity is already above 14%, despite our relatively short history in the country. Operating profit increased by 31% to more than SEK200 million in the first nine months. Now to Slide 11 and some words about our capital and liquidity positions which remains very strong. The CET1 ratio increased by 0.3 percentage points compared to Q2 and reached 21.7% in Q3. And as you see, we are in the middle of target range.

Swedish FSA have decided to move the risk rate for the Swedish mortgages from Pillar 2 to Pillar 1 as of the year end 2018. The nominal capital requirement by the FSA will only be marginally adjusted for the change. But the subsequent increase of risk exposure amount will of course lower both the requirement and the reported CEI1 ratio expressed in percentage terms. Applying the forthcoming change to the Q3 numbers, would have resulted in the CET1 ratio and dropping to 16.7% and the FSA requirement to 15.1%. Our liquidity ratios are strong as you can see.

The funding markets have started to become a bit more nervous gradually this year. We have therefore actively worked to further reduce our risks. We have made short to be very active in a broad range of markets without funding, which also has been extended maturity wise. [Indiscernible] to EUR 750 million euro Tier 2 trades during the year. On to Slide 13 and a few words about our strategic initiatives for business development and efficiency.

What you see here is our digital product portfolio as it looks now. The portfolio will give measures that increase efficiency corresponding to at least 1,600 FTEs up until 2022. This will be quite evenly split between the years. Quarter portfolio will also generate is an extensive business development. You can see some of the areas we are talking here.

The business model will remain unchanged but we will use digitalization to further strengthen and deepen our customer relationships and to improve our service. Now let's go to Slide number 14 and talk a bit more about the digital product portfolio as it looks now. As you know, we aim at capitalizing on our strong customer position by further integrating digital solutions with our local and personal service. In addition, we see materials go for efficiency improvements as administration is being digitalized. I'd like to mention a few things that we do prioritize development wise.

First of all, we look at many different features that will allow a comprehensive digitalization of the administration work. One obvious example is the parts of processes that are still based on manual. This will be addressed. Personal will be streamlined and digitalized. Artificial intelligence already plays an important role here and will become even more important going forward.

Improvements are all being made in the development process itself to speed up testing and time to markets. We also prioritize products with a clear business angle enabling holistic advice to private and corporate customers. This is about new customer reading faces, allowing distance advice but also user friendly client dashboards that can be used in several more home markets. We have just released an advisory tool to also include support from pension advice. This tool is used in Sweden and Finland and will be rolled out in Norway shortly.

The curing and developing first class handling of big data is instrumental from a business but also regulatory point of view. This requires investments in infrastructure. And finally, we have ongoing discussions with potential and existing partners that provide interesting services for our customers. In one of these partnerships, we just released a new app for children in Sweden and Denmark. On to Slide 15.

We have come really far in terms of digital support when it comes to savings advice. As you can see here, the number of advisory meetings in Sweden has increased by 70% this year and the increase has been accelerating. This proves that providing really good tools for the branches, making the job more efficient and adding value to customers give a good leverage On to Slide 16. Handelsbanken's combination of personal services, local presence and good digital services has again been highly awarded in several customer surveys. SKI, the Swedish arm of EPSI recently published its annual industry survey which show that Handelsbanken continues to have the most satisfied private and corporate customers aiming the largest Swedbanks.

We can also note that the distance to our main competitors has continued to widen materially in the last year. Customers are clear, they want to meet the back also in connection with mortgage, as seven out of ten customers want meeting according to SKI. Here I think we have an explanation to Handelsbanken's sustained strong position in this Swedish mortgage market despite an increased and tough competitive environment. Having satisfied customers is for us essential in order to in the long run reach a high and sustainable profitability. Please go to Slide 20.

We know and see clearly on this slide that advisory meetings are not only appreciated by customers, they also create business for the bank. This slide shows the savings pattern by customers before and after an advisory meeting has taken place. Every advisory meeting generated on average per year and increased mutual fund volume around SEK140,000. It occurs both through single mutual funds purchases, as well as in the form of standing transfers. Six out of ten customers increase their mutual fund savings within 30 days from the advisory meetings.

The next step we take regarding the advisory meeting tool is to integrate the pension area, which naturally will form an even more valuable meeting for the customer and the potential for further volume growth for the banks. Now to Slide 21. The increase in number of advisory meetings has been achieved with an unchanged number of staff when we compare Q3 this year to last year. At the same time, the number of licensed investment advisors in our branches has gone up. We do see a clear link between the sharp pickup in customer satisfaction in Sweden and the increased activity with our customers.

Now to Slide 26. Undoubtedly, our corporate customers to a very large extent expect and continue local and personal service. They also have expectations and demands regarding the digital tools. We're therefore investing tools and features to be able to offer a holistic advice also to our corporate customers just like in the private side. We develop new customer dashboards, we just give the customer an overview of their total financial position.

This enables us to provide better advice in various areas for the customer. Our cooperation with the software company Fortnox, where accounting and other services are integrated with our banking services was a first step and more services are to be added. Heading in the box to the left in the picture, which says business services relate to corporations with different suppliers of interesting services for corporate, which we will integrate in our own services. It's good for example relate to handling of different types of risks in the company such as FX risks. We see good opportunities to achieve similar effects from our investments in the corporate business as we have already seen in our savings business.

Now finally to Slide 27. To conclude, Q3 showed a continued good business grow, particularly within the savings area. We have continued to invest in our growth markets as well as in development. Total costs in the bank were however down by 1% compared to Q2. We also spend a considerable amount of IT resources on our business development in order to increase efficiency.

The measures ongoing will increase efficiency corresponding to at least 1,600 FTEs by the end of 2022, quite evenly spread between the years. With that I thank you for listening in and open up for questions.

Operator: Thank you. [Operator Instructions] And our first question comes from the line of Magnus Andersson from ABG. Please go ahead, your line is now open for your questions.

Magnus Andersson: Yes, hi. A couple of questions on the efficiency and also measures. If I read it, the 1,600 employees would correspond to roughly 1.6 billion and first just to be clear, I read this as a gross number and then in the next sentence, you say that the same time the bank's ambition is to increase business volumes in all markets which may require increased resources. Is this the correct way of reading it?

Rolf Marquardt: Hi, Magnus. Yes, that's the correct way to read it.

Magnus Andersson: Okay, good. If I continue then headcount, can you see anything about what you expect on headcount for example in 2022 in your base case versus your 12,600 you have employed on average today?

Rolf Marquardt: No, we haven't made any forecast about that. And I - even that might take a minute, I'd like to take you through how we approach this. And I think the starting point for us is actually just to give the context where we are coming from. Where we are as a bank today, we have really strong starting point, we have an increase in business, we gain new customers in the newer home markets, but also the older home markets, we have a very high level of customer satisfaction and so on.

So that specifically we really have a strong starting point for entering this journey. And then we have announced the strategic initiatives. The first one is about business development as you know and the strategic initiative to improve on operating efficiency. And then we have that - considering the portfolio we have today and the plans we have today, the efficiency impacts from that is the 1,600 we have communicated, 1,600 FTEs. And that is expected to be quite evenly spread over the four years, we have made plans for.

And meaning that I mean you can spit out in four more or less. And that is the gross amount. And then we are developing the bank. We want to grow business and invest. And that also means that it's more resources but also be needed in some places.

I mean what this means which is very obvious is that a number of task that are being done and carried out today in the branch offices and also at central head office in Sweden and also in all the other countries, I know those tasks will be actually be reduced and much quicker to carry out. And that is something that will improve efficiency. We have clearly the intention to make sure that we take this out in the form of reduced cost. But then when it comes to making forecasts about the other side of the coin, which is that we intend to continue to grow to actually grow income that is trumping we haven't provided any forecast about how much that is. But what is clear here is that the cost impact from this will certainly counteract the cost increases we might have from adding on more resources.

Magnus Andersson: At the group level down, will total costs still grow in the midterm?

Rolf Marquardt: We haven't made a forecast, I understand that you want that forecast but we haven't made a forecast about that. But I think when you - I think again you can get an idea when you look at the numbers and the way we expect that to come through to feed through the system over the fore coming years and then you also can see the growth rate we have in different parts of the bank. Then I think you can make an assessment. And I think a picture which is really good to look at to understand better what we actually mean is the slide where you see the running costs we have in the presentation and where we make a split between the running costs and then spit out the investments we make in the and the cost in U.K. and regarding business development and so on.

And where you could expect to see the impact from the measures we take is actually on the running cost part of the bar.

Magnus Andersson: Okay. And you mentioned development cost that it should be 2.1 to 2.2 in 2019 and I guess that's the number that is 1,832 year-to-date, where will that end up for the full year roughly, it's now 500 million to 650 million last couple of quarters, is that the run rate we should expect also in the last quarter?

Rolf Marquardt: So, the figure for this far for 2018 is 1.5 billion.

Magnus Andersson: Okay. Is the 1.5 off to the capitalization?

Rolf Marquardt: Yeah.

It's that development cost and that figure is what we expect to be between 2.1 billion and 2.2 billion in 2019.

Magnus Andersson: Okay. So that's the cost off to capitalization?

Rolf Marquardt: And then we haven't made any forecast the full-year 2018.

Magnus Andersson: Okay. And the level of capitalized costs of the total investments in development, have you said anything about or can you say anything about that because I see it's been quite volatile, I look at that in the fact book at Page 12, the last table, two tables there.

Rolf Marquardt: Yeah, it has been quite volatile and that depends on what kind of development we do and different parts of the year and has been doing - have been doing in the past. But what you could expect in the future is that we are going to continue to make investments and on average, I think the approximate figure is approximately 30% and that has been the number. But that vary overtime considering what we are actually doing. So that will continue to some extent to be volatile.

Magnus Andersson: Okay.

And just, so you didn't take restructuring charges here I guess, the headcount reduction in areas will go down will be through natural turnover?

Rolf Marquardt: Yeah, that's correct. And that's something we - so of course we have made that I mean a concert decision and gone through this and the level of turnover and staff turnover that we normally have and where this would feed to and so on. And we have comes to conclusion that we don't need to do that and also that we can handle this in a smooth way.

Magnus Andersson: Okay. Good.

And just finally on capital. Will you come back in connection with Q4 within your target range based on the mortgage fees moved to below one?

Rolf Marquardt: Yes, we will. So I mean you have the numbers, if didn't just make the calculation now and we'll come back in Q4. But I also think what we can say is that we haven't changed our mind about the level of - the amount of capital we feel that we need for the business. So it's not a change in my process, it's more technical exercise, but we will come back in Q4.

Magnus Andersson: Excellent. Thank you very much.

Rolf Marquardt: Thank you.

Operator: Thank you. Our next question comes from the line of Matti Ahokas from Danske Bank.

Please go ahead, your line is now open.

Matti Ahokas: Yes. Good morning or afternoon. Going back to Slide number 8 again, you mentioned that the development cost would be between SEK2.1 billion and SEK2.1 billion in 2019, but what about after that how does that look like? And then also a question regarding your mortgage margins, there were slightly down but basically intact but was this due to higher funding cost or lower rates? Thanks.

Rolf Marquardt: So, about the development cost for the following years that if we haven't - we are not giving any guidance about that, so we do it only for 2019.

But what I can say is that when we look at what we have in mind, the plans we have, the initiatives we have taken, I think it's fair to expect that we will remain at the level where we are and we will need to continue to develop obviously. So, and when it comes to the mortgage margin, the change is really, really small change. And this time it meant that when we rounded it, it decreased by 1 basis points. So, but what we have seen also is of course that there is competition in the market and we have peers that are obviously competing with price and of course we are affected. But we have been able to hold out quite a well so both protecting our market shares and also keeping margins at a good level but competition is part of all the picture, but it's a very small change.

Matti Ahokas: Yeah, I totally agree. But why is - what is the reason that you being to be able to keep the margins at these levels? Price is not an issue for your customer, are?

Rolf Marquardt: Price is the one part of the puzzle obviously and that's for sure. I think there are several reasons why we can keep that margin at a decent level. So first of all, one sign is something that was also shown in the SKI investigation that we also show you today, where we asked the question about whether people want to see the bank or not when they get the mortgage and 7 out of 10 want to do that. And it mean sound things to have the customer relationship and to get the chance to integrate with customers.

So that's important and then you can also discuss the whole economic condition for the customer and so on. So it's - that helps. The graphical coverage also helps because price competition is different in different parts of the country I would say and also the volume start people borrow in different parts of the country, do differ and so on. So there are number of explanations to it. And then I think also when you look at - often is what you look at primarily is normally the three months reset margin and there we do stick out.

But when you look at the other reset, so one year, two year, three and five and so on, we're not that far away from our peers and often customers do have a blend of different loans. So I think those are the main reasons. But certainly to be able to meet with the customer and talk means something here.

Matti Ahokas: Great. Thanks.

Operator: Thank you. Our next question comes from the line of Andreas Håkansson from Exane. Please go ahead Andreas, your line is now open for your question.

Andreas Håkansson: Thanks very much. And just a follow-up from Stockholm [indiscernible] I think Anders was saying that, the 1,600 FTEs that we talk about is just really equivalent in time that's going to freed up and you can see somewhere, but is not going to be any reduction in FTEs at all.

Could you just elaborate what it was meant with that statements?

Rolf Marquardt: I will try to. So 1,600 that is freed up time and we have of course also gone through the bank. I mean we have worked really hard go through these initiatives and to make all the plans and to see, and estimate the impact in all the different parts of the bank, so we really have done the math here. And what we then see, I mean this is reduced time and in many cases, this will actually lead to the reduced number of staff and that's something that you could expect to see going forward. I mean it's - I mean considering the fact we - it is, we are talking about four years.

You will be able to see it, it will take some time, but you will be able to see that in some parts of the bank where that is obvious. And that is also where the part I will show up in the running cost. So that will happen and we were really well - we'll make sure that we take account of these and that it will have a cost impact, that's quite clear. But then on the other hand, we will increase business and we continued development business and to grow business and that will require resources. And that is what he meant.

And then the net of that is different number than the 1,600.

Andreas Håkansson: Yeah, we see one of that in Swedish banks hiring quite aggressively within the IT space and digital banking and all of that. Could you see a scenario where you're actually going to reduce branch staffs and some back office people and hiring in many cases perhaps more expensive digital type employees instead?

Rolf Marquardt: I think you really have a trace of that already. So if you look at the development we've had in the Swedish operations and Swedish branch network over the last two years, you can see that the number of employees has gone down, it has been reduced. And to some degree, you could expect that to happen going forward as well as a consequence of the improvement in operating efficiency and the reduction of the number of tasks that are being performed.

The same thing would actually happen also in a country for instance like the U.K. but in that case, when you really have a growth market, you - and that will actually mean that instead of - and hiring a person and then recruiting a new one, you will keep the old one but that one will do more business and since we have freed up time and improve the efficiency. So that's the way it's going to show up in the number of employees I would say.

Andreas Håkansson: Okay. Thank you.

Rolf Marquardt: And sorry, just to answer your question about the development. That we - the fact that we reduce increase efficiency and reduce the number of staff in some positions and some parts of the bank, does not mean that we will not recruit people and that have a different profile and that is needed. So I think you could also expect that to some degree at least we need to recruit new people in development parts and so on. But I don't see that kind of massive recruitments.

Andreas Håkansson: Okay.

Thanks.

Operator: Thank you. Our question comes from the line of Bruce Hamilton from Morgan Stanley. Please go ahead, your line is now open for your question.

Bruce Hamilton: Hi, Yes.

Good morning and thanks for taking my questions. Firstly, just I mean you mentioned some comments around to the competition in margins. Can you give us a little bit more color about around margins in the different markets and products you're operating in? And then secondly, linked to that, how you're thinking about your ability to reprice should be they were expecting new rate? And then finally when you mentioned to your geographical coverage helps in terms of margins, was that a comment around sort of competition being in Stockholm in the cities or was there something else behind that? And then secondly on costs in the U.K. specifically just to make sure I've understood, I think you said SEK200 million has been incurred so far of the SEK300 million plans for this year i.e. we should expect SEK100 million in Q4.

But is there any other sort of Brexit related or other that could lead to some cost pressure in '19 above and beyond that? Thank you.

Rolf Marquardt: Hi, Bruce and thank you. So then let's start with competition and margin development. So I - when it comes to lending margins, I think the two quite clear tenancies. So first of all, we see slightly declining retail margins more or less across the border in every country and then it differs to some degree, but it is to declining margins in the private side.

And then when you go to the corporate space, the margins are stable or actually trending slightly upwards, and that's quite general. They only come to where we have declining margins also in the corporate side is Denmark, but apart from that it's a picture I gave. When it comes to the ability to reprice interest rate hikes from the central bank on that happens that's - we expect to be able to do at some degree and that's going to be beneficial for us when that happens, but it's also really hard to assess to what extent and that is depended on the competence situation to what extent we will be able to do that. But to some degree, we expect to be able to do that. And then regarding the geographical coverage we have, yes, what we see is that margin pressure is particular obvious in the Stockholm area and the major cities in Sweden, and so that is what I referred to.

And especially also lending to for apartments when you purchase apartment. And so there is a structural impact of that and then structure helps us in that respect because we do have a coverage across the country. And then regarding U.K. and the Brexit cost, yes 200 so far this year in the U.K. 2018 for the group as a whole, because 2018 was related to preparations we have to make here in Sweden the head office as well because it impacts us a lot as well.

And the assessment for the full-year is still SEK300 million. And then we - for the next year, we expected to be at the same level, maybe slightly lower, but that is - the very clean Brexit preparation costs, we also making other investments in the U.K. for incidence related to AML and other compliance related improvements, we are making and also have development investment. So and that is also something that elevates costs to some degree this year and will continue to do so next year.

Bruce Hamilton: Thank you.

Operator: Thank you. Our next question comes from the line of Johan Ekblom from UBS. Please go ahead. Your line is now open for your question.

Johan Ekblom: Thank you.

If I could just come back on to two things. Firstly on the cost, just to get a sense for the kind of ongoing efficiency improvements we've seen in the past, can you give us some idea sort of what's the normal efficiency takeout that you've managed in over the last couple of years, you showed slide of the increased advisory meetings et cetera. How do we translate that into the FTE equivalent to sort of gauge the scale of the incremental program now? And then secondly just on fee income. If we can come back and just we clarify, when I look at the trend quarter-on-quarter, how much of that was relate to this timing of the fee reimbursement and how much is underlying just to give a sense for what kind of seasonality we should expect going forward?

Rolf Marquardt: Okay. Hi, Johan.

So when it comes to cost development in the past and the pace we've had in improving on cost efficiency, the best - we did provide slides about the productivity improvements we have made in the Swedish branch network and that I think gives you that information. I don't have that at hand now, but we can provide you with those slides again that will show you that. But that - what you can see from that is the trend where we have an increasing amount of profit per employee. And that is quite stable development and has been since 2016 then we had a turning point. And since then, productivity has been improving particularly in Sweden.

And that is actually underpinned by the same kind of efficiency improvements that we will also carry on with going forward. And then when it to comes to fee and commission income and the card fee, and the reimbursement we've got from the card companies, so if you correct for that the improvement in card fees was SEK10 million for Q3 compared to Q2.

Johan Ekblom: Okay. Thank you.

Rolf Marquardt: Thank you.

Operator: Thank you. [Operator Instructions] And our next question comes from the line of Riccardo Rovere from Mediobanca. Please go ahead. Your line is open for your question.

Riccardo Rovere: Good morning to everybody.

Three questions if I may. The first one is on NII, at the beginning of the call if I remember correctly, you mentioned that NII this quarter was just somehow impacted by funding if I understood it correctly your statement. Is that - did I get it right and if that is the case, should we pack the NII to benefit from what on the funding you got this quarter? The second question, sorry, on cost, just to be 100% sure I understand it correctly, at the end of the day, you expect the number of staff to go down after reducing by 1,600 gross. And if it also fair to assume that the weighted average cost per employee should go down in the next few years assuming that the brand new hiring will cost less than the people that will leave the Group? And the third question I have is on asset quality in the U.K. do you see the level of credit impairment and asset quality in general in the first nine months in U.K., is that sustainable one? Thanks.

Rolf Marquardt: Hey, hi, Riccardo. Net interest income impact and prefunding. So what we have done during the year and we - I mean we are really conservative when it comes to both capital and liquidity as you know. And we felt when we entered into 2018 that it was really time to and good reason to issue more senior unsecured bonds and also to issue two bonds. The market conditions were good but we also expected market conditions to potentially deteriorate during the year, because I mean we saw several signs as other market participants of potential increasing risks.

And so we started to do that and we have issued SEK55 billion in senior unsecured during the year and in addition to that Tier 2 issues. And we have done that for conservative reasons and that comes with a cost. So that has a cost impact that explains the change compared to Q2. And you might have noticed that the NSFR has not been impacted by that but that is because we have a maturing covered bond benchmark that will actually mature in December, so one that is being rolled it will impact the figures. And then when it comes to a number of staff.

Will the number of staff gross, it will be reduced? Yes, that's for sure. But - and that what happens and then we haven't made any forecast about that. Obviously the measures we do take when it comes to deficiency measure is something that will counteract cost increases that will naturally have in other parts of the business. But we haven't communicated where we expect the figures to end at next year and going forward. The average cost of employees, will that be reduced as a consequence of us hiring less costly employees than we have done in the past, as a consequence of this.

And once again we haven't made any forecast about that. Regarding asset quality in the U.K. that continues to be stable and we haven't seen any changes in that respect. We of course we might be impacted by a hard Brexit, not maybe in terms of credit quality but businesswise, it could impact the demand for credit and that is something that we have seen a tendency to especially in the London area as I mentioned before. But we have seen no and I do not expect any credit deterioration.

Riccardo Rovere: Thank you, Mr. Marquardt.

Operator: Thank you. Our next question comes from the line of Paulina Sokolova from Barclays. Please go ahead.

Your line is open for your question.

Paulina Sokolova: Hi, thank you for taking my questions. I have two. The first is the pace of lending growth in Sweden looks like it slowed in the third quarter both on the household and the corporate side. Please could you maybe elaborate on the drivers here and comment on whether Handelsbanken's relatively higher pricing has any impact at all? And the second question is just coming back to cost for the rest of this year.

So the run rate for setting up the U.K. subsidiary, the cost for that are going to be higher in 4Q. On top of this, do you expect to see the usual seasonal increase maybe similar to the SEK200 million you saw last year? Thank you.

Rolf Marquardt: Thank you. So when it comes to the pace of lending growth, yeah it's correct.

So the average lending volumes did increase in all our markets during Q3, but had a little pace than we have seen earlier this year. So it did slow down and it did so both in a household side and in the corporate sector. And we think it's too early to tell whether it's a cycle related issue or if it's just an unusually strong seasonal effect because that's something we often see as you know during the summer months. But it's a bit too early to tell but the slightly lower paced and that's for sure. And when - and if that has to do with the pricing that we have and I wouldn't say that that is the impacted, it's something that is rather we would assess related to the activity during the summer.

So we don't expect it to be related to margins I would say. Regarding cost for the rest of the year when it comes to U.K. and Brexit, so the assessment is that the Brexit preparation cost will be SEK300 million and that is still the assessment we make. But the number SEK200 million that is for U.K. alone, but if you then include the Swedish operations, that is 218, but we still assessing SEK300 to be the figure for the full-year.

I know it answered all your questions but.

Paulina Sokolova: Just to clarify the second point, on top of the U.K. cost, will you see the usual other seasonality impacting costs and driving them higher?

Rolf Marquardt: Normally, we have the trend that you refer to but I don't - we don't make any forecasts about that so I don't want to go deeper into what we exactly expect. But what I can tell is that behind the figures you saw last year in Q4 that increase was higher than we have seen in previous years in Handelsbanken and that was related to the fact that we did during that period, increase the development capacity and actually recruited some people and brought on more consultants than we have before. So we did actually - then we did increase it in a way that we haven't seen so far this year and then need to stick with the level of capacity we have for the reminder of the years.

I think from the communication we have done in the past, you can be piece that together.

Paulina Sokolova: Okay. That's very clear. Thank you.

Operator: Thank you.

Our next question comes from the line of Jacob Kruse from Autonomous. Please go ahead, Jacob, your line is open.

Jacob Kruse: Thank you. Hi. Just wanted to ask a couple more question on the cost side.

So just when you talk about your normal cost growth, I know you don't make a budget or a forecast, but would you say normal inflation or normally loan growth or what you say, what is the kind of baseline that you're offsetting with these savings? And then just in terms of the efficiency gains, I guess where I struggle to see really is how much of this is a sort of additional project in addition to what you would always normally do. I mean you are saying this is active projects over the space of four years that's about eight projects a year. Would you normally do zero projects or normally do two or three in this kind of - those kind of in a sort of typical year? And then just lastly the development cost, you done SEK1.5 billion roughly this year. Is that setting you on a truck for about SEK2 billion, you have a step up over SEK100 million or SEK200 million or is this one of those things where you normally have a bit more being booked in Q4 and actually you're not really increasing development cost very much in 2019 versus 2018? Thank you.

Rolf Marquardt: Thank you, Jacob.

And, okay so let's start with the first one then. So what is the normal cost development and I think is it inflation rate or what you do look at. And I think so when you look at the cost of development, I think you actually have to split that into a few different pieces. And I think the best way to understand that is to look at Slide number 6 in the presentation because there you can see, because I think it's two falls now, so first of all we do have the - we make the investments in the U.K. and we make - we increase development cost, that is basically quickly the main drivers and then in addition we have also the Brexit costs.

And that is the area where you have seen the cost increases. Apart from that we have been very stable of the areas in the cost of developments. So we meaning that then we've had inflationary elements but then we have been able - and we have had increases in spending on developing control functions and AML investments and AML related costs and so on and regulatory compliance. So we have been able to offset those in a cost increases by efficiency improvements and then to keep the cost level stable in that area. And that is where you should expect to see the impacts from the efforts we are making now.

And then what I think is a really good question, I like that one about this is, so what comes in addition here and of course I mean we have been developing a lot else in the past years that doesn't change. But what I think the way to express what we are doing here is that, yeah first of all we have increased the development pace since last year and also the reason behind the cost increase we've seen. But it's not only about that, it's also about how you fit together your way of developing your business. And what we have done is to also get the development side of the business and the business side and IT departments closer together and to plan and to prioritize in slightly different way where we really target areas where we have major efficiency gains. And what is interesting when you look at the bank and how we spend and the allocation we have to make, we should get is that often you have to pay lots for investments in infrastructure that has acquired small impact on the efficiency gains and then you have a number of initiatives you could take, not always that expensive but that really give you a strong and good outcome in terms of efficiency gains.

And what we have done is to focus primarily especially on those and to make sure that we can carry out go through them and really to again efficiency to that. And that is to speed up development and also to take out and reduce the number of administrative routines. So that is what we have done and that is the major change there.

Jacob Kruse: Okay.

Rolf Marquardt: And then when it comes to the development costs for 2018, we haven't made a forecast, but I think it's - from the numbers we have so far, I think it's easy for you to at least get an idea.

Jacob Kruse: Yeah, it was just at in 2017 there was a step up of development cost in Q4, if I look at that chart where you gave development cost first nine months versus full-year. So if I'm not just annualizing, if I kind of assuming a similar step up in Q4 then I'll get to I guess 2.1 or so far this year, which would mean that your guidance for 2019 is broadly unchanged development cost sort of an increase?

Rolf Marquardt: A slightly increase, but I think considering the fact that we have got it is for 2.1 - between 2.1 and 2.2, and if you would come to that conclusion. But I think the way to get an idea and not just to analyze it is to go back to my comment about the development to last year. We normally have high cost increases in Q4 than the previous quarter, so that's the normal tendency but last year it was more pronounced that it has been in the past. And then it fits up together with the communication we've had on the development capacity we keep within the bank which has been stable during the year.

I think you can get some guidance but that is as far as I can go.

Jacob Kruse: Okay. Great. Thank you very much.

Rolf Marquardt: Thank you.

Operator: Thank you. [Operator Instructions] And as we have no more questions registered and I hand back to our speakers for any closing comments. [Ends Abruptly]