Svenska Handelsbanken AB (publ) (OTCPK:SVNLF) Q4 2022 Earnings Conference Call February 8, 2023 3:00 AM ET
Company Participants
Peter Grabe – Head, Investor Relations
Carina Åkerström – President and Chief Executive Officer
Carl Cederschiöld – Chief Financial Officer
Conference Call Participants
Magnus Andersson – ABG SC
Nicolas McBeath – DNB
Maths Liljedahl – SEB
Andreas Hakansson – Danske Bank
Maria Semikhatova – Citi
Sofie Peterzens – JPMorgan
Riccardo Rovere – Mediobanca
Namita Samtani – Barclays
Omar Keenan – Credit Suisse
Jacob Kruse – Autonomous
Nick Davey – Exane BNP Paribas
Rickard Strand – Nordea
Piers Brown – HSBC
Andreas Hakansson – Danske Bank
Operator
Good morning and welcome everyone to the Handelsbanken Banking Presentation of the Year End Report 2022. We are going to begin by listening to Carina Åkerström, President and CEO. This is a live broadcast presentation and you will find the link on handelsbanken.com under Investor Relations in English, you can find the presentation simultaneously translated if you choose English in the menu. After the presentation, we are going to have a brief break and then we will have an open Q&A session in English. So, following the press conference and welcome Carina Åkerström. You have the floor.
Carina Åkerström
Thank you very much, Louise and once again, good morning, everyone and a warm welcome to this presentation of the Handelsbanken results for the Q4 quarter and for the full year 2022.
Beginning with an overall summary for 2022, I’d say briefly that the bank is performing well. The interest rate situation has an impact, but in particular, the bank is performing well because we have a high level of activity. Our existing customers and new customers are basically doing more business with us. And this is partly also explained by the fact that we have excellent volume development throughout the year. Income up for the full year and for the quarter, new record levels, we reached the highest levels we have seen so far.
Net fees and commission keeping up quite well. We have seen a real drop in the stock exchange as you know. But in spite of this, we continue to gradually gain important market shares in the ever important savings market. We are investing more. I’m going to get back to this in the digital meeting with our customers, improved availability. But in spite of cost being up and expenses being up, we see that the CI ratio continues to improve. Our credit losses remain at a low level. And I’d like to also say that, all-in-all our results reflect a bank with stable finances and satisfied customers.
Let’s have a look at the figures for the full year 2022. We see a CI ratio, which continues to improve. It amounted to 42% which is the lowest level that we’ve seen for decades, in fact, we have a 12.5% return on equity. Income grew by 13%, and the large driver is, of course, a strong net interest income. However, that in turn is driven by a high level of activity. And we also have excellent lending, a well-balanced lending. Our customers are doing more business with us. Net fee and commission income is down somewhat, but it’s holding its ground and we remain at high levels in spite of the stock exchange situation. The underlying expenses are up by 3%. This increase can be explained in its entirety for the past 2 years of the digital development and business development efforts. Other expenses, if you exclude our development expenses are up only marginally, and you need to bear in mind, at the same time, that we are in a period of rapidly increasing inflation rates. And credit losses, as I mentioned, remain at a very low level. So to sum up the full year, operating profit wise, we’re up by 17% when we also adjust for the implementation of the €1.3 billion of risk tax, which is now part of our results.
Let’s have a look at the performance for Q4, then the positive results development was kept up throughout the fourth quarter as well. CI ratio amounts to 41.8% and ROE, return on equity, amounted to 13.2%. Income is up by 9%. It’s the net interest income, which continues to contribute to that fact and it is, of course, driven by positive impact of the rising market interest rates. The net fee and commission income is quite unchanged. Expenses are up. I’m going to get back to that point. But in addition to the traditional customer seasonal effects that we see in this quarter, we have some nonrecurring items as well that contributes to expanding it. But all in all, expenses are increasing according to plan as we intended it with a full focus on digital development, as I mentioned. The credit losses remain at a low level for the quarter. And if we sum up the performance for Q4, we have an underlying operating profit, which is up by 5%.
If we gaze back to and have a look at the past 3 years that we’ve outlined very clearly what we set out to do. We have done precisely what we intended to do. And we see now that income is up, costs and expenses are under control, and we have a CI ratio, which is moving in the right direction. It is continually improving. As I mentioned, by way of introduction, our customers have maintained a high level of activity. We have had more business with existing customers and good business with new customers. And we can see that this is the case for all our home markets. All-in-all, lending is up by 7% in the bank in total, and if we look at the corporate side lending, which is the right side on this slide, it is up by over 11% for the year. In Sweden, the bank was the largest player during the year, covering as much as 26% of net lending to corporates in Sweden. And it is a well-diversified lending to companies, both property-related lending and non-property-related lending.
Looking at households, over the past few years, we’ve seen stable growth in our home markets. However, considering the market development from the summer onwards, this has slowed down. So we still have, I would say, a reasonably stable development. What we do see not just in Sweden, but in some of our other home markets as well, is that our customers are paying back in extra installments a lot more paying back on their mortgages more so than before they’re using existing savings, and this has something of a dampening effect on the volume increase on both deposits and mortgages.
Let’s have a look at the net interest income. For the full year, it’s up by 21% NII. And it’s also gratifying to see, and I keep getting back to this, that this is, of course, a balance between a volume growth to lending. And also given the current interest rate situation, we see an impact from that component as well. Let’s then have a look at our net fee and commission income. Once again, over the past 3 years, we’ve seen excellent development in the fees and commissions in the bank. As you know, we have a large share from our excellent savings related business and capital wealth management. It is impacted, of course, by the fact that the market is looking the way it is. Markets are dropping somewhat. It even has an impact on our income when it comes to the fund-related fees and commissions, but it is still standing its ground. And what we also see in fees and commissions to counteract this is that payment-related fees are up and we’ve seen that over the past 3 years.
And then our savings business, as I’ve already said, it’s holding its ground with the declining stock exchanges. We can see that in Sweden, looking at the mutual funds market, Handelsbanken as a matter of fact, is in 2022, the bank with the biggest net inflow that we see in the market with a full 53% that comes to the Handelsbanken mutual funds, which means that we are continuously moving our market share, and it goes from 12% to 12.2%. And if we then look at our expenses for the full year, they’re up at 7%, but adjusted for FX and some items affecting comparability. The underlying increase in expenses is 3%. Development costs increased our expenses were 2.6%.
And as I have already said, we are stepping up the pace in our digital developments. That is where we spend resources and business development for customers we work with improving the accessibility for our customers. Underlying expenses are up with less than 1%. And here, you also have to remember that this is a year where we have rapidly rising inflation. We keep expenses under control. We spend our resources where we see that we can future-proof the bank. So it’s according to plan.
And if we then look at what we are actually doing, and if I’m going to try to explain, we’re focusing on the digital developments and digital availability, accessibility for our customers. When I started as the CEO, President a few years ago, we thoroughly analyzed the entire bank. And 1 of the things that we could identify at that time was that we needed to step up the pace in our digital investments. And then it mainly had to do with the digital customer meeting where we needed to be in parallel with our customers in all our home markets. And I’m sure you remember that for 2 years, we had an additional €1 billion to do this, to step up the pace of that development so that we can enhance and improve that customer meeting.
And what you see to the left shows you what we’ve been doing with the availability processes, meeting the customers in the digital environment. And it’s also about making efficiencies, managing data with the business development that we’re doing today, where we see and hear from customers that we have been successful in these digital customer meetings. The bars to the right, that is the trend. From 2020, we have successfully stepped up the pace up until 2022. We’re now at a good speed and the things are leveling out. We do have the resources that we needed to develop what we wanted to develop, focusing on business development, and this is to future-proof the bank and it is at a good level. We have increased the pace, but we’re now well placed and we will continue to develop the bank.
Then looking at asset quality, looking at our portfolio, in 2022 – while, 2022 was characterized by low credit losses and of course, this reflects the excellent credit quality, and also the fact that we have good customers with a high level of resilience, with good margins and customers that keep their finances in good orders. So we see nothing dramatic in our credit portfolio. Since 2019, we have made provisions and we’re building general reserves. To the right, you see what I said. We have good asset quality and in the EBA transparency exercise and that is what you see to the right, where you have the smaller bars, what is Handelsbanken? And you see that it’s a very, very low, very low when it comes to NPL also compared to our Nordic colleagues, our Nordic peers, which tells us that the asset quality of our portfolio is very good.
Then looking at our home markets, Sweden is the engine locomotive, no doubt. And we have operating profit, if we exclude the risk attacks that we have in our home markets, we are up 16% in operating profit. CI ratio continues to improve over these quarters, and we see that we have a CI ratio now that is very low to very close to 30%. We see high activities in our branches, our digital channels, which means that we have a nice growth rate in lending. And of course, that also impacts the net interest income. Then looking at the biggest change in trend in 2022, it’s the United Kingdom, where we clearly see what has happened. We have operating profit up, it’s actually doubled compared to 2021. CI ratio is down.
And this doubling in operating profit, well, we see income up and of course, that is driven to a great extent by the interest market where we have a very nice lending business in the UK that we’ve had for quite some years now. Expenses are down and what is interesting is that net fee and commission income is up, but the CI ratio as you can see, going down to 56%. And I’ve mentioned about Sweden already, we see that in the UK as well. Looking at the situation with amortizations, we see that many customers amortize more than they have been doing before. Briefly, Norway and the Netherlands, we see nice developments here as well, and Norway is an example where we see that we spend additional resources on developing the digital meetings.
Capital, stable finances, a very good capital situation. And this is something that has given us and continues to give us room for new business with existing customers and new customers, regardless of where we are in the business cycle. The Board proposes an ordinary dividend of €5.50 per share and an additional extra dividend of €2.50 per share, and that is the proposal for the AGM and CET1, including the dividend is 19.6%. And then we have also taken into account, well, let me put it this way. We have regulatory requirements that have been taken into account when it comes to the countercyclical buffer requirements, which means that – we have 1.2 percentage points that we will be above that interval, which means that we have a stable situation and every opportunity for good continued growth.
If I am to summarize the year and the last quarter, well, I can tell you what everyone is feeling that we have had a year with a lot of uncertainties and macro level, geopolitical uncertainties, and it hasn’t been what we expected worse, I would say, than the beginning of the year. But in spite of that, the bank is doing its best result ever. We have stable finances that gives us room to meet support our customers. We continue to invest to future-proof our bank, not least when it comes to the digital, and we want to be there with our customers. And for 2022, well, I think that we can say that we see a bank with stable finances, good growth and satisfied customers.
And I think I will stop there, say thank you for everyone who has been listening and there will be a 5-minute break before we continue with the Q&A session. Exactly a brief pause and then in a couple of minutes, we’ll have Peter Grabe, the Charge of Investor Relations, who will start the Q&A session, and that will be through the telephone conference services and at handelsbanken.com, you have information about how to join that conference under Investor Relations. Thank you.
Peter Grabe
Hello, everyone and welcome back. [Operator Instructions] And with those words, operator, please, can we start the Q&A session.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And the first question comes from the line of Magnus Andersson from ABG SC. Your line is open. Please ask your question.
Magnus Andersson
Okay. Thank you. Can you hear me?
Peter Grabe
We hear you.
Carina Åkerström
We hear you.
Magnus Andersson
Yes, good. Okay. Just on costs then, first of all, a clarification or my question is on cost. Just a clarification, you talked about the – that the development costs we saw – or the cost savings towards the end of the year should be a good proxy for what we should expect for 2023. Just to be clear, is the annualized Q4 development spend then a good proxy for what we should expect for ‘23? And also, what happens beyond 2023 here? Do you see this as a temporary elevated level or will the ‘24 level be subject to whatever income growth or cost-to-income ratio, et cetera, you have? And finally, on cost, just I noted that the capitalization level is increasing again quite significantly. How you think that will look during ‘23? You’ve commented on this earlier, depending on what you have been investing in?
Carl Cederschiöld
Yes. Thanks, Magnus, for the question. Well, first of all, obviously, yes, you are correct in that one. The trend we’re or the pace we are entering or we are exiting Q4 is the pace where we are foreseeing to have during 2023. And then when it comes to the levels after 2023, as you say, we’ve been highlighting that we want to run the bank below 45% in cost-to-income level, and that’s – we don’t have any more to say on that topic. We appreciate that we are in a situation where we have ample of room for growth in all of our home markets and that’s the reason why we are investing quite a lot right now. The capitalization level, as you say, it has been very low, below 20 for quite some time now. We – the investments, especially we do in UK, in Norway, do have a bit more long-term perspective around it. And therefore, you should expect capitalization level, all else equal, to increase a bit going into 2023. But as we have been saying, that’s – the actual level in the end is from an accounting perspective. So, very little subjectivity in it, but it is more of core system development as well in UK and Norway.
Magnus Andersson
Okay. Thank you.
Operator
Thank you. Now we are going to take our next question. And the next question comes from the line of Nicolas McBeath from DNB. Your line is open. Please ask your question.
Nicolas McBeath
Thank you. So, a question on capital, So as you mentioned, Carina, you’re well now above your target interval also if we add the announced countercyclical buffers in 2023. So I was just wondering what you are still waiting for before calibrating down your capital ratio to within your target range? So should we see that you want to keep an additional buffer on top of the buffer you’re targeting or help us understand here why you’re not being more keen to trim down your capitalization to the range you’re guiding for?
Carl Cederschiöld
I think it’s fair to say that, obviously, when we enter 2022, we didn’t foresee the year as it has passed by. And I think that holds for the future as well. We live in extremely uncertain times now where a lot of things can happen. We could actually grow quite a lot more than we used to do in the past. And we could also see, obviously, the economies running into trouble. So from that perspective, we think it’s very prudent right now to stay at elevated levels. But in the long-term, we haven’t changed anything to our target range, no.
Nicolas McBeath
Okay. So if I may just follow-up on that. So I mean I understand there is macro uncertainty and all that, but I guess that’s why you have the buffer to start with. But I mean, with regards to growth, do you think that the growth outlook for 2023 is kind of above normalized in terms of growth opportunities or how should we think about that?
Carl Cederschiöld
We think there is a lot of volatility around the growth assumptions going into 2023. I think you can find arguments for seeing slow growth, but you could also find arguments actually for quite a lot of growth. And I think some future questions now from the audience will most likely address the growth question. So let’s leave that for that question.
Nicolas McBeath
Okay, thank you.
Operator
Thank you. And now we are going to take our next question. And the question comes from the line of Maths Liljedahl from SEB. Your line is open. Please ask your question.
Maths Liljedahl
Yes. Hello, Maths Liljedahl here. I guess it was me, I dropped out of the call. If we ask on NII sensitivity, then going forward, we have a rate hike tomorrow? Do you think that will be more or less pushed on to clients in terms of deposit yield? And also, the UK deposit is growing very, very strong. How do you think in the UK operations? Are you still managing to charge or to keep interest rates at a low level in the coming rate hikes? Thanks.
Carl Cederschiöld
Thank you. And Peter, please fill me in here. I think, first of all, obviously, we’ve actually, during 2022, we’ve actually increased the rates on the savings accounts as much as we’ve increased the mortgage rates, and we might differ there a bit to the other banks, but we think that’s been really good to our clients to do that. Nevertheless, obviously, we’ve seen quite a lot of increase in the NII margins or the NIM. So going in now into this year, yes, we are most likely will see quite a lot of increase with the rate hikes, we will most likely follow it. But as you know, the competitive landscape has been moving around quite a lot in mortgage margins and also deposit margins. So we won’t guide on any NII sensitivity, but nevertheless, increasing rates most likely is beneficial to us. And then as well, when it comes to the – we can guide you on that we – 30% of the volumes in deposits are on transaction accounts, and they will obviously stay – 40%, sorry, 40% are in transaction accounts and they – we don’t pay any interest on these accounts. Then on the NII or the NIM in Norway, I think it’s worth to highlight that we obviously have the notice periods there. And they accumulate to the size of SEK300 million at least, and that should be a tailwind going into 2023. And then in the end, as you say, in UK, we are in a very fortunate situation in UK that we – the bank’s rating is higher than even the country as UK, their rating. So we actually attract a lot of deposit flows from solicitors and municipalities, etcetera. So yes, we’ve been in a situation where our client base is not very rate-sensitive in the UK. So we will foresee to have a higher margin increase in UK when rates are being hacked.
Maths Liljedahl
Okay, thank you. Very helpful. Thanks.
Operator
Thank you. Now we are going to take our next question. And the next question comes from the line of Andreas Hakansson from Danske Bank. Your line is open. Please ask you question.
Andreas Hakansson
Thank you. Good morning, everyone. Follow-up question on NII, on the mortgage side, it seems like you’ve been lagging the market in terms of how you’ve been pricing up mortgages. At the same time as your funding structure, you keep a very big portion carbon funding, so it’s relatively expensive. Could you tell us what’s happening with your mortgage margins at the moment? And if you don’t hike your list prices, how does that really impact your back book, the discount sits or compares to your list prices, right? So what’s driving the back book margins at the moment? Thanks.
Carl Cederschiöld
No, you are correct in the sense that we have been extremely – we’ve decided quite a lot when we priced the mortgages that we obviously like that market, and we want to give our clients a really good offer. So we have been competitive in the mortgage pricing definitely in the last quarter of the year. And we will keep on playing this. You know that we’ve been highlighting on all the time that the NIM consists of many buckets now and the mortgage part is one part of the NII. And obviously, the total NIM of the bank increases quite a lot, but we see actually the mortgage margins are dropping. When it comes to the pricing, yes, you are correct in the sense that when we change the list prices, we need to go through the client base because, obviously, their rate is dependent on the list price and the discount. So we have obviously both automatic support to do that, but we obviously contact our clients as well. So it’s not going automatically in changing the back book margins, but there is definitely a correlation, so we need to work with that one.
Andreas Hakansson
Yes. Just following up on that, you said that you’ve been wanting to play in that market, but it seems like you’re losing market share. And since there is very little growth in the system overall, is it really worth lowering prices to capture that little volume growth of new lending or is the problem that you see on a gross basis that you’re losing clients?
Carl Cederschiöld
I think it’s rather fair to say that we’ve been highlighting that we have two core offerings in the bank; first, the financing part and then the savings part. In Sweden right now, we are the – we have the top position in accumulating corporate lending growth, deposit growth and also savings growth. Yes, we trail a bit on the mortgage perspective. But of all of these ones, we really want to give our clients a long-term confidence, gain the client satisfaction. So we will play this in a long-term fashion. So we won’t short term, try to optimize the NII in that perspective. And we think that’s been really helpful behind the results of this year as well.
Andreas Hakansson
Okay, thank you.
Operator
Thank you. Now we are going to take our next question. And the next question comes from the line of Maria Semikhatova from Citi. Your line is open. Please ask your question. Maria, your line is open.
Maria Semikhatova
Hi. Yes. Hello. Thank you. I’d like to follow-up on your NII comments. You mentioned that 40% of deposits on transaction accounts, just wanted to clarify if that households only and if it relates to Sweden or the group? And if you could break down the remaining 60%, how much of that is actually on term deposits? You also mentioned that you raised rates on savings accounts as much as mortgage rates. So could you please maybe comment on deposit beta in different markets that you’ve seen by end of last year?
Carl Cederschiöld
When we talk about the deposits, there are transaction accounts, we refer to Sweden, and it’s roughly 40% of the both households as well as corporate deposits that are currently running with 0% interest rates. So those are the 40%. When it comes to deposit beta, we typically don’t give any guidance. And I think given where the expectations were ahead of the report, it seems like the market has been quite good at actually capturing the dynamics. And unfortunately, we don’t provide any specific details when it comes to the deposits in the other countries in terms of how much is on savings and transaction accounts. And in terms of the remaining 60%, those deposits are at different types of deposit accounts, but we don’t specify how much is on different specific deposit accounts – savings deposit accounts.
Maria Semikhatova
And just maybe – I understand you don’t try the breakdown, but generally, because I believe some of the peers mentioned that they are seeing the trend of customers in Sweden switching from transaction accounts into savings and term deposits. And I think based on your previous comments, your share of transaction accounts hasn’t really moved over the quarter. Just want to confirm if you’re seeing similar trends or other reasons in your case, customers are keeping their liquidity on the account with zero interest rates?
Carl Cederschiöld
Well, you can say that in terms of Sweden, as I said, that’s where we specify the split. The amount of deposits with 0% interest rate has moved from around 50% at the end of Q3 to 40% at the end of Q4, just to give you a hunch.
Maria Semikhatova
Okay, thank you.
Operator
Thank you. Now we are going to take our next question. And the question comes from the line of Sofie Peterzens from JPMorgan. Your line is open. Please ask your question.
Sofie Peterzens
Yes. Hi, here is Sofie from JPMorgan. Thanks for taking my questions. So I was just wondering on Slide 31 on your CRE exposure. If I look at kind of mortgage statistics, it seems that this fell on average 7% quarter-on-quarter. But if I look at your property management LTVs on the slide, there was no change in any of the loan-to-value. So I’m just wondering, for example, if you see a 20% fall in in-house prices and we already had a 7% fall in the fourth quarter, how come the LTV is exactly the same end of the third quarter? And kind of related to the asset quality and that your Stage 2 loans increased by 23% quarter-on-quarter despite kind of selling Denmark. So I was just wondering if you could kind of give some details around why kind of loan losses remain so low and why the property management slide is unchanged versus the third quarter? Thank you.
Carl Cederschiöld
When it comes to the property management side, yes, you’re correct. It’s not updated with Q4 numbers and – we will obviously wait for the year-end reports of our exposures to do a reassessment again. So in Q1, it’s probably fair to assume that this slide will be updated. When it comes to Stage 2 loans, yes, the volumes are increasing in the quarter, but it’s due to revised PD assumptions in the very, very low risk classes, meaning that the volumes technically move to Stage 2. But as you can see on the provision side, you can see that, that has not triggered any uptick in the provisions for the Stage 2 loans, i.e., suggesting that the quality of the loans that have migrated into Stage 2, obviously, is very strong.
Sofie Peterzens
Okay. Okay. But I mean once we update the real estate exposures and the loan values, that really be fair to assume as we potentially need to see a little bit more provisions for the property management exposures.
Carl Cederschiöld
Not necessarily. But obviously, there will be more information when we get the annual reports, but not necessarily there will be updates, no.
Sofie Peterzens
Okay. Okay, thank you.
Operator
Thank you. Now we are going to take our next question. And the question comes from the line of Riccardo Rovere from Mediobanca. Please ask your question. Your line is open.
Riccardo Rovere
Hello. Can you hear me?
Carl Cederschiöld
Yes, we hear you.
Riccardo Rovere
Okay, sorry. Okay. I just wanted to follow-up a little bit on Sofie question. I understand you will be updating at some point, the LTV slide on Page 32. But unless starting from kind of 40% of commercial real estate and, say, 50% for residential real estate, I mean, the residual collateral is basically double or more than double the receival debt exposures. So is it fair to say that you see a material impact on your asset quality even with the collapse in the real estate prices in general? Is it fair to say? I mean, the buffer here is technically extremely large. Is that a fair assessment? And then a second thing, if I may, to Carina, you extended as a buyback request. But at the end of the day, what we see is a cash dividend plus an extraordinary dividend. Is it fair to say that you, at least at the moment, prefer cash versus buybacks? Is it fair to say?
Carl Cederschiöld
Thanks, Riccardo for the questions. Well, first of all, obviously, yes, obviously, we do like the position in the LTVs we have. And we’ve obviously run a very conservative view on credit policy. But nevertheless, obviously, if house prices drop quite a lot, and we obviously estimate that impact from – if prices were to drop 20%, obviously, our LTVs would go up a bit – a touch more than 10%. So we’re not unimpacted. But yes, we like the situation we are in the asset quality and the collateral we have in place. The second question, we obviously – it’s a board decision around it. But as we’ve been highlighting before, we obviously have the possibilities to do share buyback programs. We will definitely reconsider it, but that will obviously be a case between the equity price and the way we choose between dividend and share buybacks.
Riccardo Rovere
Thanks. Thank you.
Operator
Thank you. Now we are going to take our question. And the question comes from the line of Namita Samtani from Barclays. Your line is open. Please ask your question
Namita Samtani
Hi. I just got a quick question on corporate deposits in Sweden. So I saw they went up quarter-on-quarter, not quite different to what we’ve seen at the other banks. So is there a reasoning for this? Thanks.
Carl Cederschiöld
Yes. In – I mean, our corporate deposits did go down on the quarter. But as you say, we – I think the reason when you compare us to other banks, it is the ratio of financial corporates vis-a-vis non-financial corporates. The non-financial corporates are more stable in their deposit behavior, but the financial ones do more massage their holdings, etcetera, over the quarterly ending. So – but I don’t think we had an increase.
Operator
Thank you. Now we are going to take our next question. And the next question comes from the line of Omar Keenan from Credit Suisse. Your line is open. Please ask your question.
Omar Keenan
Good morning, everybody. Thank you very much for taking the questions. So the first question I had was on mortgages and customer behavior. I was wondering if you could add some color around the accelerated amortization in mortgages. What can you see around the particular cohorts in your customers in terms of who has high levels of deposits versus high levels of mortgages where you can see that this pay-down behavior might continue for a little bit longer? So I was just wondering if you could just flush out to us a little bit how you’re thinking about the amortization trends? What were they sort of normally and where do you think they could pick up to? And my second question was just on capital and regulation. I just wanted to check in on your view – your latest view on whether there might be any impact from the IRB overhaul? What impact do you think there might be from Basel III.1 on the January 1, 2025? And then whether you think there is an impact from the output floor in 2030 and whether it’s binding? Thank you.
Carl Cederschiöld
Thank you for the question. Well, first of all, I think it’s early to say to draw conclusions from the amortization behavior. But what we can say is that we’ve seen 2 or 3x the level of amortization in the end of – in the last quarter. We, in many cases, that has actually been the really strong client base who’s been using their deposit and just paying off loans. And obviously, that’s quite rational and quite intuitive when mortgage rates are up now in the level as some of the share dividends you can see in the market. So, I think you can’t draw any more conclusions than that. But it is a strong client base who pays off right now. When it comes to the capital, we do have a few uncertainties, obviously, going forward. The IRB overhaul is obviously one, but we don’t have any more information to give you there. We don’t foresee any changes as of yet. When it comes to the future Basel IV implications, we think we will have a little impact when we move into it. So, that’s the best guidance we can give. And then as you know, we have the structural FX case as well, which we do think if anything should have a positive impact. So, I think we have some pros and cons, but not any large size in either of it.
Omar Keenan
Okay. Thank you. Could I just ask a quick clarifying question? So, I think in an earlier response to one of the questions, you said that you expect the overall capitalization to increase in 2023. Could you just confirm and elaborate the comments a little bit because it sounds like you are not expecting much in terms of regulatory headwinds, and there is already an excess capital position that could fund growth. So, why do you think the capitalization should increase further? Could you just help us a little bit more with that?
Carl Cederschiöld
This might be a misunderstanding actually, when I addressed the capitalization level when we come to the IT spending, the amount of the investment we put on the balance sheet, and they will most likely increase in 2023 based on the kind of development we do in Norway and UK. I didn’t mean that we were foreseeing that the capital demand from a regulatory perspective, we think is going up 2023.
Omar Keenan
Understood. And could you give a bit more color on the pay-outs then and capital ratio levels in 2023? How we should be thinking about that?
Carl Cederschiöld
I think it’s – let me say a few words then on the capital level and the profitability of the bank. You know us as a bank, and we like really to – we have a conservative view. We really do believe that being conservative, both in funding and capital and the way we treat our asset quality and the way we treat our client is the recipe for long-term success. And so – and now we live in really uncertain times and then we think it’s prudent and a good position to be in to have even higher buffers, but we haven’t changed our long-term target range. If you were to look at the absolute return on equity level, yes, there are some Swedish peers who are above us at the time being. But if you were to compare over long-term and even the last years, if you were to dig into risk-adjusted return on equity, you would see that the stability our bank is showing really puts us in a really good position when it comes to risk adjustment – risk adjusted return on equity. And therefore, I mean you as investors and analysts, you could just increase the size of the position in our bank, and then you could increase the absolute return on equity. So, I think that’s the way you should view us. We play the capital level over a longer term cycle and obviously, we haven’t seen the downturn yet. We really do believe the uncertainty – uncertain times right now favors being prudent. And we do foresee there could actually be really big position or big possibilities actually for growth as well. So, we think this is prudent to do at the time being, but we haven’t changed anything in our long-term target range.
Omar Keenan
Okay. Understood. So, you would expect to run with something a bit higher than the long-run management buffer in the near-term because of the growth opportunities or certainty. But over time, it should come back within that range.
Carl Cederschiöld
I don’t know if I – sorry. Please go on.
Operator
Just wanted to confirm, have you answered all the questions or not yet?
Carl Cederschiöld
I think we have answered all the questions, but please get back if there were any questions you didn’t get an answer on.
Operator
Thank you. Now, we will take our next question. And the question comes from the line of Jacob Kruse from Autonomous. Your line is open. Please ask your question.
Jacob Kruse
Hi. Thank you. Could I just ask on the expenses for the pension claim or the reimbursement that you took this quarter? And I think you said that, that was to rebuild the consolidation ratios of the pension foundation somewhat. Are you at the level you want to be or should – would you expect to continue to treat it this way given that on a sort of net of tax base, you seem quite neutral to you or should we see this as a one-time effect in the cost line very strictly 2022? Thank you.
Carl Cederschiöld
Thank you, Jacob. You should definitely see this as a one-off because we – as we have been highlighting for some time now, we – our pension system has gone from – if you look back 2 years, 3 years to 10 years, obviously, it has created a lot of volatility to the capital situation. We have managed to reallocate the pension system on a very, very good timing. So, we sit in a really good and solvent situation when it comes to the total pension system. Then we have some technical factors how to treat when we can get the contribution from the pension foundation. And these kind of technical issues made us treating it this way during the last quarter. But we don’t foresee that to happen going forward. So, rather our message is that our pension system is in a really good situation. We didn’t need to do this to increase the solvency of the system.
Jacob Kruse
Perfect. Thank you.
Operator
Thank you. Now, we are going to take our next question. And the question comes from the line of Nick Davey from Exane BNP Paribas. Your line is open. Please ask your question.
Nick Davey
Good morning everyone. A big picture question on costs, please. If we take a step back and look at this run rate of costs that you are guiding us towards into 2023, it’s obviously very substantially higher than the aspirations you originally had for the Handelsbanken cost base around the same time. Now, I appreciate inflation has been a bit of a surprise. But if we exclude that element, can you help us to better understand tangibly what has disappointed you or what has made you see the bankers in need of so much development spending versus your original plan? And as we go into sort of ‘23 and 2024, can you help us to better understand these big step-up in development spending? Do you view what you are doing as a sort of defensive spending to catch up Handelsbanken to maybe where peers are in terms of capabilities or is there some component of what you are doing that you view as really revenue positive into the future? I think we have just got into this mode of noticing costs are higher, but I am not sure within this development spending bucket, I am fully on top of what the money is being spent on and why? Thank you.
Carl Cederschiöld
Thank you, Nick and thanks for the question. I think this is a really important topic actually. I think Carina was saying in her press conference alluding to when she entered a CEO role and the analysis we were starting in the bank. And there, as you all know, we went through a phase where we thought we needed to adjust the stability of the bank. And the analysis of that one was rather that we should focus on the areas where we are really strong, we should narrow down the geographies we are present in, etcetera. We have come quite far in that journey, actually, and we have created a really profitable bank right now. So, we stand on geographies and in areas we really like, and we see ample of room for possibilities there. So, we – and in that sense, we have then gone from a stability phase into a profitable phase. And we really think we are in a good position to enter a really growth phase as well. So, what you see right now is obviously – and in that sense, we changed from obviously having an absolute cost target to rather steer the bank towards our cost-to-income target. In these cases now, we – what we do is we invest quite a lot. We have really good position. We have really good client satisfaction, and we are really profitable in the underlying business in all of our four home markets now. But we really do see possibilities for us to strengthen this position and grow even further. And in that sense, we are spending quite a lot on the digital capabilities, especially in definitely Sweden, UK and Norway. We actually really see the benefit of this to some extent. You can see that in client satisfaction, we actually increased the digital satisfaction quite a lot in a few of our home markets. So, we really view this as an offensive move. We think we run a bank with a really strong cost control in the underlying business with huge possibilities actually to grow. And so we keep coming back to the guidance that we want to run the bank below 45% in cost to income. But that should really be seen as a really efficient underlying bank, but also quite a bit higher spending rate than we have seen in the past.
Nick Davey
Okay. Thanks for the clarification. Briefly then, just to pick up on the UK and Norway spending. What kind of areas is it being spent on? And what’s the tangible outcome of the spending 2 years, 3 years from now? What will your capabilities be that they aren’t today?
Carl Cederschiöld
Yes. If we start with UK, UK, we are a small bank. We are very niche to the private banking segment. We have the highest client satisfaction with some magnitude. We already have the best combination of return on equity and cost-to-income levels vis-à-vis our peers in UK. And we foresee that difference to actually improve further. Our challenges in UK is the IT perspectives. So, we do invest actually in changing our core system there, but we also invest in the digital capabilities because we know that we have room to improve there. So, we actually – and as you know, we have been going through a few years of some tough challenges in UK, which we think will turn around quite nicely now. So, we look really, really promising in the possibilities for us to grow even further in UK in the segment we are in. In Norway, we have possibilities with a really good position vis-à-vis corporates and lending. And as we have been highlighting before, we like to balance that to more retail side and also to more savings side. So, in that sense, we are investing quite a lot in the digital capabilities of the bank to strengthen that perspective. So, that’s the key highlights of the investments in UK and Norway.
Nick Davey
Okay. Thank you.
Operator
Thank you. Now, we are going to take our next question. And the question comes from line of Rickard Strand from Nordea. Your line is open. Please ask your question.
Rickard Strand
Hi. Good morning. A follow-up question on costs. It looks like the FTE development is currently where you are growing at a 3% year-over-year growth rate and it’s also up quarter-on-quarter. Just want to hear your view here, looking ahead, how you expect this to develop? Is it fair to assume that you will continue to grow in 2023, and if so, in what areas? And then also a short follow-up question on the one-off there related to the payroll tax, I think I missed the quantification of how big that was in Q4? Thank you.
Carl Cederschiöld
Yes. Thanks Rickard well, first of all, I mean FTEs, yes, we don’t see a structural decline anymore in FTEs. We are rather increasing, obviously, the development spend and in that sense, that requires more resources. That could be FTEs or it could be external help with consultants. So, I don’t think we can guide you on the level of the FTEs because you will most likely have an increase in development, but we could also have a shift from consultants into employees of the banks. So, we can’t guide you on the absolute level there. I think your second question was alluding to the pension one-off. And as you say, it was – the cost increase is SEK152 million, but we actually do decrease the tax line with SEK160 million. So, from a net bottom line, it is actually positive with SEK8 million, but it do increase the cost. And in that sense, obviously, we have viewed that as a one-off to the cost line.
Rickard Strand
Thank you.
Operator
Thank you. Now, we are going to take our next question. And the question comes from line of Piers Brown from HSBC. Your line is open. Please ask your question.
Piers Brown
Hello. Can you hear me?
Carl Cederschiöld
We hear you loud and clear.
Piers Brown
Yes. Sorry, I missed the operator there. Yes, Piers Brown, HSBC. Just a quick question on your risk appetite in commercial real estate at this juncture, I mean most of the fourth quarter reporting we are seeing from the property management companies in Sweden looks surprisingly good in terms of still very high occupancy rates and increasing rental values, resilient property values, etcetera. So, in the context of that, how do you assess the – your appetite for taking on further credit to these companies because the problem we are still confronting is the refinancing wall that they faced in 2024. So, if you can just talk at that point, given that you are obviously already 30% of the portfolio is for the property management sector, would you be happy to increase that percentage even further from here?
Carl Cederschiöld
Thank you, Piers. Well, as we have been highlighting many times, obviously, we don’t view our exposures from a portfolio perspective. We do like good clients and many of the clients we have, which are good is obviously in the real estate sector. As you say, yes, you can see that the fourth quarter reports are decent. But I don’t think that’s the way you should view our bank that we will – you can see the way we will behave when it comes to credit appetite has a very strong correlations with the reports they are posting. We would like – we will definitely continue to do business with the clients we deem good. And we think there is definitely both a need and a possibility for us to grow when you see the shift from bond to bank in the financing perspectives. And we definitely see that already happening. So, it is – we are in the midst of it.
Piers Brown
Okay. That’s clear. Thank you very much.
Operator
Thank you. Now, we are going to take our next question. And the next question comes from the line of Andreas Hakansson from Danske Bank. Your line is open. Please ask your question. Excuse me, Andreas, your line is open.
Andreas Hakansson
Hi. Can you hear me now?
Carl Cederschiöld
Yes. We hear you.
Andreas Hakansson
Yes. Sorry for that. Just a follow-up, you – on the capital side, you opt for a new buyback mandate, which I guess you have done all years. But should we see that as an indicator that you actually want to do any buybacks? And if you would plan to do it, wouldn’t you have announced it now or is that just to have the flexibility on trading in your security stuff that – so how should we view that mandate?
Carl Cederschiöld
I think we can’t guide you anymore. It is obviously flexible. It is a mandate, as you say, we have been having it for many years. It creates flexibility for us. If we would have instigated a buyback program today, we would obviously have said it. So, you should see that there is flexibility for us going forward.
Andreas Hakansson
Okay. Thanks.
Operator
Thank you. And now, we are going to take our last question. And the question comes from the line of Jacob Kruse from Autonomous. Your line is open. Please ask your question.
Jacob Kruse
Hi. Thank you. I guess I just wanted to ask you if you could say anything about the underlying inflation you see outside of this development spending in terms of how – any indications from wage negotiations or contract negotiations with suppliers? Just how do you think about cost growth for 2023 versus 2022 outside of the development spending? Thank you.
Carl Cederschiöld
Thanks Jacob. I think it’s fairly hard actually to tell the various components. What we can say is that if you go back and look at our other cost line and you look at the seasonality, the average seasonality for the last 15 years, that has been at the pace of 24% roughly. And in that sense, you can actually explain quite a bit of the cost increase we see in Q4. So, it is quite difficult to divide this into what is normal seasonalities, what is inflationary tendencies. What we can say is obviously that the salary negotiations in Sweden, the – we obviously do local ones, but the official ones are being held now. And I think that most guidance point that to somewhere roughly 4% or so. That – from a European perspective, that’s obviously quite low, but most likely, the agreement will also be short one. It might be a 1-year agreement, and then we have the uncertainty going into the next year. So, we don’t foresee massive inflation, but nevertheless, obviously, some inflation will go through. And in that sense, you can actually find arguments for the cost increase being fairly muted anyway vis-à-vis both seasonality and in inflationary terms.
Jacob Kruse
Thank you.
Operator
Thank you. Dear speakers, there are no further questions.
Carina Åkerström
And thank you to all of you who have participated during this session. And if you have any further questions, please don’t hesitate to talk to Peter or to call during the day. So, thank you very much to all of you.
Carina Åkerström
Thank you all.
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