Svenska Handelsbanken AB (publ)

Good morning and welcome to Handelsbanken and the presentation of Q3 2023 and we'll begin with Karina Åkestrom, our CEO president. And this will be broadcast live and you find the link under investment relations.

In English, you will find the presentation simultaneously translated by choosing English in the menu.

After the presentation, we're going to have a short break and then after that, a Q&A session in English and information as to how to join you will find on the website. Karina, please. Karina, thank you. Thank you, Louise. And well, good morning and welcome everyone. And let's get started. One can say overall that in spite of the economic slowdown, we do see a quarter that can be summarized with stability, efficiency and profitability. Income is growing faster than expenses and together with the well, basically non-existent credit losses. This gives us a better profit and profitability. The interest rate situation and volume growth beginning of the year, well, that leads to an increase in NII and the savings business continues to grow and the bank is attracting more than twice as much of the market share to our mutual funds compared to what we have in outstanding volumes. The CI ratio is improving to record low levels and the credit loss ratio in our lending portfolio continues to stay good and the credit loss level, as I said, was close to zero. Our financial position is strong and in times like these, they're still very uncertain. This is something that is obvious for us that we have to safeguard those stable finances. Customers in all our home markets yet again have shown their appreciation for the bank in all our home markets and customer service and awards during this quarter, which is very gratifying. And last but not least, talking stability, no other privately owned bank in the world has better ratings than we from the leading rating institutes to summarize a very good stable position for the first nine months in this quarter. Then looking at Q3 compared to the second quarter 2023, we see that CI ratio is up and we now have a record low level at 35 percent. ROE is up to 17.3 percent. And this in spite of the fact that we have a higher capital buffer than we've had for underlying operating profit adjusted for one offs, including these effects of fluctuations, it ends up at 13 percent and income is up seven percent and then I had three. So we see a recovery in Q3 and we also see a slowdown in business volumes in the market as such and for the bank. Commission income is doing well in spite of the volatilities in our markets of two percent compared to the previous quarter. And the explanation is our savings business and asset management. And we also see new developments when it comes to payments and advisory services. Expenses underlying down one percent. And this is something that follows the usual seasonal patterns. And as I've already said, the credit losses have basically been non-existent in the quarter. Then looking at the first nine months compared to previous year, the key ratios are up here as well. CI ratio being 36.8 percent and ROE is up to 16.2 percent. The underlying profit is up to 48 percent and income is up with 30. And as I've said already, this is a nice volume growth. And of course, we see this also in this last quarter with interest rates and recoveries in margins. Our expenses underlying are up 10 percent. And this is explained by and as has already been mentioned, that we have increases in the development capacity and also that we have the inflationary situation that has an impact on costs and salaries alike. And we also continue to invest more in preventive work, preventing financial crime and in cybersecurity. Credit losses yet again at a very low level, 0.01 percent. Then looking at a net interest income in the quarter, we have, well, if you start to zoom out, of course, this is volume growth, but the bank is growing in a stable manner over time. And last few quarters, we have seen a slowdown in the market with a dampening in growth in deposit and lending volumes. Amortizing levels remain at a high level for households and corporate alike. And that, of course, has an impact on deposit and lending volumes. However, we continue to do the business that we wanted to do. We do that together with customers with strong cash flows that are resilient. Looking at the net interest income for the quarter compared to the previous quarter, it's up just over 4 percent and the underlying adjusted for FX3 percent. And you see in the slide that volume changes are neutral and volumes are more or less stable. We see mainly recovery in margins and that is what is driving the NII in the quarter. If we continue with net fee and commission income, we see that these are up and were up during the pandemic. And then we have seen a more balanced growth since then. The savings business payment and capital management that is stable. And we see a trend with a stable growth since about a year and that continues. Also see looking at the payment fees and advisory services that we continue to see a nice growth. And then looking at the savings business

in Sweden. And on this slide, we can see the inflows into our mutual funds. We have an outstanding fund volume in market shares that is just over 12 percent in Sweden. But since 2010, for quite a long time, that is, we have had a market share of 26 percent of the net inflows into new savings and mutual funds. And during the first nine months of the year, the bank took 31 percent of all the net inflows on the market into the Handelsbank and mutual funds. Savings business continues to be a very important growth area for the bank. And we have a high market share of the net inflows and that creates value over time. If we take a bit of a look at our expenses, we can also see that the this quarter's expenses have decreased somewhat when adjusted for FX effects. And that follows a relatively normal seasonal pattern with lower activity during the summer months. Compared to a year ago, the bank is now investing at a significantly higher rate. And that is exactly what we communicated just over a year ago. We also maintain development at a much lower rate. And therefore, our investment expenses are stable. And this is true for the fourth consecutive quarter. The ratio was improved as mentioned previously and is for this quarter down at 35 percent. If we continue and take a look at our net credit losses, like I said, they are practically nonexistent for the quarter. And you can see on the slide that historically during the period when we've seen economic decline, the bank reports significantly lower net credit losses than the rest of the banking sector. And that is also what we can see reflected in the low net credit losses over time. But for this quarter, very, very low, almost nonexistent net credit losses. Our capital is very strong. We have strong financial stability and we continue to continuously generate capital. That's good. That gives us room to maneuver. At the end of the quarter, the CET1 ratio was 19.4 percent compared to the estimated regulatory requirement of 14.9 percent, including the announced counter cyclical buffer hikes. And that means that now we're in a very good, stable position when it comes to our financial stability. Finally, it's very nice to see that our customers appreciate what we do and how we do it, and not least through our local presence and our ability to adapt to changes in customer behaviors. And again, this was confirmed by various annual accolades and customer satisfaction surveys that were also published during the quarter. To have satisfied customers is the foundation to building and maintaining long term relationships, and it provides stable creation of value over time. And the bank is in a very good position now, and we're well equipped for future profitable growth together with our customers. Here I would like to end, and I would like to thank you for listening, and I'll give the floor back to Louise. Thank

you. We'll take a short break. After that, our manager Investor Relations will have a Q&A session in English and information as to how to connect to find under hundersbank and dot com investor relations. Welcome back.

Welcome back, everyone, to the Q&A session. Before starting, we would just like to remind everyone to limit the number of questions to one person per person. And after you've asked an initial question, you're welcome to get back in line to ask any follow up questions. And with those words, operator, we're ready to take the first question.

Thank you. To ask a question, you'll need to press star one and one on your telephone and wait for your name to be announced. Please limit yourself to one question at a time. To withdraw your question, please press star one and one again. We will now go to the first question. And your first question comes from the line of Magnus Andersson from ABGSE. Please go ahead.

Yes. Hi. I was just wanted to ask a question on asset quality. We can all see that you have very low net provisions in the P&L. Although the migration to stage two continues both at the group level and within the CRE segment, could you tell us a bit about the dynamics here and by the provision ratio in stage two is coming down? And it's done so since Q1 22. And related to that, perhaps I note that your loans in the property management segment, if I add commercial real estate to residential has been flat now for three quarters in a row after having increased quite significantly since the spring of Q1 22 if you have become more cautious there in any way. Thanks.

Thanks, Magnus, and good morning, everyone. Well, first of all, yes, you're absolutely correct. The stage two reservations do increase or the stage two volumes do increase. The reason behind that one is that obviously when rates increases, the cash flow outcome becomes a bit more strained for all the companies. So we do foresee that our branches is going to downrate more or less the clients based on the cash flow outcome. That doesn't necessarily translate into higher credit risk if we deem ourselves having very strong collateral. So when rates continue going up, we do foresee actually stage two volumes to increase, but that might not be similar to actually stage two reservations or even stage three reservations. So that's the first one. The other one is to some extent, obviously, we've been more we were a bit more we keep on doing the business as we do, but nevertheless, we've also adjusted, obviously, standards to the practices in the market. We still like the clients we have and we keep pursuing the business. I think it's worth to highlight as well when it comes to the correlation between deposit movement and loan movement that we've obviously seen corporate deposits shrinking a touch now. And we can obviously see that clients are using their deposit volumes and pay off that. And that's exactly what you what you want to see in a deleveraging mode.

Well, OK, thank you very much.

Thank you. We will now go to the next question. And your next question comes from the line of Jakob Heselvik from SEB. Please go ahead.

Good morning. I follow up on Magnus question. So could you please just explain to me how property management stage two, which amounted to 79.4 billion SEK this quarter, which represent an increase of 58 billion SEK year over year, but your stage two provisions for properties have increased by just 200 million SEK.

Yes, thanks, Jakob. Yes, and exactly the same answer there. I mean, when rates do increase, the way we do our internal ratings are based on two steps. First of all, it is based on the cash flow outcome. And obviously, when rates increase, the cost to carry the business is going up. So you would foresee a down rate of that part of the credit process. On the other hand, it is the financial resilience. And that, and if we now, as we post in the report, if we have LTVs of 50 percent, roughly, it doesn't necessarily translate to if we have really good collateral in place, that doesn't mean that we need to reserve as much. So it's nothing, the system works as it should. You shouldn't really see it, not the necessity to see stage two volumes and stage two reservations move hand in hand.

Property prices have come down, so LGD should have moved up, no?

Yes, from that single effect, yes. But there are many moving parts in the LTV components. First of all, obviously, clients could actually have amortized their debts. So loans go down as well. And then you obviously see, we've always, we've kept reiterating at previous calls that we tend to be very conservative when we value the properties. First of all, we don't include land which is not built on. So we only include the properties which is generating cash flows. Then second, we tend to be more conservative when it comes to the expense line of running a property business. So the transaction we've seen in the areas we were in, we can't say that we've seen a real deterioration in it over the quarter, no.

All right, thank you.

Thank you. We will now go to the next question. And your next question comes from the line of Alex Dimitrio from Jeffreys. Please go ahead.

Good morning and thank you for taking my questions. Just on the CRE stress test on slide 28, would you be able to write some color and firstly, where current bond yields are for these companies so we can gauge how stress test is? And secondly, are you able to disclose the average ICR covenants for these companies? Am I right in assuming these are around two times? So if so, what happens if a company drops below its ICR covenant from a provisioning perspective? Thank you.

Sorry, we didn't really follow your question. I think you were referring to slide or slide page 28, did you? Can you reiterate your question, please? Sorry.

Yeah, sure. So firstly, what would be the average debt for these companies in the market at the moment, just so we can see how stressed the stress test is? Secondly, are you able to provide the average interest rate covenants, coverage ratio covenants for these companies? And if so, I'm assuming it's around two times and if it does drop below two times, what's that mean from a provisioning perspective?

Well, first of all, obviously, yes, you're referring to the CRE stress on slide 28. As you say, we're obviously showing there the ICRs, first of all, of the 30 biggest companies. So the reported ICRs from these companies are 3.1, but our own assessment, which is more conservative, is based on 2.5 and you can see in the footnotes there the reasoning behind it. What you can say is that the clients with the lowest ICRs, they have more or less 100% floating debt. On the total of these 30 companies, you can see that they roughly have 50% of their total is refixed at the present levels and there will come and this is going out to 2024 maturity then. And Peter, do you want to add anything?

No, I think you have the pieces of the puzzle that you need in order to get a sense of how the portfolio will develop in a stress scenario you have on the slide, but we're happy to go through the details perhaps after these calls if you have some further questions on it.

Yeah, that would be great. I really appreciate that. Thank you.

Thank you. We will now go to the next question. And your next question comes from the line of Sophie Peterson from JP Morgan. Please go ahead.

Yeah, hi. Here is Sophie from JP Morgan. Sorry, just going back to the slide 28 and the stress assumption. The ICR stress seems to be based on 6% or 7% interest rates in the UK, but if interest rates already are 4% in Sweden, some people think they will go to .5% in the UK. You have over 5% interest rates. Does this mean that the stress margin that you would charge for these real estate companies is less than 2% or up to 2%? And then just to follow up on the previous question, the ICR governance that you have in your documents, could you just confirm that it is 2 times or is it lower than this? What actually happens when the ICR governance is breached? Do you need to reclassify the exposure as stage 2 or does nothing happen? So if you could just talk us through the process. Thank you.

First of all, as we've been highlighting, this shouldn't be seen, page 28 shouldn't be seen as a stress. You can obviously see the average breakeven interest rate for the clients in the boxes there. Then as you say, yes, market rates are where they are and what we're saying is that yes, we have calculated the outcome here with 6% as you say in Sweden and Netherlands and 7% in Norway and UK. And the outcome is the ICRs you can see on the slides. So that's the first one. The second one, we obviously have internal governance but they're not similar to all of them so we can't disclose the internal governance. On the other hand, obviously, what we've been saying is that the negative migrations to stage 2 this quarter and the previous quarter as well, it's rather based on the probability of default moving up several times. And if, as we've been highlighting as well, if we start with an extremely low PD value and that moves up two and a half times or so, we will move it to stage 2. So the implication might be that it moves from a very, very, very good quality to still a good quality. And if you have a really good collateral at the low LTV, then that necessarily doesn't translate into high credit risk. So I think that's really worth to highlight. And yes, we won't change the covenant levels but obviously when a company is starting moving towards the covenant, being close to the clients, that's when we have the discussions with them. And obviously, we will have a dialogue with them having a plan how to adapt to the current market levels.

Okay, but maybe just then you mentioned the PD is going up, but how is the PD calculated? Is it based on the credit risk of the counterparty, historic losses, the macro outlook? What factors do you take into consideration or calculating the probability of default?

That's a question for you to address to the IR people after this meeting. But obviously, we work with generalized mathematical functions here. It's not a Handelsbank in specific one. But please.

Okay, thank you.

Thank you. We'll now take the next question. And your next question comes from the line of Richard Strand from Nordia. Please go ahead.

Hi and good morning. Can you hear me?

Yes, we hear you. Hi there.

Yeah, thank you. So a question on the cost development and we noticed that the FTE growth -over-year continues to increase in Q3 and is now about 7%. Just if you could give any flavor what to expect here going forward, if you have been sort of forward leaning in your investment projects or if we should expect that this growth continues also into 2024?

Thanks, Richard, for the question. Well, first of all, we think that our cost line now moves accordingly to what we want to see. We've been guiding on obviously Q4 last year that we were increasing the IT spend and we keep on following that pace. So we think it's really nice to see that even though we keep on investing to a high degree, cost line has stabilized and moving down a bit in the quarter. So that's the overall guidance we will give. Then obviously we will work with the FTE, the resources we need to do the business we do. That's a component of both FTEs and consultants. So the separate movements on these lines, we will have to wait and see what they play out to. But we want to spend, we not want the total spend to go up in IT investments and we want to get as much efficiency as we can out of the investments we do. So that's the ambition we work with. But we don't foresee an increased spending.

Okay, thanks.

Thank you. We will now go to the next question. And your next question comes from the line of Riccardo Rivera from MedioBanca. Please go ahead.

Good morning everybody. Hope you can hear me well. Just a quick one on capital. If I remember correctly over the past few calls you were reiterating the fact that despite having 450 bases above the requirement at the moment is preferable to stay cautious or prudent, I just want to better understand that this still stands, this kind of position. And also in light of the fact that despite market concerns at the very, very end your provisioning ratio is zero, it's always been zero and continues to be zero with LTVs and commercial real estate below 50% or kind of 50%. So just want to understand what's your position on capital now.

Thanks Riccardo. We hear you loud and clear. Yes, it's true. We haven't changed our stance on capital. It is a board decision. And historically we've been approaching this kind of decisions at the AGM time in spring. We're building capital even though the capital relation moves down from 19.8 to 19.4. We're building actual capital in billions. So that's all good. So we're generating a lot of value now for our shareholders. Having said that, yes, we play it conservative. We think it's a really good situation. We don't think the world has been calming down over the last month, unfortunately. So we don't have that much more message to give you. We will wait until AGM and talk more about the capital. But it is a really good situation to be in. Creating the all-time high in P&L and seeing your clients delivering the way you want them to do. That's obviously the result is a strong capital generation. So that's all good in our view.

Thank you. Very, very clear. Thank you.

Thank you. We'll now go to the next question. And your next question comes from the line of Jeff Dawes from Society General. Please go ahead.

Yeah, good morning, everyone. It's Jeff Dawes here from SockGen. Swedish net interest income is the area I wanted to focus on. And the obvious question would be whether you're at the peak run right now. And if not, how far away you are from that. I know that that's probably too direct a question. If you could just give us a feeling for the margin sensitivity from here. Whether you're seeing the trends in deposit rates and deposit flows between the mix effects that are starting to eat into your sensitivity. So just to give an impression of Swedish NII would be great. Thank you.

On a relative basis, we've been talking about this during many quarters now. We are approaching once the Ricks Bank are approaching their top in their cycle, obviously, we will start approaching our top in NII margins. Having said that, I mean, we're posting a solid quarter now with good margin expansion. And as we've said as well, in our bank, this is really a decision for the branches and for the countries out there to decide the pricing to their clients. And it's not being done centrally from the treasury in that sense. So we're pleased to see that we keep on posting good margin development. But yes, of course, we're coming closer and closer to the peak. So when that happens, time will tell. We don't foresee it that much better than you do,

actually. Great, thank you. And just on that deposit mix, if you could clarify on that. The mix between current account and savings account.

Yes, I mean, we've said right now in Sweden, we have between 25 and 30 percent still on transaction account. We were at 30 percent during Q2, and now we're slightly below 30 percent. And we've been saying that people will need to have their salary, etc. on a transaction account. So we're not foreseeing this to massively go down from these levels. We rather think we're approaching a steady state now. So in that sense, you won't have a negative marginal impact on deposits coming from the movement from transaction to term as much as we've seen for the last quarters.

That's brilliant. Thank you very much. Very helpful.

Thank you. We will now go to our next question. And your next question comes from the line of Piers Brown from HSBC. Please go ahead.

Yeah, Gavreel. I have a question on the last quarter, but the escaping Q3, you've more or less zero or no provisions, but clearly some underlined iteration.

Sorry, Piers, we hear you very poorly. Perhaps you need to hang up and dial in once again. I don't know, but we'll try once again if we can hear you. But we will prioritize your call if you hang up and dial in again. Okay, then we can move on.

Thank you. We will now go to the next question. One moment, please. And your next question comes from the line of Namita Samtani from Barclays. Please go ahead.

Good morning. I've got two questions, please. Firstly, just a question on your quarter one requirement. The regulator has given the group a pillar two temporary add-on of around 100 basis points for the IRB model review. Do you expect that 100 bits to come down at all once your models have been approved? And secondly, I just want to understand aspirations for return on equity because consensus has the group printing 11 to 12 percent over 2024 and 2025. And I wondered whether you think you can do better than that given you've printed 17.3 percent this quarter granted with zero loan losses.

Thanks, Namita. Well, first of all, I have to correct you. I mean, the requirement from the IRB overhaul is plus half a percent, not plus one percent. And as far as we can, this is obviously uncertainty around, but as far as we can tell, obviously, we see this as once we get approval for the new IRB models, we will obviously have models which we think will increase the capital. And that might be the same level as this IRB overhaul requirement. Time will tell if the net effect, if they will net each other out. But it's half a percentage point right now. Then the, yes, I agree with you that the market foresee ourselves having a much lower ROE than we do today. And I can relate to your view that I struggle with finding the relevancy in 11 to 12 percent. But time will have to tell on that as well. We don't have an absolute ROE target. We think the bank is moving in a really strong fashion now. We're performing more or less on all the lines and we still are very confident in our asset quality. So we think there's room for improvement.

Thanks very much. Thank you. We will now go to our next question. And the question comes from the line of Piers Brown, HSBC. Please go ahead.

Yeah, hi again. I don't know whether you can...

We hear you loud and clear. Hi, Piers.

Okay, I'll give it a try. Yeah, so the question was on loan loss provisioning and it's actually a similar question to the question I asked last quarter.

But I

mean, if I look at the landscape, you've booked more or less zero loan loss provisioning and loss provisions, there is some underlying deterioration in credit quality. We can see that through... You mentioned the negative migration. And I guess if I look at the risk weighting on the property management companies, that's moved higher again this quarter. You're up at about 21 percent. I think you were sort of 16 percent a year ago. So the underlying inputs into your IRB models are clearly deteriorating. And I'm just interested that if I look at the reconciliation to tier one capital, you've now got about 1.7 billion deduction for the shortfall of loan loss reserves to expected loss. So your models are telling you your provisions should be 1.7 billion higher than what they currently are. And that gap just gets bigger and bigger each quarter. So the question is, at what point do you address that gap? Or do you see a need to address it? At what point do you actually start to provision more in line with what your models are telling you is your current expected loss?

Yeah, you're referring to some technicalities in the C2-1 calculation. And again, I think we'd be happy to go through the details and how the framework looks perhaps after this call because it will be quite technical. But in general, what we can say is that that number is not an indication of potential credit losses. It's more a technical component. But again, I think we can take this bilaterally instead of discussing it on this call.

But it is fair to say that, I mean, when you look at stage two and stage three volumes and reservations, obviously, they are based on two, or at least dependent on two separate things. First, it is the cash flow outlook. And that's obviously that that becomes a bit deteriorating when rates are moving up. But then it is the second one, the financial resilience as well. That pictures two different sides to the puzzle right now. And being in the LTV at 50%, that's a really good starting point. So we don't foresee that it might as well be the stage two that moves down going forward.

Okay, that's helpful, Coler. I'll take it up afterwards with Peter. It's probably slightly technical for the call.

Thank you. We will now go to our next question. One moment, please. And your question comes from the line of Jakob Korser from Autonomous. Please go ahead.

Hi. Thank you. So I guess just two questions left. So firstly, on the octagonal, you didn't provide anything this quarter. And you have record earnings and loan losses, you say, cost and control. I know this is a relative performance metric, but I guess my two questions here are, A, do you think you need to top up by the year end? Secondly, do you think if not, you need to come up with a different type of staff remuneration system? It doesn't seem to remunerate the staff for what looks like a very strong P&L in the quarter. And then I just want to ask the corporate deposit outflows, which I think mostly happened in September, does that change your funding outlook? Do you need to replace these with other sources of funding like carbon bonds? Thank you.

Thanks, Jakob. Well, first of all, obviously, octagonal, during the year, it is a fairly mechanical exercise. And that points to us before we on the relative metric, we didn't reach our corporate goal during Q2-ish. So we will have to wait and see what happens in Q4 and with the other bank P&Ls. So that's just the first question. Then obviously, we're obviously pleased with the P&L we're producing. We can obviously see that some of our peers are producing really, really strong P&Ls as well. Having a good remuneration system for the staff, the most important thing is that you have that through the cycle and over times. And we will play it very long term in the way we steer the bank. So having said that, it's a separate discussion what kind of remuneration system we have. But we're pleased with the P&L and we can't foresee exactly what happens in Q4. The corporate deposit development, it is, as you say, you can see that first of all, we're dropping down on the other line between Q2 and Q3. And that's obviously very, you can see that that line has historically been quite volatile. So and the underlying behind that line is rather our businesses from US and Luxembourg, etc. What you have there is most likely non-sticky deposit money, which we can't use as a primary source for funding nevertheless. So that will not have an implication on our funding. Then I would like to stress as well that, as I've been saying, that you can see that from quality deposits, they move quite in line with at least the gross growth in lending as well. So you can see that obviously on the household deposits, they move in line with the household growth. And on quality corporate deposits, they actually move hand in hand with what you would foresee as a strong growth line from bond financing moving to bank. So I think it's a really good situation to be in. We are a bank now producing an all-time high P&L and we see our clients leveraging and that's really what you want to see at this stage in the cycle.

Okay, thank you.

Thank you. We will now go to the next question. And your next question comes from the line of Jens Hallen from Carnegie. Please go ahead.

Hi, it's Jens here. Good morning. Can I take us back to net interest margin? I mean, I understand that expansion can't continue forever. You say it's losing pace, but at the same time, the move on transaction accounts, the savings account seems to be over. My question is, what kind of pressures do you see over the next couple of years if market base stays flat? In consensus, we think we will have a significant margin contraction over that period of time. What's your take on that?

I think at least the history tells you that net interest margins correlate quite well with rate levels. That's one component. So from a long term cyclical perspective, I think you see a correlation there. Then obviously over time, you tend to see a bit tougher competitive landscape, and that's rather down to digitalization, etc. So I think it's very hard to guide on the outcome of NIM if rates stay the same. So we will see as much as you the outcome of that one. But nevertheless, I think it is a stronger correlation between rate levels than it is from the structural component of competition, because that obviously goes up and down as well now. Do you have anything?

Okay, now it makes sense. Thank you.

Thank you. We will now go to the next question. And your next question comes from Magnus Anderson from ABGSE. Please go ahead.

Just a follow-up on costs more on a high level. I'm just wondering what kind of flexibility you have in the cost base to potentially offset stalling income year on year in 2024. Are there any lagging inflation effects, potentially driving costs in 2024 that we should be aware of, and how would you think about IT investments in such a scenario, etc. And secondly on costs, just since you put the old octagon in runoff. Thanks.

Thanks, Magnus. First of all, the cost line then. Yes, I think if you look over the yearly development here, the cost increase are obviously explained by first of all an increase in the development ambition, then second inflation and thirdly a weak crown. That's the major contributions. And we think we've been playing this actually fairly well. I mean, being able to increase investments as much as we've done and living in high inflation and nevertheless, we've been able to keep these lines okay. That's quite good. Looking forward then, yes, what we can obviously bring down the investment pace. We also work with creating more efficiency or productivity within our investments. And one way there would be to move from consultants rather into ordinary staff. So we think we have some flexibility there. Then obviously we do foresee that the trends do come down as well. And you wouldn't at least you wouldn't you're approaching a level where you wouldn't be surprised to see a crown actually start increasing rather than weakening again. So yes, we think we have some flexibility to play with there. Then octagon and no, we can't say first of all, we haven't changed the metrics. I mean, the method is still the same. The payment is still the same, even though it's not invested into equity. So we can't say that we we've seen any dependence on this on staff as well. And we keep reiterating that we rather think it is the way we run the bank, which is the biggest motivational perspective of working in Handles Bank and being in having an individual mandate where you are in charge of that mandate, rather than having a very central steering. We think that's the biggest motivational component. Thanks.

Okay. Thank you very much. Thank you. We will now go to the next question. And your next question comes from the line of Nicholas McBeath from D&B. Please go ahead.

Thank you. And good morning. So a follow up question on capital. Please still trying to understand your capital planning and given your current position of strength. Do you think it's important to operate within your buffer target interval of one to two, one to three percentage points? And related to that as well, if you could please reflect on your capital generation so far in this year, how has been this been relative to your expectation at the start of the year?

Yes, thanks, Nicholas. Well, capital planning. Yes, first of all, it is obviously a broad question. So that question might need to be addressed to them. But yes, of course, we haven't changed the target range. And we think over time it is it is important to be easily understandable for investors so they can view us. So having said that, obviously, we are not stressed moving down into it. We think there are uncertain times. But nevertheless, we haven't changed anything. Obviously, we will have to wait until the ADM to see more. Then I think the way we reflect around capital, I think a few things are worth highlighting. First of all, just the P&L creation now. The deducted dividend, not saying that this is going to be the ordinary dividend, but just saying by pure mechanics, the deducted dividend, the ordinary dividend last year was five and a half crowns. The deducted dividend is right now running at 7.4, 7.5ish. So that's quite a big increase. Second, even though we have deducted that dividend, we've built capital, and this is equity then. We built equity of nearly 18 billion and we built core tier one of nearly 13 billion. We've also moved down the, we've decreased the goodwill after we divested Denmark, and we've also reworked the pension system. So we actually think we're in a really strong capital situation, which is obviously over time this is going to be the value for the shareholders of the bank. So we think this is a really good outcome and we're not troubled that we keep on holding into the bank in short term and nevertheless posting 70% return on equity.

Okay, but when you say we have to wait until the AGM, does that mean we should not anticipate any kind of update on the capital distributions in the Q4 report? Because that's before the AGM, right?

More or less, yes. Most likely.

The more likely Q4 or AGM?

More likely AGM.

Okay.

Sorry, sorry, Nicholas, more likely Q4.

Perfect, thanks.

Thank you. We will now take our last question for today. And your last question comes from the line of Ricardo Rivera from MedioBanca. Please go ahead.

Thanks. Thanks for taking my very kind of question. Just a kind of philosophical one. Now, we see, we have been seeing real estate prices, I mean flats and villas, going down kind of 15%, peak to trough. Now they are recovering a little bit. Part of that decline has been recovered. If real estate prices for flats and villas kind of stabilize with rates at 4%, is there any scenario, any circumstance in which commercial real estate prices should go down by 50%? Because that's what you would need to see, to let's say, to damage your credit losses if the business is kind of 50%. How can these two things go divorcing in such a way?

Let me put it this way instead. And perhaps I don't answer completely your question. But so far, obviously, the cash flow obviously has been deteriorating due to increased rates. Having said that, we've also seen that many of the CREs have been able to index their rents and the vacancies haven't deteriorated either. So we've actually seen the cash flows are fairly constructive in their movement nevertheless. And they're also pursuing a lot of cost savings that don't make any new investments. So I actually think there's room to deliver just from their cash flow outlook. Then second, as you say, if prices don't drop, or I should put it this way, being a bank then with loans on an average LTV level, of course the CREs will need to in some sense. They need to adapt to the rate levels and over time most likely move down their debt, inject equity, sell off assets, etc. We think we're in a really good situation and a negotiation situation to them. We think they realize the equity owners that they have a risk of losing equity, but they have an even bigger risk if they're not injecting equity and they need to give collateral to banks with an LTV level at 50%. That's obviously capital destructive for them. So we think we're in a really good situation where we can talk to them, we can find a good solution for all parties. And the outcome of that one will most likely be that some way they deliver their balance sheet, they adjust with more equity or sell off assets. And that's the journey we're following now to solve these imbalances which obviously the rate increases has created. So no, we look very constructed to this and we find it hard, at least on where you have LTVs of 50%, we find it hard to see huge credit losses coming from that.

Thanks, thank you very much.

Thank you. I will now hand the call back for closing remarks.

Okay, thank you very much for calling in and thank you very much for your questions. And if you have any further questions, please call Peter and his team and they will definitely give you all the answers to them. So thank you very much for today. Have a good day. Thank you. Thank

you.