Svenska Handelsbanken AB (publ)

Good morning and welcome everyone to the Handelsbanken presentation of the year-end report 2022. We're going to begin by listening to Carina Åkerström, President and CEO. This is a live broadcast presentation and you'll 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 presentation...

After the presentation, we're going to have a brief break, and then we'll have an open Q&A session in English. So following the press conference. And welcome, Carina Åkerström. You have the floor. 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, our 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've 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're investing more. I'm going to get back in the To this, in the digital meeting with our customers, improved availability, but in spite of costs being up, with 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's mounted 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. That 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 two 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 a risk tax which is now part of our results. Let's have a look at the performance for Q4. The positive results development was kept up throughout the fourth quarter as well. CAE ratio amounts to 41.8 and ROE return on equity amount 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 customary seasonal effects that we see in this quarter, we have some non-recurring items as well that contributes to expending it. But all in all, expenses are increasing according to plan as we intended it would have. 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 and have a look at the past three years, 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 CAI 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've 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 markets. deposits and mortgages. Let's have a look at the net interest income for the full year. It's up by 21% NAI, 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, so 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 three years, we've seen excellent development in fees and commissions. In the bank, as you know, we have a large share from our excellent savings-related business and wealth management. It is impacted, of course, by the fact that the market is looking the way it is. Markets are dropping somewhat. It has an impact on our income when it comes to the fund-related business. 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 three years.

And then our savings business, as I've already said, it's holding its ground with 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 Handelsbank and mutual funds, which means that we're 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 7%, but adjusted for FX and some items affecting comparability, the underlying increase in expenses is 3%. Development costs increase our expenses with 2.6%. And as I've already said, we're 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're actually doing, And if I'm now 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 one 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 two years we had an additional billion to do this, to step up the pace of that development so that we can enhance it. 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 successively 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 well 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 customers that keep their finances in good order. 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 very, very low, very low when it comes to NAPLs, 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, the locomotive, no doubt. And we have operating profit if we excluded the risk attacks that we have in our home markets. We're 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 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. See our 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 U.K. 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 drops. 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've 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 ADM. 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 counter-cyclical 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'm to summarise 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, 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 and say thank you for everyone who has been listening. And there will be a five-minute break before we continue with the Q&A session. And then in a couple of minutes, we'll have Peter Grabe, who's in 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.

Hello, everyone, and welcome back. And before entering into the Q&A session, could we just please ask for the limitation of the number of questions to one per analyst. If you have follow-up questions, you're more than welcome to sign up to the queue after the initial question. And with those words, operator, please can we start the Q&A session?

Thank you. Dear participants, as a reminder, to ask a question, you will need to slowly press star 11 on your telephone and wait for a name to be announced. To withdraw your question, please press star 11 again. Please stand by. We will compile the Q&A. This will take a few moments. Now we're going to take our first question. And the first question comes from Magnus Andersen from ABGSC. Your line is open. Please ask your question.

Okay. Thank you. Can you hear me?

We hear you.

good okay just on on costs them first of all a clarification or my custody some cost just a clarification you talk about the development costs we saw the cost level so 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 for what we should expect for 423 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 income ratio, et cetera, you have? And finally, on cost, I noted that the capitalization level is increasing again quite significantly. How do you think that will look during 23? You commented on this earlier, depending on what you have been investing in. Thanks.

Yes, thanks, Magnus, for the question. Well, first of all, obviously, yes, you are correct in that one. The trend or the pace we're entering or we're exiting Q4 is the pace we're 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 we don't have any more to say on that topic. We appreciate that we are in a situation where we have ample room for growth in all of our home markets, and that's the reason why we're investing quite a lot right now. The capitalization level, as you say, it has been very low, below 20 for quite some time now. The investments, especially we do in UK and 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've been saying, 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.

Okay, thank you.

Thank you. Now we're going to take our next question. And the next question comes from Nicholas Macbeth from DNB. Your line is open. Please ask your question.

Thank you. So a question on capital. So as you mentioned, Karina, you're well now above your target interval also if we add the announced increases to the counter cyclical buffers in 2023. So I was just wondering what you're 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 going for?

I think it's fair to say that obviously when we entered 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.

Okay, so if I may just follow up on that. So, I mean, I understand there's 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?

We think there's 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 future questions now from the audience will most likely address the growth questions. So let's leave that for that question.

Okay, thank you.

Thanks.

Thank you. Now we're going to take our next question. And the question comes from the line of Mats Liljedahl from SEB. Your line is open. Please ask your question.

Yes. Hello. Mats 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, I see 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.

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 name. So going in now into this year, yes, we 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 we don't pay any interest on these accounts. then on the and i i'm all or the name in norway i think it's worth to highlight that we obviously have the notice periods there and they they accumulate to the size of three hundred million at least and that should be a tailwind going into twenty twenty three and then in the end as you say in u k we we're 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 unit municipalities etc so yes we've been in a situation where where our client base is not very rate sensitive in in the UK so we we will foresee to have a higher uh... higher-margin increase in uk when rates of being okay thank you very helpful thank you now we're going to take our next question

and the next question comes from the land of andreja kakasen from danske bank your line is open please ask your question thanks and good morning everyone full up question on the n i i 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 you keep a very big portion there cover bond 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 set sits or compares to your list prices, right? So what's driving the back book margins at the moment?

Thanks. No, you are correct in the sense that we have been extremely – We've decided quite a lot when we price the mortgages that we obviously like the 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 name 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 discounts. so we we have obviously both automatic support to do that but we obviously contact our clients as well so it's it's not going automatically in in changing the back book margins but but we but there is definitely correlation so we need to work with that one just following up on that you say that you've been wanting to play in that market but it seems like you lose the market share and it's 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?

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 have the top position in accumulating corporate lending growth, deposit growth and also savings growth. Yes, we trade 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.

Okay, thank you. Thank you. Now we're going to take our next question. And the next question comes from Maria Simikatova from Citi. Your line is open. Please ask your question. Maria, your line is open.

Yes, hello. Thank you. I'd like to follow up on your NAI comments. You mentioned that 40% of deposits are on transaction accounts. Just wanted to clarify if that's 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?

When we talk about the deposits that are on transaction accounts, we refer to Sweden, and it's roughly 40% of 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 data, 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.

And just maybe, I understand you don't write the breakdown, but generally, because I believe some of the peers mentioned that they're 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. I just want to confirm if you are seeing similar trends or there are reasons why, in your case, customers are keeping their liquidity on the accounts with zero interest rates.

Well, you can say that in terms of Sweden, as I said, that's where we specify the splits. 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.

Okay, thank you.

Thank you. Now we're going to take our next question. And the question comes from the line of Sophie from JP Morgan. Your line is open. Please ask your question.

Yeah, hi. Here is Sophie from J.P. Morgan. Thanks for taking my question. So I was just wondering on slide 31 on your theory exposure, if I look at market statistics, it fell on average 7% quarter-and-quarter. But if I look at your property management LTVs and the slide, there was no change in any of the loaned values. So I'm just wondering, for example, if you assume 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 at the end of the third quarter? And kind of related to the asset quality, I also noticed that your stage two loans increased by 23% quarter-and-quarter despite cut-off selling Denmark. So I was just wondering if you could give some details around why cut-off loan losses remain so low and why the property management slide is unchanged versus third quarter. Thank you.

When it comes to the property management slide, 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 two 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 moved to stage two. 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 two loans. I am suggesting that the quality of the loans that have migrated into stage two obviously is very strong.

Okay, okay. But I mean, once we update the real estate exposures and the loaned values, would it be fair to assume that we potentially need to see a little bit more provisions for the property management exposures?

Not necessarily, but obviously there will be more information when we get the annual reports, but not necessarily there will be updates, no.

Okay. Okay, thank you.

Thank you. Now we're going to take our next question. And the question comes from Ricardo Rivera from Mediobanco. Please ask your question. Your line is open.

Hello? Can you hear me?

Yeah, we hear you.

Okay, sorry. Okay. I just wanted to follow up a little bit on Sophie's question. I understand you will be updating at some point the LTD slide on page 32, but unless we're starting from kind of 40% for commercial real estate and say 50% for residential real estate, I mean, the value of the collateral is basically double or more than double the residual debt exposures. So is it fair to say that to see a material impact on your asset quality, you would need a collapse in the real estate prices in general? Is it fair to say? I mean, the buffer here is technically extremely, extremely large. Is that a fair assessment? And then a second thing, if I may, to Karina, you extended the buyback period. 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 thanks Ricardo for the questions well first of all obviously yes obviously we do like the the the position in the LTVs we have and we obviously

run a very conservative view on on on credit policy but but nevertheless obviously if if if house prices drop quite a lot and we obviously estimate that impact from if if prices were to drop 20 percent obviously our LTVs would go up a bit a touch more than 10 percent so we're not we're not unimpacted but yes we like the situation we are in 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. Thanks. Thank you.

Thank you. Now we're going to take our next question. And the question comes from Namita Samtani from Barclays. Your line is open. Please ask your question.

Hi. I've just got a quick question on corporate deposits in Sweden. So I saw they went up quarter on quarter, and that's quite different to what we've seen at the other banks. So is there a reason for this? Thanks.

Yeah, I mean, our corporate deposits did go down on the quarter, but as you say, I think the reason when you compare us to other banks, it is the ratio of financial corporates vis-à-vis non-financial corporates. The non-financial corporates are more stable in their deposit base. behavior, but the financial ones do more massage their holdings, et cetera, over the quarterly ending. But I don't think we had an increase. No. Okay. Thank you very much.

Thank you. Now we're going to take our next question. And the next question comes from Omar Keenan from Credit Suisse. Your line is open. Please ask your question.

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, you know, this pay down behavior might continue for a little bit longer. So I was just wondering if you could just flesh out 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 3.1 on the 1st of January 2025? And then whether you think

there's an impact from the output floor in 2030 and whether it's binding thank you thank you for the questions well first of all I think it's it's early to say to draw conclusions from the amortization behavior but what we can say is that we've seen two or three times the level of amortizations in the end of the in the 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 of some of the shared dividends you can see in the markets. So I think you can't draw any more conclusions than that, that 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 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 them.

Thank you. Could I just ask a quick clarifying question? 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 those comments a little bit? Because it sounds like you're not expecting much in terms of regulatory headwinds, and there's 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?

This might be a misunderstanding, actually. When I addressed the capitalization level, when it comes 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 it's going up 2023.

Understood. Could you give a bit more color on the payouts then and capital ratio levels in 2023, how we should be thinking about that?

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 have a conservative view. We really do believe that being conservative, both in funding and capital, in the way we treat our asset quality, in the way we treat our client, is the recipe for long-term success. And now we live in really uncertain times, and then we think it's prudent and a good position to be in, to to have even higher buffers but we haven't changed our long-term target range if you were to look at the 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 especially and and even the last years if you were to begin to risk adjusted return on equity you would see that the stability our bank is showing It really puts us in a really good position when it comes to 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, the uncertain times right now favors being prudent. And we do foresee there could actually be really 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.

Okay, understood. So you'd expect to run with something a bit higher than the long run management buffer in the near term because of the great opportunities and uncertainty. But over time it should come back within that range.

I don't know if I. All the questions. Yeah. Sorry. Please go on.

Just wanted to confirm, have you answered all the questions or not yet?

I think we've answered all the questions, but please get back if there were any questions you didn't get an answer on.

Thank you. Now I'm going to take our next question. And the question comes from Jacob Cruz from Autonomous. Your line is open. Please ask your question.

Hi, thank you. Can 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 would you expect to continue to treat it this way, given that on a net-of-tax basis seem quite neutral to you? Or should we see this as a one-time effect on the cost line, very strictly in 2022? Thank you.

Thank you, Jacob. You should definitely see this as a one-off, because as we've been highlighting for some time now, our pension system has gone from, if you look back two, three to ten 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.

Okay.

Thank you. Thank you. Now we're going to take our next question. And the question comes to the line of Nick Davy from . Your line is open. Please ask your question.

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're guiding us towards into 2023, It's obviously very substantially higher than the aspirations you originally had for the Handelsbank and Costbase 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 bank as in need of so much development spending? versus your original plan. And as we go into sort of 23, 2024, can you help us to better understand these big step up in development spending? Do you view what you're doing as a sort of defensive spending to catch up Handelsbank and to maybe where peers are in terms of capability? Or is there some component of what you're doing that you view as really revenue positive into the future? I think we've just got into this mode of noticing costs are higher, but I'm not sure within this development spending bucket, I'm fully on top of what the money is being spent on and why. Thank you.

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 the CEO role and the analysis we were starting in the bank. And that, 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're really strong, we should narrow down the geographies we're present in, etc., We've come quite far in that journey, actually, and we've created a really profitable bank right now. So we stand on geographies and in areas we really like, and we see ample room for possibilities there. And in that sense, we've then gone from a stability phase into a profitable phase, and we really think we're 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 a cost-to-income target. In these cases now, 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're 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 increase 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 so we keep coming back to the 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 really efficient underlying bank but also quite a bit higher spending rate than we've seen in the past 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 two, three years from now? What will your capabilities be that they aren't today?

Yeah, 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've been going through a few years of some tough challenges in UK, which we think we turned 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're in. In Norway, we have possibilities with a really good position vis-à-vis corporates and lending. And as we've been highlighting before, we like to balance that to more retail side and also to more savings side. So in that sense we're 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.

Okay, thank you.

Thank you. Now we're going to take our next question. And the question comes from Rickard Strand from Nordea. Your line is open. Please ask your question.

Hi, good morning. Follow-up question on costs. Looks like the FTE development is currently where you're growing at a 3% year-over-year growth rate, and it's also up quarter-on-quarter. 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.

yes thanks record well first of all the I mean FTCS we don't see a structural decline anymore in FTS we rather increasing obviously the development spending in that sense that requires more resources that could be FTCS or it could be external help with consultants so I I don't think we can guide you on the level of the FTCS 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 guide you on the absolute level there. I think your second question was alluding to the pension one-off. And as you say, the cost increase is $152 million, but we actually do decrease the tax line with $160 million. So from a net bottom line it is actually positive with eight million but it do increase the cost and in that sense obviously we we've we've viewed that as a one-off to the coastline yeah thank you thank you now we're going to take our next question

And the question comes from Pierce Brown from HSBC. Your line is open. Please ask your question.

Hello, can you hear me? We hear you loud and clear.

Yeah, sorry, I missed the operator there. Yeah, it's Pierce Brown at 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're 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, etc. So in the context of that, how do you assess your appetite for taking on further credit to these companies? Because the problem we're still confronting is the refinancing wall that they face in 2024. So if you could just talk to that point, given that you're obviously already 30% of the portfolio is to the property management sector, would you be happy to increase that percentage even further from here?

Thanks. Thank you, Piers. Well, as we've 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 but I don't think that's the way you should view our bank that we will you can you can see the way we will behave when it comes to credit appetite has a very strong relations with the with the with the reports they're posting we will like we we will definitely continue to do business with the clients we deem good and and we we think there's 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're in the midst of it okay that's clear thank you very much thank you

Now we're going to take our next question. And the next question comes from the line of Andreas Harkinson from Danske Bank. Your line is open. Please ask your question. Excuse me, Andreas, your line is open.

Hi, can you hear me now?

Yeah, we hear you. Yeah.

Yes, sorry for that. Just a follow-up. On the capital side, you asked for a new buyback mandate, which I guess you've done all year. 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 own security and stuff like that? Or how would you view that mandate?

I think we can't guide you anymore. It is obviously flexible. It is a mandate, as you say, we've been having it for many years. It creates flexibility for us. If we would have instigated a Barry Baird program today, we would obviously have said it. So you should see that there's flexibility for us going forward.

Okay, thanks.

Thank you. And now we're going to take our last question. And the question comes from the line of Jacob Cruz from Autonomous. Your line is open. Please ask your question.

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 any indication from wage negotiations or contract negotiations with suppliers. Just how do you think about cost growth for 2023 versus 2022 outside of the development space?

Thank you. Thanks, Jacob. 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, we obviously do local ones, but the official ones are being held now, and I think that most guidance Paul point that to somewhere roughly four percent or so that should from a European perspective that's obviously quite low but most likely the the the agreement will also be short one it might be a one-year agreement and then we have the uncertainty going into the next year so sir a we we don't foresee massive inflation but nevertheless uh... obviously some inflation will go through and in that sense you can actually find arguments for the cost increase being fairly newt that anyway vis-a-vis both seasonality and inflationary terms thank you the speaker for the question

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 Carl during the day. So thank you very much to all of you.

Thank you all.