Carina Åkerström: Good morning, everyone, and welcome to this call for the Fourth Quarter and Full Year 2020. Together with me today, I have our CFO, Carl Cederschiöld; Head of Group Financial Strategy and Investor Relations, Lars Höglund; and Head of Accounting, Annika Engler. I will start by giving you an update very short about the progression of the bank. And then Carl will walk you through the key financial topics for the fourth – for the quarter, followed by a Q&A. And I’m sure that Lars will also jump in into this.

2020, a year like no other year, it has still been okay for the bank and with a good year – with a good end of the year. We do have a volatile year behind with the pandemic and all of the impact that has had on the world. However, I think it’s clear that the bank has managed the year very well. The result was stable, with an underlying increase of 1%, in a year when economies have been extremely volatile. We have a very strong capitalization.

Our credit quality is stable. And our conservative view on risk has once again rewarded us through very low loan losses and the customers’ credit us as the bank that they are most satisfied with. In the mortgage market, we have gradually moved closer to our back book market share, and we have been the biggest player in the market when it comes to net new lending. The savings business continues to attract volumes at a significantly higher market share than our back book. And our early focus on sustainability within our saving business is clearly paying off.

On the cost side, it is very encouraging to see that we have turned the trend and we are very committed to deliver on our cost target of SEK20 billion in annualized level by end of next year. And I feel very pleased with how the initial development has progressed both in terms of the strategic initiatives communicated in 2019 and those in 2020. It moves according to plan and in some places even ahead of plan. So one way of showing that we feel good about the progress is that we have made a provision of SEK213 million in Q4 to the profit sharing scheme, Oktogonen. The bank is delivering on the target of a higher ROE than the average of peers and the cost trend in the group shows clear signs of a positive and sustainable trend.

So we continue with the same idea, the same goals and the same – and same bank, but with a renewed and more efficient organization. This will help us reach our goals, higher profitability, lower costs, and more satisfied customers. And that is our foundation for creating increased shareholder value also in terms of earnings per share growth and a stable dividend growth. I think I will stop here and leave over to Carl to take us through the key financial topics. So please, Carl.

Carl Cederschiöld: Thank you, Carina. I will touch upon a few selected topics, and then we’re happy to discuss all questions and details in the Q&A session. To start off with net interest income, as you can see on Slide 31, the development of net interest income in Q4 was very undramatic being more or less flat compared to Q3. Mortgage volume growth remains strong and very stable. Handelsbanken was the largest player in 2020 when it comes to net inflows and the market share moved closer to the back book during the fall.

This is the core product for the bank and the ambition is to further strengthen our position in the market. Demand was weaker on the corporate side in the wake of the pandemic, all in all leading to more or less zero sequential volume contribution to net interest income in Q4. As you know, the corporate volumes have been exceptionally volatile in 2020, but in Q4, the volumes appeared to have stabilized somewhat. Year-on-year we did see some growth on our home markets, but as you know we are closing down operations outside of our home markets, meaning that the volumes dropped expectedly as a consequence of that. In terms of margins and funding, the contribution to the NII was also very minor in Q4, only negative SEK14 million.

Behind that figure lies an additional interest cost of SEK70 million for the AT1 we issued at the end of Q3. We have called the outstanding AT1, maturing in a few weeks from now. So, you can call it a temporary double funding cost in Q4 for the AT1s. This negative impact was, however, offset by the final reversals of the negative impact we experienced during Q2, when we were early out restoring the liquidity reserve after the markets had been closed. Apart from that, the NII in Q4 was negatively affected by the strengthened Swedish kroner by some SEK30 million.

So very undramatic NII development in Q4. And the conclusion is that margins overall were stable, which is also true for the mortgage margins in Sweden. As we have talked a lot about during the year, the net interest income during the prior quarters has been extraordinarily volatile. However, I think it’s fair to say that we ended Q4 more or less back to somewhat normal NII situation again, albeit with unusually weak corporate loan demand. If we move over to the fee and commissions, we can see on Slide 12 that Q4 reached an all-time high quarterly figure.

On Slide 13, you can see a rough split of the commission component, with savings related commissions account for roughly half. The recovered stock markets, together with a very strong net inflow, drove savings-related commissions up 11% compared to Q4 last year. The payment fees have, on the other hand, seen a decline during – due to lower card fees during the pandemic, breaking and up until then positive trend. The sum of the remaining commissions, i.e., loan and deposit fees, guarantees, securities, commissions, et cetera, has shown a relatively stable development during the year. Note though that the scale-down of our non-home market business means that especially the guarantee fees are trending down, all according to the strategic plan we communicated a year and half ago.

On Slide 14, you see a more detailed picture of the mutual fund business. As you know, this is another core area for us. And the success is the result of a long-term dedicated focus by the bank. In 2020, Handelsbanken attracted 46% of all net inflows in the market. And in the past decade, the market share of the net inflows has been 24%.

However, the market share of the total outstanding volumes in the market still remains just below 12%. So, it goes without saying that we see scope for further strong growth ahead. Despite the pandemic, the net inflows were 37% higher in 2020 compared to 2019. And if highlighting a special success, obviously, we can mention our Sustainable Energy fund, which attracted 27% of all net inflows in the Swedish mutual fund markets in 2020. The sustainability focus is deeply rooted in our asset management operation.

And at year-end, almost 90% of the total mutual fund volumes was invested in funds with enhanced sustainability criteria. Clearly, our offering and focus goes in line with the customer preference. Let’s move over to costs. Q4 normally shows a seasonal uptick in cost, and that happened this year as well. When you look at the development over a long-term perspective, on Page 9, you can clearly see that the negative trend up until then – up until the end of last year has clearly been discontinued.

Year-on-year, in Q4, the underlying costs were down 3%. And as you see on the next Slide Number 10, the costs for the full year were flat when you adjust for one-offs on Oktogonen. Please go to Slide 23. In Q3, we communicated a fixed cost target of SEK20 billion in annualized level by end of 2022 and the aim of keeping that one flat in 2023. So, in effect, you can say, costs of SEK20 billion for the full year 2023.

Over 2021 and 2022, we will target increased IT development resources equivalent to a total of SEK1 billion of additional IT spend. This means that the underlying efficiency gains during 2021 will most likely be more or less offset by the additional IT cost. During 2022, we expect to see the actual level of total costs moving down towards the SEK20 billion level. On Slide 11, you see the progress on the program we launched in the fall of 2019, and the progress is largely progressing according to plan. Almost 60% of the targeted cost base has been addressed and almost 40% is now seen in the actual cost base.

There have been some minor delays in the execution due to the pandemic, but generally speaking, the initiative is progressing according to plan. We have now implemented a new organization in the bank, not only reflecting the regional banks in Sweden and UK, but also across the bank to create a quicker and more efficient organization, where the responsibilities of all units are very well defined. All-in-all, we have more than 100 initiatives ongoing, all contributing to the cost reduction. We follow each and everyone closely, and of course, also have time lines for all of them. Some of them, like the branch operations in Sweden and UK, are large, but many of them are considerably smaller.

However, summing them up is what it will take us to reach the SEK20 billion cost level. Let’s move over to the credit losses on Slide 18. The credit loss ratio was three basis points in both Q4 and for the full year 2020, and underlying credit quality remains strong despite the pandemic. In Q4, there were only fine-tunings of the IFRS 9 assumptions. And we can note that over the full year, credit losses of SEK780 million, SEK564 million of them related to model-based COVID overlay.

And to remind again about the reason for the low credit losses, let’s start with Slide 19, where you see EBA’s updated transparency exercise based on June 2020 numbers. This slide shows the European banks nonperforming loans and loans with forbearance measures. Net of reserves as a percentage of lending, Handelsbanken again had the lowest share of problem loans, and the difference compared to Nordic peers also remain fairly large, which you see on Slide 20. On Slide 21, you see a key explanation for this, i.e., our preference for secured lending, which deviates, again, quite a bit from many of our local peers. Then as a final remark on asset quality, please go to Slide 22.

This slide shows three decades of credit loss ratio development of Nordic banks. And again, it is clear that having a deeply rooted conservative credit risk culture and close relationships with customers lead to lower credit losses over time and in particular, during a stressed macro environment. Let me finish off on capital, and please go to Slide 17. The CET1 ratio increased to 20.3% from 19.4%, which means that the bank is 7.5 – sorry, 6.5 points above the FSA requirement of 13.8% and 3.5 percentage points above the upper end of our long-term target range. The Board is proposing a dividend of SEK4.10 per share, which is exactly 25% of total net profit for 2019 and 2020, i.e., what the Swedish FSA stipulates as of now.

This quarter, there are several remarks to be made about the capital and SREP. First, on the CET1 ratio, the risk exposure amount has increased by SEK46 billion, as UK volumes have moved to the standardized model on group level. This is less than we estimated earlier. And the lower figure is a result of slight change in portfolio composition and calibration of the calculation. We choose to input these figures a quarter before we had to do it as well.

Then the previously deducted dividend proposal for 2019 earnings have been added back. And then, of course, the dividend proposal for 2020 has been deducted. Second, on the SREP side, the absolute majority of the impact from implementing the European banking package in Sweden is now in the numbers. Also, the Q4 estimated SREP level includes the risk weight floors on Swedish CRE, which increased the SREP by 40 basis points. So this means that most of the forthcoming items regarding capital that we flagged in Q3 are now factored into the numbers.

The key remaining topic from Q3 that has not been included and relates to the Norwegian FSA’s proposal of risk weight floors on Norwegian CRE. A worst-case scenario for the bank would suggest a negative impact of around 40 basis points on the capital buffer to the SREP. However, it could be significantly less, and the timing of the implementation is uncertain and depending on the legal scope for – and level of reciprocity, among other things. Many of you are likely to ask about the capital plan after December when the current dividend recommendations by the FSA will expire. First, let me stress that we are in the middle of the second wave of the pandemic, and it is too early to have a clear view on the general economic conditions eight months from now.

We have little reason to front guess what the view of Swedish FSA will be as we approach September. And in the end, the decision around dividend and capital distribution is a Board decision, which is based on an overall assessment. So for now, all we can refer to is that the bank’s long-term capital target range of 1 percentage point to 3 percentage points above the SREP under normal circumstances. Obviously, we are not in normal circumstances currently, but we will, of course, come back and address the situation in the coming quarters. In any case, our capitalization is a very strong situation in place to be in and that’s really good in terms of enabling us to support our customers and aim for growth in the bank.

So to sum up, net interest income was very stable in the quarter, with strong mortgage lending, muted corporate lending, fairly neutral margins, and funding effects and some FX headwind. Commission income reached all-time high. Again, this is the success of our savings business, and in particular, our sustainability focused mutual funds. The work of streamlining and strengthening the branch operations and the offering to our customers has kicked off well. The cost progress continues in the right direction.

And the bank remains firmly committed to the cost target of SEK20 billion by the end of 2022. Asset quality remains very strong despite the pandemic, and the capital position is extremely strong. So with that, let’s open up for questions. Thank you. [Operator Instructions] Thank you.

Operator: Thank you. [Operator Instructions] We have a question from the line of Magnus Andersson from ABG. Please go ahead.

Magnus Andersson: Yes. Hi.

Just on – first, on the capital, although you don’t want to speculate about what’s happening in the future, just from here, you – since you added back the 2019 accrual, I guess that we should accrue 40% from now on. And also, then if we – if I assume that you arrive to the second half of the year and the dividend ban is lifted, the dividend restriction is lifted on the 30th of September, and you would feel overcapitalized, how do you look at share buybacks versus dividend to potentially adjust such an overcapitalization? And also there, if you could say something about the IRB overhaul, if that is something during 2021 that worries you, if that’s a large uncertainty factor for you.

Carl Cederschiöld: Okay. Thank you, Magnus, for that question. First of all, let’s address.

Yes, you’re correct on that. We will accrue 40% of the 2021 results going forward. And then obviously, going into the fall, we will have to see what happens. And obviously, when we’re back in normal times, we will target our target range again of 1 percentage point to 3 percentage points. Choosing between giving dividend and doing buybacks is not something we have addressed yet, but obviously – and that will come down to the evaluation of the equity as well.

That will affect the decision. But both options are obviously available. So that’s a good situation to sit in. And then what was the third?

Magnus Andersson: IRB overhaul.

Lars Höglund: I think – yes, the new models, the IRB models and their impact on capitalization.

That’s your question, right?

Magnus Andersson: Yes.

Lars Höglund: Yes. So I can take that. I mean, it’s really too early to give any firm guidance here. We’re still in the process with the Swedish FSA.

But the general comment is that, no, it’s not something that we feel overly concerned about, but it’s too early to give any firmer guidance what that will mean.

Magnus Andersson: Okay. Thank you.

Operator: Our next question comes from the line of Antonio Reale from Morgan Stanley. Please go ahead.

Antonio Reale: Hi. Good morning, everyone. It’s Antonio from Morgan Stanley. Thanks for taking the questions. I’ve got two.

So the first one is a clarification really on your cost targets and IT investments for 2021. I would use – I remember, you were targeting a SEK1.5 billion cost savings for 2021. And you’re saying that you expect it to be fully offset by higher IT investment for the same amount. Now it seems like you’re taking all of the IT expenses and even more than the one being you initially targeted upfront in 2021. Can you confirm, is that correct? Or what’s the difference is? And related to the costs, how much of this amount – the residual amount actually, would you expect to be net cost savings going forward? That’s my first question.

Carl Cederschiöld: I don’t know if I understood the last part of it, but let’s start with it. First of all, obviously, the cost initiative of 2019 was SEK1.5 billion savings, all else equal. So it’s hard to guide around what cancels each other out. Obviously, we have salary increases and we have an extra SEK1 billion of IT spending. What we can say right now is that we are moving on plan of the 2019 program.

We have SEK560 million, is sitting our cost base right now, and we’re moving according to plan down to SEK20 billion in the end of 2022. It’s hard to go into details on the various components, which ones increase and which one decrease.

Lars Höglund: I think if I may add, it’s Lars here again. If I may add there, I mean what we want to guide you about is that, again, the SEK20 billion target, we’re very committed to that. But its trajectory throughout 2021 and 2022 is not going to be linear.

So on the additional SEK1 billion of IT spend, of which some, let’s say, SEK700 million will end up in the P&L, for 2021, that is likely to eat up, so to speak, the impact of the real cost reduction. But from 2022, we expect that the cost reduction will be bigger than the additional IT spend. Was that…

Antonio Reale: No. I appreciate the color. I think it’s important for the market to be able to sort of track and monitor also sort of the development.

So hence the question. Okay. My second question was on the NII, please, with a focus on Sweden and the UK, which I think was soft in the quarter. So my question is really how competitive dynamics on low spreads changed recently to comment, to some extent, at least with Sweden? I would like to hear also on the UK, what you’re seeing. How do you expect loan spread dynamics to affect loan demand? I see you seem to be derisking somewhat your corporate book in the UK as well.

If you could elaborate your comments and provide more color on the outlook, it will be very useful. Thanks.

Carl Cederschiöld: Yes, sure. First of all, let’s start with Sweden, then on the NII development. I mean, obviously, 2020 has been an extremely volatile year.

And as we’ve been talking a lot with you about, we saw increased funding levels due to building the liquidity reserves in the second and third quarter. That’s out of the book. And as we’re guiding now, in the fourth quarter, we actually see fairly stable loan margin. So we don’t see decreased margins at currently. Obviously, we do believe that the competition will be fierce going forward as well.

So we are – we will see probably tough margins from time to time, but we don’t see a trend of them falling right now. And we obviously are very interested in focusing even further on the mortgage market. So that’s quite good. When it comes to the UK, and perhaps I should add as well Norway to that one, we have two things worth highlighting. First of all, obviously, this is a quarter with obviously – or a year with quite good swings in FX, but taking FX out of account, you see, obviously, that the margins in UK and Norway has dropped.

That’s due, obviously, quite a lot on the deposit side and the rate change from Bank of England and the Norway’s bank down to more or less zero. So – and that has hit our margins for sure during last year. When you scale out in time a bit, that tends to rather drive volumes in lending growth. So if that happens this time, it’s too early to tell, but we’re fairly constructive around it. And normally, if these markets move in the same fashion as the other ones have done, it usually becomes constructive from the NII development.

Lars Höglund: And maybe just to add there, specifically on Sweden. I mean, overall, what we can see in the quarter is a very low volume impact on the sequential NII development. I mean, pre-pandemic quarters, you typically saw for the group, some SEK80 million to SEK100 million additional NII from volumes, and we clearly don’t see that this quarter. And of course, that is also related to Sweden and it is related to the corporate business in that sense. So – and then, as Carl mentioned earlier, the SEK70 million additional sort of double AT1 funding costs that we carry right now, of course, part of that is also impacting the Swedish NII.

Antonio Reale: Thank you.

Operator: Our next question comes from the line of Robin Rane from Kepler Cheuvreux. Please go ahead.

Robin Rane: Yes. Hi, good morning.

So are we – could we expect any further allocation for Oktogonen for 2020 later this year when we look back at 2020 and can compare to the benchmark, sort of what we saw in the spring of 2019, but the inverse of that? And then secondly, could you just remind us if there is any changes to the resolution fund and deposit guarantee fund fees in 2021 versus 2020. Thanks.

Carl Cederschiöld: Thank you, Robin. No, you shouldn’t expect any more Oktogonen being reserved for 2020. As Carina was saying, and we’ve been telling as well, we have hit our ROE targets, most likely, but we – during most of the year, obviously, we haven’t been on track and been showing for a while that cost trends in the right direction.

And we are certain of that one right now, but you shouldn’t expect us to change any view on the Q1 to Q3. And apart from that one, resolution fund fees are now down on 5 basis points, and we don’t see any change there going forward into 2021.

Robin Rane: Okay. Thank you very much.

Operator: Our next question comes from the line of Jens Hallen from Carnegie.

Please go ahead.

Jens Hallen: Thank you. First question, on loan loss provisions, how we should think about them sort of into 2021, given the portfolio provisions you took already in Q1 last year? And also, I think the – some of the charts you showed. If things – the question is, if things turn out as you now expect, is there any reason why they should be elevated and not normal in 2021?

Carl Cederschiöld: Thank you, Jens. Well, of course, out of the SEK781 million in loan loss provisions, SEK576 million of them are a COVID overlay.

But having said that, I mean cred losses are fairly low. So yes, sooner or later, we won’t have the COVID overlay. What the outcome of that one will be quite a lot dependent on the idiosyncratic risk and the other developments. So – but yes, technically, a large part of the SEK781 million for 2020 is actually a COVID overlay.

Jens Hallen: Okay.

Thank you. And then just a second question on fees. Is there anything in asset management that is sort of not recurring? It is, of course, a very strong Q4. I want to make sure we have the right baseline going into 2021.

Carl Cederschiöld: Yes.

I don’t think you should expect us to take 46% of market share inflows every – each and every year, because – and part of that one is, I mean, the sustainable energy fund took SEK21 billion in net fund flows in 2020. That’s obviously exceptional, and it’s partly – it’s retail money from the Avanza and Nordic likes and it’s also institutional money. But – so I think you rather should look at the 24% market share for being rather the structural trend and the feasible. But we like positive flows. And obviously, we do believe we’re quite well-positioned.

Some of you might have seen, but probably not, the release of the SDG solution Funds, which details quite a lot how the fund company works in choosing companies which both produces good financial wealth, but also a sustainable future. So otherwise, go in and look at that one, SDG Solution Funds.

Lars Höglund: And Jens, perhaps in your question also, if I read you right, are there any performance fees that makes the line lumpy? And the answer is no. There are no performance fees in the line. So very clean from that perspective.

Jens Hallen: Okay. Thank you very much.

Operator: Our next question comes from the line of Find Williams at Credit Suisse. Please go ahead.

Find Williams: Hi, there.

Thank you. So two questions from me. Firstly, on revenues, if possible. Last quarter, you mentioned that a large part of the estimated SEK1 billion in revenue headwinds from the restructuring was already visible in the results. So can you maybe give us an update on this, please? And whether or not that number has changed.

And secondly, my second question is on the – sorry. Yes.

Carl Cederschiöld: Thank you for that question. Yes, we believe SEK0.50 of revenue drop is in the books at the moment, if that was your question.

Find Williams: Yes.

Lars Höglund: I think if I may step in here. I think you – we have talked about two different revenue drops. We talked about the SEK500 million from 2019 initiative and then another SEK500 million from what we presented last year, right? And what we said earlier about the initial SEK500 million was that, a fairly large part of that was in the books already, and we show it now clearly on the NII year-on-year impact of around SEK95 million from the international close down and also some lower guarantee fees. But I think what we also said that in Q3 around the initial SEK500 million was that, most likely, the final outcome is not going to be as big as the SEK500 million. Then when it comes to the additional SEK500 million that we talked about in Q3, that is pretty much related to the payments business, where we talked about potential scenarios, so that one in Q3.

So yes, we have seen quite a bit of the initial SEK500 million in the books in terms of revenue drop, but it’s also fair to assume it’s not going to be a full SEK500 million from that one.

Carl Cederschiöld: Thanks for that clarification.

Find Williams: Great. Thank you. Sorry.

If I could just squeeze in one more. Secondly, on the UK given the capital requirements, it looks like the marginal return might be a bit of a drag on group return on equity. So – I mean I appreciate that specific dates for the IRB model approval might not be possible. But could you maybe give us a time line on when you intend to apply for these models? And alternatively, if this is a longer four, five year process, do you expect the UK growth prospects to be lower over this period?

Carl Cederschiöld: Yes. Thanks for that question.

We don’t expect it to be a four, five year, but rather a three-ish-year progress of applying for the IRB method. And – but that’s – we will not see a growth harm in that sense anyway during these years. I think what you’re seeing is that we’ve been having quite restrictive growth for some time now when we try to plc ourselves, and that’s the difference of it. But we will steer – we will try to steer the business in UK as being cost-efficient over long term. So it will definitely hurt our ROE until we get the IRB permission, but we will not change the way we behave in our business during that time.

Find Williams: Okay. Thanks very much.

Operator: Our next question comes from the line of Andreas Hakansson from Danske Bank. Please go ahead.

Andreas Hakansson: Yes.

Thanks and hi, everyone. First, in your presentation pack on Slide 23 on costs. Can you tell us that the SEK21.6 billion for 2020, that you kind of show that it should be a similar level in 2021, is that before Oktogonen allocation?

Lars Höglund: Yes. It is before Oktogonen allocation. We’re not saying it’s going to be the same in 2021.

We’re just saying that don’t expect a linear development. But…

Andreas Hakansson: No. Sure. If I then assume SEK850 million full allocation in 2021, I think this SEK21.6 billion plus SEK850 million, that’s the – how I should understand it?

Lars Höglund: Yes.

Andreas Hakansson: Then you continue to talk about SEK20 billion for 2023.

But if you’re now improving your cost base and the profitability of the bank, given that you already reached your Oktogonen targets, should we believe that you are going to have a full allocation by 2023? And why do you then guide without it?

Carl Cederschiöld: Because it’s a profit dividing scheme rather. So we – what we guide here in – is cost without Oktogonen. And that’s for you to be able to compare the two different lines. So it is without Oktogonen. And yes, of course, if we move down to SEK20 billion and improve our cost efficiency and have a better ROE than our peers, yes, then we’re in a good situation of accruing Oktogonen as well.

But that’s the reason why we haven’t included it.

Lars Höglund: And also, we don’t want to use Oktogonen as a lever to pull in order to reach a certain cost level. I think that’s another reason.

Andreas Hakansson: Yes. Fine.

And then related to cost as well. The SEK1 billion that you talked about in IT costs, am I right to understand that that’s IT costs spread out over your different countries, including the UK? And could you tell us? I mean we spoke about it in the old days, but I can’t quite remember. How does it really look with your different IT systems country by country? Because the SEK1 billion is not that much, so that must just be on the front end. Are you doing anything on the back end to try to get those systems to be united?

Carl Cederschiöld: Yes. And that’s a really good question of you.

So – and you’re correct. Obviously, first of all, we have SEK1 million of extra IT spend during the two years. And we run roughly with SEK2.5billion of IT spend yearly apart from this SEK1 billion. And yes, we are – right now, we are pursuing the core bank changed in Finland. And obviously, these things will happen over time.

And so we will have these kind of issues and development going forward. But that’s not for the SEK1 billion to be used for. And as you say, yes, the majority of the SEK1 billion is fairly interface-heavy or being very front office like and development, the meeting places, and the apps and the digital perspective. But it’s also part of the components of the way we work and integrate with each other and how we build efficiency in the way we work. So it will definitely hit more countries than Sweden.

The majority of it will be fairly Swedish, but it will not be on the core bank system level.

Andreas Hakansson: Thank you.

Operator: Our next question comes from the line of Nick Davey from Exane BNP Paribas. Please go ahead.

Nick Davey: Good morning, everyone.

Two questions, please. The first one, coming back to this question about corporate borrowing. If I can just look at a couple of pictures on Slide 32. If I wanted to be optimistic, I suppose we could say that some of the kind of panic borrowing in the beginning of the pandemic has been unwound. So it maybe is not a bad starting point for growth.

If I want to be pessimistic, I suppose I would say that there’s been a 20% growth in deposits, and perhaps companies will use that cash to unwind debt somewhere after the – as we approach normality. So I wondered whether you had a view or a feel from what you’re seeing in the branches in terms of the tilting you one way or the other on that question. And then the second question, sorry, just going back to dividends. I know you’re limited in what you want to say here. But one of your peers kept the unpaid part of the 2019 dividend still deducted from capital, and you’ve decided to add it back.

So my question would be for the investors that are listening into this call that might still feel hard done by for not receiving that path to 2019 dividend, do you still think of that bit as unpaid, unfinished business? And – or in your own mind, is it now all back in the capital stack? And from here on out, it’s just a sort of mathematical question of your buffer to requirements? Thank you.

Carl Cederschiöld: Well, let’s start with the corporate loan demand then. Yes. Obviously, I think this is a fair reflection of yours. I think that the way we see the corporate side is that they are fairly well.

They are in a good situation as well. And obviously, we’ve seen a bit more muted loan demand there. We’ve obviously – we do think that there are there are definitely a case of them paying back guarantees and everything. But we do see a bit muted loan demand there going forward as well. So we will have to wait and see what that turns out to obviously, we do, in the ambition of change in the branch network, we have the ambition of strengthening our offering to the corporate side.

So we do believe that we can – we’re in a good situation to take the demand, which is out there. But so far, yes, muted. And it is high uncertainty around that development going forward. When it comes to the dividend, obviously, yes, our guidance is that we will, in normal times, work with plus one to three over the Swedish FSA demand. So – and I think that’s the best guidance we can give you on how we will treat dividends going forward.

But obviously, it’s a Board decision.

Nick Davey: Okay. Thank you.

Operator: Our next question comes from the line of Rickard Strand from Nordea. Please go ahead.

Rickard Strand: Hi, two questions on your UK operations. So starting off with the reorganizations that is currently in the making there. If you could say anything about the – what do you expect in terms of the impact on the number of FTEs and the costs – total cost effects there. And anything about the timing of that, if we start there.

Carl Cederschiöld: Thank you, Rickard.

Well, what we – I mean, obviously, reorganization of UK is included in the goal of taking us to SEK20 billion. What we can say is, obviously, that they will go down from five regional banks to one regional bank and they will overview the number of branches and on what places they want to – they might close down or so. We won’t give any guidance on the FTEs and cost side of that one solely. But it is included in the SEK20 billion obviously.

Rickard Strand: Okay.

then secondly on – did I understand it correctly? When I look at the loan growth, it continues to be negative in the UK also in local currency, in both for household and corporates? Is that – should we expect that to continue until the models are updated and approved? Or how should we see that in the coming years?

Carl Cederschiöld: No. That’s not what we want to tell you. We rather want to say that, actually, that when you look at UK and in local currency, they’ve actually had the loan growth during 2019 as well. Then we obviously had quite a big currency effect around that one. We – our message to you is that IRB models will not affect the loan growth.

We will steer the bank in the optimal way long-term there. And the EBIT muted loan growth has rather been around us plcing ourselves and the administrative parts of that one. And in that sense, we are closer to the end of that one. And so we see fairly constructive actually on loan growth in UK going forward.

Rickard Strand: Okay.

Thanks.

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

Johan Ekblom: Thank you. I think most things have been covered, but maybe just to come back to the issue around AT1.

So if I look at your current AT1 position about 1.6% of risk weighted asset. So, you mentioned that you will get some benefit from the AT1 that you called in March. Should we expect you to replace that? Or should we expect you to run with a very low level of AT1s, and I guess fill up the difference with CET1?

Lars Höglund: Hi, Johan, it’s Lars here. Well, we did, you can say, pre-fund, the one we call now last of September with the new one. And then how we sort of structure the capital base from here, I guess we’ll have to come back to.

But I mean, basically, you can – now you can assume a pretty much similar kind of capital structure as we have had up until now. So we obviously cannot speak in advance whether we plan to each any new of these instruments going forward. So you can assume pretty similar capital structure. But clearly, right now, we have the negative impact from carrying additional AT1, so to speak.

Johan Ekblom: But it’s also fair that it will be an – the AT1 that you will have after March is not an optimized capital structure? You had too little AT1, right?

Lars Höglund: I mean, again, we won’t give any sort of firm issuance plans, but you can assume a fairly steady mix from here.

Johan Ekblom: Okay. Thank you.

Operator: Our next question comes from the line of Namita Samtani from Barclays. Please go ahead.

Namita Samtani: Good morning.

I’ve got two questions, please. The first question, the offset for moving the UK to the standardized model in terms of a lower requirement from the Swedish FSA, has that been included in the 13.8% minimum requirement? Or are we still waiting for that? And secondly, just going back to the market share of net inflows in mutual funds, and appreciate 2020 has been an unusual year-to-year. But even in previous years, the market share versus the other incumbent banks has been significantly higher. So what do you believe your competitive advantage is? Is it just the types of funds you offer? Thanks.

Carl Cederschiöld: Thank you, Namita.

Well, first of all, on the UK part, we don’t know about that one, if there are going to be any future positive movements in that one. So that’s too early to tell, and we won’t guide on that one. When it comes to the fund flows, I think it’s fair to say, obviously, being a bank like ours, obviously, it’s a huge positive thing with the distribution. That’s the first and foremost explanation around the success having had. And then, obviously, yes, it’s about performance in the funds, and we have been in a good situation there as well.

And then I should say that – let me give you a 30 second on the SDG Solution Fund. What we did what a few years ago, we have developed a model where we can highlight each – the turnover from each and every company if they attached to some of the 17 goals of the Sustainable Development Goals. So, our asset managers do actually have a map for them both to track, obviously, the financial development of all companies, but also if they are structurally well placed to perform well when the world moves more sustainable. So – and that’s just one example of the way we work. And obviously, having these ones in all the funds, that’s had quite a big impact when it comes to the institutional funds, because they – obviously, or institutional demand, because they obviously put quite heavy emphasis on being far ahead in the sustainable thinking.

Thank you.

Namita Samtani: Thanks very much.

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

Riccardo Rovere: Good morning to one and all.

Thanks for taking my questions. The first one is on credit losses to in 2000 – let’s say, 2021, now do you think that the level that we have seen in 2020 is somehow really supported by the various measures put in place by the various governments in the various countries? And is it reasonable to expect that once those measures will be lifted, this might eventually have an impact on your credit losses eventually? Or do you think that what we have seen in 2020 is not particularly affected by any of the measures put in place in the various countries? This is my first question. The second one is on the costs side. Just for me to put a little bit of clarity. You – the SEK20 billion in 2023, the descent that you stated is not going to be linear, if I have understood it correctly.

You should – you expect to get closer to the SEK20 billion toward the end of 2022 and then get to SEK20 billion in 2023. Did I get it right? And this, obviously, without taking into account Oktogonen, which is a bit – can you also elaborate? How do you see Oktogonen in 2021?

Carl Cederschiöld: Thank you, Riccardo, for these questions. Well, first of all, the credit losses. Obviously, in 2020, they are exceptionally – they are low in Handelsbanken standards as well. So three basis points for the full year is obviously very low.

And so – and if that has something to do with the stimulus the government has given, well, obviously, that’s a general trend. But having said that, in our message, keeping that, a lot of the explanation behind our figures is based on the balance sheet construction, and we obviously like having collateral on the back of our lending. So our client base, we do believe, structurally are fairly little sensitive to the pandemic. Having said that, obviously, our credit losses do end up in the end where they come. Normally, they come from idiosyncratic reasons.

And that could happen this year that could happen next year or in the future. So it’s very, very hard to guide around the development of credit losses going forward. But what you can be sure of is that we won’t change our credit policy. So in the end, the past performance we believe are, to a large extent, based on that fact, and we will use that going forward as well. Then when it comes to cost, you were absolutely correct in your interpretation.

Riccardo Rovere: Alright. And Oktogonen?

Carl Cederschiöld: Sorry, I forgot that question. Sorry. Yes. Oktogonen, yes.

I mean if we are having a return on equity levels above our peers and we see cost development moving in the right direction, I think we’re in a good position to accrue Oktogonen. But that’s a Board decision and an overall decision for them to take. But that’s the way we view it.

Riccardo Rovere: And sorry for abuse 30 seconds of your time. In – let’s say, in the past year, Oktogonen was about SEK800 million, SEK900 million per year when you were accruing the whole of it, something like that, this – can we assume that this should be a kind of the mason that you might eventually provision if things go into the right direction?

Carl Cederschiöld: Yes.

I mean the maximum amount is SEK850 million. And if we are above two percentage points above our peers, then we can get the maximum amounts. So the maximum amount is SEK850 million. If we move the bank in the right direction and do it really successfully, yes, then we have a good situation of accruing that number yearly.

Riccardo Rovere: Okay.

Alright, thank you.

Operator: Our next question comes from the line of Jacob Kruse from Autonomous. Please go ahead, your line is open. Jacob, your phone is mute, can you please unmute it? Since I get no response I will go to next questionnaire, Martin Leitgeb from Goldman Sachs. Please go ahead, your line is open.

Martin Leitgeb: Good morning from my side. Just a follow-up on earlier comments you made with regards to the Swedish mortgage market that you would be interested in focusing on that market. What does that mean in terms for your flow share ambition? Should the flow share, I mean, essentially, you would like to have a similar flow share to back book share? Or do you see scope that you can potentially increase that further? And related to that, how should we think about revenue NII evolution into 2021? One of your peers commented that they expect that NII and revenues to remain broadly flat. Is there greater ambition on mortgages? And obviously, what you said on asset management, could that mean that you should potentially see an increasing revenue line here in 2021? And if I may, a second one briefly on dividend accrual for 2021, the 40% seems a little bit more cautious compared to some of your domestic peers. And I was just wondering what informs that? Is that anticipation of high uncertainty maybe with regards to regulatory changes? Or what’s driving the lower payout ratio? Thank you.

Carl Cederschiöld: Thank you Martin for these questions. Let me try to address them. Then – well, the – yes, you are correct. We have an ambition to move up higher in market share of mortgages. We do think that should be feasible with the client segment we’re targeting.

And in that sense, if we move back to the market – to the back book or even higher, then that should be really positive. And we are spending quite a lot of time and efforts to make that happen. When it comes to growth side, going forward we are looking fairly constructive of income growth. We do believe that, obviously, asset management, a lot could happen to the market, having said that. But still we do believe that structurally, we’re well placed in that situation for having income growth.

Then when it comes to mortgages, as you say, if the market performs constructive and we keep going taking market share as being the biggest bank, then I do believe that, that will add to top line over time. Then we do put a lot of emphasis, obviously, in strengthening our offering to the corporate side in the way we redevelop our branches and strengthening the capability there. And we are obviously the largest Swedish corporate bank today, and we do have the ambition there to strengthen our position even further. Then I do think that we should see, sooner or later when the vaccine takes – when the effect is flowing through, then I do think that we should see a catch-up situation, especially from the North Sweden in our – the other home markets because they’ve been obviously more hit than Sweden. So we are fairly constructive actually on the income growth.

Not saying – not being overdramatic, but still.

Martin Leitgeb: On the dividend accrual…

Carl Cederschiöld: Sorry, sorry. Dividend accrual as well. Yes, you are correct. We obviously accrue 40%, and that’s a bit lower than some of our peers.

We do believe that is a good situation in order to support growth. But in the end, obviously, if growth doesn’t happen, then we run more or less the same machine as they do. And obviously, we do believe that we will be one of the most efficient banks in Sweden. So it’s a good situation to support clients’ demand. If demand doesn’t happen and our CET1 ratio moves even further up above the target range, then we will be in a good situation to take decisions around that one when it happens.

But yes, we will accrue 40%.

Martin Leitgeb: Very clear. Thank you very much.

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

Magnus Andersson: Yes. Just two follow-ups on costs. On Slide 23, when I look at your cost trajectory, I assume it means that you expect to divest x on the card acquiring business sometimes during 2022, if that’s a reasonable assumption. Secondly, just on your headcount trajectory into 2021. We saw that your average headcount is down year-on-year in Q4, although it’s primarily due to your noncore markets.

So just wondering given your pension offering, et cetera, in Sweden, how many that has accepted? And when that is – when we are going to see that in the numbers, et cetera? So headcount trajectory into 2021.

Carl Cederschiöld: Thank you, Magnus. Well first of all we can’t comment on the timing of extra in the payment business, but we are obviously working with that situation. Then when it comes to the FTE development, yes, we have had a pension scheme out, and it’s above 400 people who has accepted that one. They will obviously gradually move out.

And then obviously, we will go into the restructuring – or we are in the process of the restructuring of the Swedish branch network as well. So most likely, FTEs will move down, but we won’t guide on the progress of it quarterly by quarterly. So that is very important steps in taking us down to SEK20 billion, and we are moving on track.

Lars Höglund: And I can also add, Magnus, that also from the 2019 initiative, there are still headcount reductions to be expected because, as we said, we’ve been somewhat delayed in some of the – primarily Asian markets. So that will – we’re not done there yet.

Magnus Andersson: Yes. So most likely, there should be a gradual headcount reduction over the coming quarters throughout 2021?

Carl Cederschiöld: It will be a gradual drop in headcount out until late 2022.

Magnus Andersson: Okay. Thank you.

Operator: Our next question comes from the line of Sofie Peterzens from JPMorgan.

Please go ahead.

Sofie Peterzens: Hi. Here is Sofie from JPMorgan. I had a question about your credit losses. If I look in your interim report on Note 6 on credit losses, you again have very high actual credit losses for the period, almost SEK550 million.

Last quarter, it was SEK950 million. Also, if I look at the provisions you have against Stage 3 loans in Swedish kroner terms, they’ve declined around 35% over the past six months. How should I think about these actual credit losses that you’re booking? What are they? Against what kind of exposure are these? And should we expect in coming quarters, these actual credit losses also did start to trend down? So that would be my first question. My second question would be on the newspaper article around 100th bank introducing a risk side committee for the UK operations. What’s the rationale for having kind of the board directly overlooking what’s happening in the UK? Is it that you’re concerned about asset quality? If you could just give a little bit more details around the decision to have the Board directly looking at your UK operations? And then my last question is on M&A.

You have plenty of excess capital. There is going to be some question marks about future payouts. How do you think about M&A, especially in the UK, where you also have some quite big banking operations potentially for sale? Is this something you could potentially consider? Thank you.

Carl Cederschiöld: Thank you, Sofie for these questions. Well, let me start, and then I think Lars can dive in as well.

The gross numbers you see in the – around the credit losses are heavily dependent on one of the idiosyncratic credit losses we made one of the earlier years here. So they’re still affected around that one. And you shouldn’t view that as a forward-looking guidance at all on what it will look going forward. So if that’s correct? If that’s clear.

Lars Höglund: That is exactly correct.

That’s right. Yes. That’s right.

Carl Cederschiöld: And then when it comes to the UK committee, obviously running a plc and a subsidiary right now in a non-EU environment, with all different regulators, differences which comes with it, it’s a bit of a different business than we’ve done before. We think that’s a really good reason to build a committee and try to take that question really, really seriously.

So that’s the underlying decision around constructing the UK committee. Then when it comes to M&A and excess of capital, you shouldn’t expect us to change our behavior. It’s a good situation to be in having a lot of capital. It’s to be used for growth. It’s to be used for shareholders in the end.

And if we see some reasons for M&A activity, well we would have seen it in a normal situation as well. So we won’t change our depend – our behavior.

Lars Höglund: And Sofie, maybe I can just come back on your first question on Stage 3. I mean when we look at the overall development this year of sort of new exposures popping up in Stage 3 that has been extremely small, just to make that very clear. Thanks.

Sofie Peterzens: Okay. Thank you. Okay. I mean – but how should I think about the kind of provisions you now have for Stage 3? I mean if I use the Stage 3 for actual credit losses, you have had SEK1.5 billion in the past two quarters and until the provision you have for Stage 3 just above SEK2 billion, so I mean if you have another three quarters, like the past two quarters, you didn’t have any Stage 3 provisions left. I recognize that these are ad hoc.

But I mean, for example, in the UK, the outlook is pretty green. You have looked – you have the third lockdown. It’s going to be until kind of March, April, at least, if not the summer. Lot of companies are closing. Real estate prices are coming down.

It just seems odd to have only 3 basis points in the UK of credit losses. And also, we need to get the kind of provision you have for Stage 3, they look very low?

Carl Cederschiöld: Lars, you can add to this one later. But I think it’s a case of – I think many of – many tries to understand Handelsbanken in a general way of – and obviously, Stage 3 is a specific reservation around problem loans, which we see. And it is definitely our best guess that these are accurate at the situation. So we don’t see any reason why they should structurally trend upwards.

And obviously, yes, we are affected by COVID, and UK is in a much more lockdown situation. But we believe that this is the best guidance we can give on the book as of now.

Lars Höglund: Yes. No. I’ve got nothing to add to that really.

Sofie Peterzens: Okay. Thank you.

Operator: Our final question comes from the line of Chris Hartley from Redburn. Please go ahead.

Chris Hartley: Hi everyone.

Thanks for squeezing me again here. Just a quick follow-up on the Oktogonen point. So you mentioned you accrued this quarter, was actually a quarter of your maximum amount, wasn’t it? So do we read that as a maximum allocation for Q4 2020? Or is that a 25% allocation for the whole of 2020? The implication of that being if we’re at a stage now where we’re meeting our ROE targets and costs are going in the right direction, could we start to expect to see maximum allocations in each of the quarters going forwards? Or is the journey to a maximum allocation a little bit longer than that? Thanks.

Carl Cederschiöld: And a really good question of you, Chris, because this needs to be a bit more transparent, I think. The way we view it is that, obviously, we had a journey where we haven’t been satisfied with the cost development.

We’ve hit that position right now. We do believe we’re in a good situation on cost. Obviously, if this continues, we will go back in measuring our ROE comparisons to our peers. So in that sense, you can view our provisioning right now as 100% of the maximum of Q4. And in that sense, if we still keep on moving cost in the right direction and we are having superior ROE, then we have a possibility of accruing 100% on a yearly term.

Lars Höglund: If I just may take a final minute here because I got an e-mail from one of you who was a bit unclear on the cost target and when the SEK20 billion cost level will be achieved. And so I mean what we have said all the time is that, by the end of 2022, we will have moved down to an annualized cost base of SEK20 billion, meaning that we enter into 2023 with a SEK20 billion cost base. That is not the same as saying that we will have for 2022 a total cost of SEK20 billion because it is a gradual decline of cost base. So effectively, don’t expect SEK20 billion as the full year number 2022 cost. I hope we’ve been clear on that all the time.

But maybe just to reemphasize that.

Carl Cederschiöld: Carina, do you want to say something.

Carina Åkerström: No.

Carl Cederschiöld: Well, then I think it’s – we just want to thank you all for sharing the time with us and taking the time to ask all these questions. And please get back to us with extra time and questions if you feel a need for it.

So thanks for your time and effort.