Svenska Handelsbanken AB (publ)

Ulf Riese - CFO Mikael Hallaker - Head, IR Lars Hoglund - Head, Debt IR Jorgen Olander - Group Head, Accounting

Omar Keenan - Deutsche Bank Research Jan Wolter - Credit Suisse Christoffer Rosquist - Barclays Capital Anton Kryachok - UBS Johan Ekblom - Bank of America/Merrill Lynch Anil du Toit - JPMorgan Edward Firth - Macquarie Research Adonis Catic - DNB Markets Jacob Kruse - Autonomous Research

Good morning, everyone, and welcome to this Conference Call for the First Quarter 2016. Joining me today I have Mikael Hallaker, Head of IR; Lars Hoglund, Head of Debt IR; and Jorgen Olander, Group Head of Accounting.

And the slides used for my presentation are as usual available at handlesbanken.com. My first Slide Number 2, is very, very familiar to you.

Here you can see the value creation of the Bank, with equity per share, including dividends, continuing its 15% annual growth rate, also when adding to the first quarter. During the quarter, interest rates have continued to fall in most of our home markets and are even deeper into negative territory in Sweden, for example.

On the negative side, we've also had a stock market decline that affected fee income on mutual funds, and the card business has been affected by lower interchange fees since December last year. Still with these different challenges, the business model of Handelsbanken has continued to generate these very stable developments, as has been the case for so many years now.

Our capital position has continued to strengthen, and was at the end of the first quarter at a level that we already now believe is compliant with the new and higher capital requirements that the Swedish FSA has proposed for implementation towards the end of the year. Return on equity for the first quarter was 13.1%.

Now to Slide Number 6, operating profit all in all decreased 10% compared to the fourth quarter. However, there were a few non-recurring items this quarter to consider when comparing the quarters.

During the first quarter, the Bank has sold non-core shares in MasterCard and Visa with a total capital gain of SEK827 million and in the fourth quarter, as you probably remember, we had a gain of SEK1,207 million from our divestment of SCA shares. The Bank has also decided to set up a reserve of SEK700 million, mainly for early retirement, in order to facilitate for the Swedish branches to adopt to and take advantage of the changed customer behavior that our digitalization creates and finally, regarding Oktogonen, the Bank has decided not to do any allocation during 2016.

This is on the back of the higher capital requirements that have been proposed, and to which I will come back to. In the fourth quarter of 2015, the Oktogonen allocation amounted to SEK438 million and adjusting for these items, operating profit actually increased by 2% quarter-on-quarter.

Then on Slide Number 4, you can see the profit and loss for the first quarter, here you can see that net interest income was down 2% compared to last year, but adjusted for currency effects, NII was unchanged. Net commission fell 6%.

Card fees decreased because of the lowered interchange fees that apply from December 2015, but on the other hand, we have increased annual card fees, which will gradually be reflected in the income throughout 2016. Equity brokerage fees were also lower, while there was a strong development in advisory fees.

Net gains and losses on financial transactions increased, but this was, of course, entirely due to gains from divestments of shares in the first quarter this year. Revenues all in all increased by 5%, including the capital gains.

On the cost side, personnel costs rose by 17%, and adjusted for the non-recurring items, currency effects and IAS 19 for pension costs, underlying staff costs rose by 2% year-on-year. This increase is explained by annual salary increases and, of course the expansion we are having in our growth markets.

Other expenses increased by 5%, and expenses all in all increased by 14%, but again, excluding the non-recurring items, underlying expenses increased just under 3% year-on-year. Loan losses fell to 4 basis points, down from 7 basis points one year ago.

Impaired loans dropped to 18 basis points, down from 25 basis points, and credit quality remained stable. If we then jump to Slide Number 23, you can see the sequential development of net interest income, a decline of 3%.

The major reason for this decline relates to higher state fees. As you may remember, in the fourth quarter we had the reversal of earlier booked fees to the stability fund.

This year, we start to pay half the fee to the new resolution fund and we estimate that to be SEK255 million for the first quarter. All in all higher state fees reduced net interest income by 169 million quarter on quarter.

The stronger Swedish krona gave another 84 million negative impact in the quarter and more negative interest rates in Sweden decreased NII by 41 million. Some decline in margins in Sweden were compensated for by volume growth in Sweden and elsewhere.

The mortgage market in Sweden was flat in the quarter and lending margins in Denmark, Finland and Norway were under some pressure, while deposit margins in Norway increased. All in all, total net interest income from lending and deposits in all our home markets had a very marginal decline of SEK13 million.

Now back to Slide Number 5. Here you can see that the Bank has had a good business development in the first quarter both on the private and corporate side.

Lending volumes increased in all our home markets and for the Group, lending increased by 2%, or SEK36 billion since year end. The incremental positive impact from the lending volume growth in the Group is clearly seen here in the chart on the dark blue bars.

It has been a steady growth, as you know for a long time. In the first quarter, the Riksbank lowered the repo rate by 15 basis points to minus 0.5% and average Stibor dropped 4 basis points.

The impact on deposit margins was still increasingly negative, however with a smaller incremental deterioration than we have seen in previous quarters. This is what the light blue bars show in the graph.

And of course, when interest rates only stop falling in Sweden, let alone increase, the underlying positive impact from our organic growth will become visible in the net interest income. Then on Slide Number 7, this shows our balance sheet which again has continued to strengthen.

Total capital ratio, which we calculate with a 50% payout ratio in 2016, rose to 28.8%, up from 27.2% last quarter. Core equity Tier 1 ratio, at the same time increased to 22.7%, up from 21.2% at the end of 2015.

A number of factors contributed to the strong increase and here profit generation was the largest item. We also had again positive volume migration, improved use of collateral, as well as a positive contribution from IAS 19 in the pension system in this quarter.

As you know, our very strong capital generation means that our core equity Tier 1 ratio has in fact more than doubled since the first quarter, 2009. In June, the countercyclical buffer in Sweden and Norway will rise and the recommended level of 18.6% communicated by the Swedish FSA as of year-end 2015 will therefore increase further.

And then in March, the FSA also communicated some proposed changes regarding the IRB models for corporate exposures. One of the changes regards risk weights in Pillar 1, which according to the proposal is anticipated by the FSA to be at least 30% for corporate exposures.

In order to achieve that, the banks will be asked to increase the assumed probability of default in the models by including a severe downturn year every five years to the statistics of actual loan loss history. The other proposal regards the maturity factor in advanced IRB models, where a floor of 2.5 years is proposed as an additional Pillar 2 requirement.

The details in these new proposals are not yet decided by the FSA, but they are expected to be implemented later in 2016. Our assessment is that the bank already at the end of the first quarter was indeed compliant with the new higher capital requirement that these changes may bring if the proposal is implemented.

On Slide Number 10, you can see the return on equity in our home markets, and this quarter again UK was in top with 16% in spite of the continued growth in the branch network in the first quarter. Denmark, still with negative interest rates, was at 14%, and so was Sweden, if you exclude the provision taken in the first quarter.

Norway, with an economy being in downturn, was at 12%, while the Finnish economy continues to struggle, and it has now for many years, as. However, the Finnish return on equity still amounted to 11%.

And finally, the Netherlands, where we have invested substantially in our product offering, was at 10% ROE. The underlying profitability in the Netherlands is strong, and we are very enthusiastic about the opportunities here.

In the Netherlands, our fee generating business is still very small compared to the lending business, but with large opportunities now when we add savings and asset management to the product range. On Slide Number 11, let me talk a little bit more about the Netherlands.

Our Dutch business is developing very well. Operating profit in the first quarter doubled compared to the first quarter 2015.

Household lending grew by 38%, and the loan loss level remained at zero. Cost efficiency improved, and cost income ratio fell by 10.6 percentage points, in spite of the continued substantial investments we do in the business.

We have the most satisfied customers of all Dutch banks, both in the private and corporate segments, served by our 23 branches. On the private side, the products we now offer to the customers include lending in various deposit accounts, cards, mobile app and the Internet, and we have today also announced acquisition of the Dutch asset manager, Optimix, and I will come back to that in a second.

In terms of lending, one half of the loan book is now to household. This is where we have seen the strongest growth during the last year.

Now with Optimix we also have the complete product range and have become a full service bank for private customers in the Dutch market. This gives us the opportunity for higher product penetration with our existing customers, and of course also stronger competitive position to attract new high quality customers in the Netherlands.

We are highly enthusiastic about the opportunities we have in the Netherlands. On Slide Number 12, you can see a little bit more information on our announced acquisition of Optimix.

This firm is mainly active within discretionary asset management, and its assets under management are €2 billion, including mutual funds and a very good customer base. Through this acquisition, we get a strong platform for growing the savings business also in Dutch market.

In the Netherlands, as well as in our other home markets, our customers have a strong demand for qualified asset management products. And as we did in the UK, we have been looking carefully into this market in order to find the right type of asset manager that fits into the Handelsbanken culture and our way of servicing the customers.

We are very happy to have found Optimix to make our Dutch product offering complete, and we expect the deal to close during the third quarter, subject to normal approval from authorities. Then on Slide Number 14, you can see the continued strong development for our mutual fund business in Sweden.

During the first quarter, Handelsbanken again was the largest provider in the Swedish market in terms of net new savings in mutual funds. While the market had a deteriorating trend in the quarter with net outflows, we gained EUR7.6 billion in net new savings.

Looking at the entire period since 2010, Handelsbanken has received 27% of new net mutual fund volumes in Sweden. On Slide Number 15, let me now discuss some of the improvements we will do in Sweden.

As I mentioned, the Bank has a strong development within the savings area, and we have had that for a long time, but we also still have a large potential and want to focus even more now here taking our best expertise even closer to the customers. Therefore, we have decided we will now start 10 new regional advice units covering savings, pensions and private banking.

By decentralizing our regional business support to more locations, this also allows us to improve the administrative efficiency in the regional banks; and as a consequence, we are merging the purely administrative functions of the eastern regional bank with the southern one. Our digital strategy is as you may know, based on providing all the tools to the customers and to let the customers decide how they like to interact with the branch.

In Handelsbanken, all customer interaction leads to the local branch, this has proven to be very successful and we have the most satisfied customers, and the use of opportunities, I would say, provided by our mobile app continue to growth very rapidly. New features are constantly added, and this enables the branches to work in a different more efficient way and to focus their time on proactive customer interaction in all the different channels, and on providing good advisory services, apart of course from also always decide on and monitoring the credit.

In order to facilitate the way the branches adapt to this new way of working, we have now set up a reserve of SEK700 million to primarily allow for early retirement, all else being equal this is expected to reduce cost in Sweden by some SEK600 million to SEK700 million per year from the end of 2017. So to summarize, the value creation in the Bank continued with an average increase in equity per share, including dividends, of 15% per year.

Operating profit increased 2% quarter on quarter, adjusted for the extraordinary items in the fourth and first quarters. We have decided to further increase the local footprint in Sweden with respect to savings, pension and private banking, by creating 10 new regional advice units.

Divesture of shares gave SEK827 million in capital gains, and at the same time, the Bank has set up a reserve of SEK700 million to facilitate the Swedish branches in their continued transformation to change customer behavior on the back of our digital development. This in turn, all other things assumed equal, is expected to lower costs in Sweden by some SEK600 million to SEK700 million annually from the end of 2017.

In the Netherlands, the Bank has agreed to acquire the asset manager, Optimix, this acquisition will provide a platform to expand our offering within asset management products in the Netherlands, and thereby, the Bank will from now on be full service bank with a complete product offering. Core equity Tier 1 ratio increased to 22.7%, up from 21.2% at year end, and we assess that the Bank is thereby already compliant with the new higher capital requirements proposed by the Swedish FSA that may be implemented towards the end of the year and with that, I conclude my presentation and open up for questions.

Thank you.

I've got two questions, just one on corporate risk weights, and then secondly on dividend accrual and the payout outlook. So firstly, I guess we started to discuss what the impact of higher corporate risk weights is going to have.

Could you talk through the potential for lending margin increases on the corporate book? Would you expect that lending margins can increase generally later in the year?

And how would that come about? And then my second question just on dividend accrual.

We've noticed that the accrual methodology in capital has changed from 70% last year to 50%. Could you just elaborate if that change is just of a technical nature, whether there's any link to higher capital requirements?

And should we take it as a signal that the extra dividends are not currently being planned for and could be replaced with, say a flexible buyback program? Thank you.

On the first one, as you may know, we are in discussions with the FSA to understand the mechanics behind the proposal that they have put forward and they have earlier said that they will make some sort of decision on this proposal in May. So we don't actually know exactly what the details are here.

And then you ask, could that be compensated by lending margins? And I guess that has to do first of all with the impact, and secondly, of course what -- how the market looks.

In general, it has always been the case in Sweden that fees in terms of taxes or whatever have been transferred to the clients, but I have a no more intelligent answer to that. And as you know, we don't do any forecast or budgets, or so on.

On the second one, I think it's important to understand that the 50% payout ratio deduction we are doing when we are calculating the core Tier 1 ratio for the first quarter does not contain any forecast element. Our capital policy is very clear.

We should first of all be compliant with the regulation. Secondly, we should have enough capital to cater for our growth which is as you know, very profitable.

And money that is left over after that we are happy to distribute. So the Board will of course as usual come back after year end with their proposal to the AGM on this year's actual dividend, what it will be.

I think it's very comfortable though to note that we clearly state that our best estimate, desktop analysis of the FSA proposal shows that we are already after Q1 indeed compliant with the proposal should it come into effect later in the year. And as a technical detail, you might be interested to also note that that would have been the case also if the payout ratio would include an extraordinary dividend.

So no forecast value whatsoever in that part. Thank you.

If we look at the adoption of the Swedish branch operations, you expect that to yield up to 700 million in cost cuts. Just to clarify on that.

And also, if those cost cuts or savings would flow to the bottom line, or if you think that they will be used for investments rather. So that's my first question.

Yes. Thank you for that.

We are putting aside the [indiscernible] of SEK700 million which is to be used predominantly to early pension as individual solutions for early pensions in Sweden and we see quite a lot of different parts when it comes to what we see in terms of efficiency gains in Sweden. One is of course, the reduction of personnel and also the competence shift that this will mean.

But also we have a very good as you know, customer appreciation of our app and that is growing very much. Simple transactions are now more and more done by the clients themselves.

We have also, as you know are now further decentralizing and reinforcing our capability when it comes to giving advice. I'm thinking of the 10 new units that we're setting up in terms of private banking, savings products, the pensions products and so on.

And I think that all of these -- the message here is that all of these things brought together we anticipate will have a very good impact in terms of efficiency. Then if you look purely on the 700 and the effect of the 700 million that we put aside, we said that all things being equal, that should correspond to the 600 million to 700 million in cost reduction as of the end of 2017.

And on those 600 million to 700 million cost savings, do you expect that to flow to the bottom line or used for investments? How should we think about that, please?

Well, as we don't have any budget like that. So we don't have any cost plan or so on in its totality.

And also, I think it's important to note that we're not doing this because of a cost reduction scheme, we are doing this in order to reinforce our interaction with our clients and make our clients even more satisfied. But it's also, of course, it's very beneficial from an efficiency point of view and from a financial point of view.

Okay. Many thanks.

And if I may, another question. On the capital side, there was a dividend paid out from Handelsbanken Liv boosting the capital this quarter.

Is there any excess capital left in Handelsbanken Liv, please?

We are, of course, very much hoping that Handelsbanken Liv will continue to perform and thus generating also these kinds of dividends to the mother company also in the future.

And a final question. The decision not to pay Oktogonen this year, I don't think that has happened more than a couple of times in the past 25 years.

And typically, when Oktogonen is not paid, that is because the ordinary dividend is capped. How should investors think about this?

Thank you.

That was a very good point that I've never thought of so thank you very much for bringing that up. There is no link whatsoever in this decision.

This is not at all linked to any such decision. So this is purely linked to the fact that the new capital rules have been proposed from the FSA, and in that context, we think it's a good idea to take time out with Oktogonen for 2016.

On the back of that, that's a good decision for the bank and it's a good decision for the bank's shareholders. And it so happens that the largest shareholder of the bank is Oktogonen and the employees of the bank.

So it's not a very dramatic decision. As, the Oktogonen decision is actually a discretionary decision each year of the Board, but of course, it goes without saying that from a practical purpose, this is something that we have discussed in the bank among ourselves to come to this conclusion.

So what's good for the shareholders is good for Oktogonen.

First one on capital and then secondly one on margins. So just on capital, following up on a previous question here.

It gives the impression with those moves that you're actually increasing your ability to build capital, but it's very clear what you said that neither Oktogonen or accrual of dividend has that purpose. But could you perhaps refresh what you said previously about your main concerns in the regulatory space?

You've spoken today about the Swedish FSA announcement in March but also said that you already meet those requirements, arising requirements and are comfortable with that. So are you also worried about Basel IV or other initiatives outside of Sweden?

That's the first question. And then secondly on margins, you said that your Swedish mortgage margins were flat in the quarter, while in the market, we can observe that discounts seem to be decreasing and the spread to short rates increasing.

So I was just wondering if you could elaborate a little bit on the mechanics behind your flat rates and perhaps how you expect that to develop going forward, as on your slide, you seem to have a quite positive view on the short rate development at least. Thank you.

On the first question, the Swedish FSA proposal is the immediate one and the one that we are thinking about. And also, we of course know that the counter cyclical buffer will go up in Sweden and Norway as of June this year, and then also its proposed for March in Sweden, March next year.

So that's a factor that we factor in. We are also, of course, thinking of the two elements in the Swedish FSA proposal.

When it comes to the Basel IV paper, it's very much early days. That should also first be decided what is the view of the Basel proposal, and then it should be implemented in the EU and then it should be implemented in Sweden.

So are we talking 2019 or 2020 or what? So it's very much too early to say anything on that.

I think it's interesting when you compare what the Basel paper that was put out now have said; and, of course, that does not go as far as the Swedish FSA does. If I asked you to do a sort of top-down summary, I would argue that the Basel is maybe going 20% of the way that the Swedish FSA are doing, It's not exactly the same because the Swedish proposal has more to do with the PD side and the Basel is also a bit on [LGE] side.

But ballpark, that's much more lenient, if you like, compared with the Swedish proposal. But we have to see, margins and you are talking about mortgage margins in Sweden, and that's a very interesting subject.

We don't do any forecasting on this, but I can only say that in the quarter it was very flat. And I'm talking about the back book; that's the only thing we talk about.

So I would very much say anybody's guess what's happening next year here. I don't really have any intelligent guidance to give you here other than the general observation that when capital rules change, or taxes are implemented, or resolution fund fees are implement, or so on, over time in Sweden it has always worked in that way that the full effect is actually paid by the end client.

But that has nothing to do of course on a quarter-on-quarter basis, but over time, we have always found that.

Can I just remain on the first point on capital, today; we have at least the first iteration with Swedish rules. If you look at the iterations coming out of the Basel Committee, those papers seem to become more and more lenient.

So would you say that overall when it comes to the threat, the rising regulatory requirements on the capital side that today we have slightly better visibility than in the fourth quarter and that you're seeing a more dovish picture, or is that not the case at all?

In a way, I think you're right, but of course, if you look in a longer perspective, we've seen Basel I, Basel II, Basel 2.5 transitional rules, Basel III, CRD4, CRR, Swedish implementation rules, and now Basel IV, so I don't think the world will stop after Basel IV, unfortunately, but on the other hand, I think that there is a limit to how high you can push capital levels without having a detrimental effect on the economic activity and I think that is on a general level, on a European level, and so on, now really coming and more and more into the considerations when implementing new rules. So I definitely see when talking to the decision-makers in EU, Brussels, etc., that this is more and more of a concern, so I think that is, when you say more lenient, yes, I mean compare Basel, the first Basel proposal on Basel IV and the paper that has come out now, I think it's very clear that the trend has gone in that direction.

Two questions from my side, please, firstly, on the contribution to Oktogonen. If the capital generation this year turns out to be better than you currently expect, and you will be in a position to pay more than 50% payout ratio by the end of this year, will this trigger a payment to Oktogonen towards the end of the year, maybe another rated payment in Q4 like we've seen last year?

Or have you completely ruled out making any payments to Oktogonen in 2016? That's the first question, please and then the second question on capital.

In the interim statement, you say that 90 basis points of profit, sorry, of capital build, came from profit and other capital measures, but if we just look at 50% of the profitability this year, that would account for roughly 40 basis points capital built Q on Quarter, so I was wondering what else is in that 90 basis points? and linked to that, when determining how much to pay out at the end of this year, do you still stick to having a significant buffer where the Swedish FSA capital requirement has been a prerequisite for having an elevated payout ratio; i.e., do we need to see a capital buffer of 300 basis points or so for you to be able, for you to be comfortable to be distributing elevated level of dividend?

Thank you.

Thank you very much for those questions. On number 1, Oktogonen 2016, yes, we have decided that no matter what the development will be, there will be no Oktogonen allocation in 2016.

On the second item, capital measures include, for instance, that we have things like we are using derivatives to lock in all currency effects and interest rate effects of our funding to match that 100% and, therefore, of course, when we now have cleared and chosen to clear more of that, counterparty risk goes down and, therefore capitalization goes up. We took 2.3 billion in a dividend from Handelsbanken Liv to the mother company.

We have also been able which has been a lot of technical IT work actually to link more of the securities we have -- the pledges we have, concerning some British lending on the real estate side. We were not able technically to get the information, the granular information.

So things like that are when we talk about capital measures. Your last question, we have not taken any other decisions regarding our capital goal.

So yes, we certainly want to have a buffer. And why do we want to have a buffer?

Well, we know that when the business cycle turns up, there will be good demand from our clients in terms of new lending. Investments are coming back to the system and so on, and we want to be prepared to meet that demand for our clients.

There's always also some volatility in the capital measures when you measure it. And thirdly, there are always some details in the regulation and so on that you can have small shifts quarter by quarter.

So to be comfortable there, you certainly will need to have a buffer, so no change on that reasoning.

Just a few quick follow-ups, firstly on capital, can you confirm that when you say you're compliant you've assumed a 30% corporate risk weight as opposed to anything more granular given the available information today? And secondly, with regards to the upcoming cost phase, or the restructuring of the Swedish operations, what's the broad timing?

Is this something you're starting now and most of the branch mergers and early retirements will come end of this year and next year, or is this already moving full speed ahead and we should expect to see this already in the second quarter?

On the first question, yes, we have Desktop actually said that what will happen in a risk-weighted assets if we use 30% -- we're actually a little bit over 30% as the risk weights. And you come to that you would need about 100 billion more in risk-weighted assets, just under that and calculated from that and we also know the effect -- more certainly we know the effect of the M Factor, the 2.5 year floor in Pillar 2 which both we and FSA have met that 0.5% in CET1 terms.

So that's how we come to that. So it's not a granular calculation saying that we should be less, or so on.

We are actually doing what they anticipate in the paper. The timing, this is up to -- the timing on the Swedish changes and improvements and so on, that is of course up to the branches and the regions to implement this.

But this is not something that has come, I want to stress top up, from the top in any way. This has come from the branches and that has talked with the regional heads and so on.

So they have been working on these ideas for a long time. But we don't do any budgets.

When you do budgets and those kinds of timing plans, you always get some sort of awkward effect. This is a natural process.

It's good for the clients. It's good for everyone.

And it's a lot of positive things that it will bring more expertise out closer to the client and more focus on the pensions and savings, more possibilities to free up time since our app has been so fantastically well appreciated. And new features here are not only planned but close to be delivered from the technical side on the app.

So lot of things happening here, but I don't want to have any view of the timing. We have said that we estimate that at the end of 2017 we will have the full effect.

I have two questions, please. The first one is on fees and the second one is on the pension impact on capital.

On the fees, in particular on the interchange that you were talking about earlier, if I take the first quarter number, down 7% quarter-on-quarter for payment fees and I extrapolate that for the entire year, that gets me to about 200 million in lower fees on an annualized basis. Now you mentioned that there was some mitigation from an increase in annual fees, but is the 200 million a reasonable estimate, or will it or is it likely going to be less than that?

And then secondly on the pensions, I think you commented last quarter that if the level of interest rates remained where they were, which I suppose they have, you would gradually start to increase the discount rate over the course of 2016. I guess you've already increased it by a little bit this quarter.

I'm just wondering whether if rates remain where they are we should expect to see you further revising the discount rate upwards in the following quarter. Thank you.

On the first one, the interchange fees, I think your calculation is in the right ballpark. And when it comes to the contracting annual fees on the cards, the contracting effect, it was like this that, of course, not all cards have got new fees as of yearend because it depends on when you pay the card fee, and that depends on when they in the year, when they did you start your card, so to say.

So this is an effect that will come gradually during the year. When it comes to pension interest rates, you're absolutely right.

It was 2.25 at yearend, and we are now using 2.5. If the new or if the interest rates are as they are today, it will not have any effect, we are at the same number.

So this is the case at the moment.

Okay. And just to confirm then, if rates remain where they are, then the 2.5% discount rate is the appropriate level?

Yes. If something happens until Q2 is ended, we will use 2.5 also for Q2.

My question, sorry, is back to capital, and I'm just trying to check where I'm going wrong here, because I hear what you say about meeting future capital requirements, but if I look at the regulatory minimum of 18.6%, it seems to me most of the numbers are pretty clear. You've got plus 0.3% for countercyclical and plus 0.5% for the M Factor, which gets you to about 19.4%, which if I then put your buffer on top, it's somewhere around 21% I guess broadly, not precisely, and that's against your current 22.7%.

But if you put an extra 100 billion of risk weighted assets here, which I think is what you said was the 30% risk weighting that takes your 22.7% down to about 19%. So that seems to me a gap of about 200 basis points.

So could you tell me, what number am I missing in the sense of you saying that you're meeting your requirements already?

Yes. This is a very interesting exercise and I don't know if we've got the time to go through it all, but the complexity when you talk about quotas is, of course, the fact that in Pillar 2, you have some absolute numbers, while the rest is a quota.

So for instance, when risk weighted assets goes up, our number of course goes down, as you say, but at the same time, the FSA number goes down, because some parts of the quota is in Pillar 2 terms with absolute numbers. So you will actually have to think through the whole thing, the whole quota.

So what we have done is that we take all our situation at the end of Q1, that includes things like the pension system concentration, risk interest rates, interest rate risk in the banking book, etcetera. And this risk weighted asset and risk weighted assets [indiscernible] effect, and we look at what our number will be and we look at what how does the FSA, if they will put in all the numbers that we know now is a fact, because Q1 has ended.

They don't have the numbers yet, but we put in them in our model for them and use their methodology. Then we come to that, yes, we are indeed compliant.

There are uncertainties because we still don't know the details from the FSA.

Does that mean that what you're saying? Sorry.

As we move along in Q2 and Q3, things will happen. We will grow and we will generate capital etcetera.

Interest rates, we talked about the pensions and so on. So things fluctuate, and that's of course why we have a buffer.

So take it as our best estimate when we use all the knowledge that we have, we are indeed compliant. And as I said, maybe it's interesting to know that, yes we're actually compliant even if we in that calculation would include an extra dividend.

So just to be clear, does that mean that you're assuming the 18.6% will go down i.e. the Pillar 2 buffer will be reduced?

Is that what you're expecting?

I deliberately refrained from using any numbers because it's so dangerous, because when you use a number, you have to be very specific and detailed about what kind of regulation you use when you use the numbers and that's why I say we have the numbers that you see in the report; that's according to today's regulation. What we've done is that we've taken the future regulations or the proposed future regulation to our best knowledge, and done the calculation.

But I don't want to give you exact figures because this is not exact. We don't know the details.

The only thing we can say is that, yes, when we do these, we come to the conclusion that, yes, we are indeed compliant already now after Q1.

I just have one follow-up question regarding this SEK700 million in provision that you are taking to facilitate the adaption to change customer behavior. Do you see a reduction in the number of branches?

And what would you say is an optimal number of branches for Handelsbanken in Sweden with the current customer behavior? Thank you.

Yes. When I hear what the branches have said and the regions, and so on, there is scope for maybe merging some branches.

I'm not talking on a big, big scale, but on the marginal, yes. As you know, in Handelsbanken, the branch really is the Bank, so we will always be the Bank with most branches, and so on but, for instance, in terms of competence, as you know, there will be new legislation now that you have to be certified talking about mortgages.

That's new legislation. You've got MiFID II.

You've got more and more legislation regarding investment advice, etc, which means that you have, we have, for instance, branches that are only one person, or 1.4 person, one part time and of course, to keep that competence and also be very active in the savings deals, or private banking deal, and so on, that is not possible if you don't team up with a branch that is a little bit larger. So, yes, there are elements of this.

Again, there's no central plan saying this is the exact number or this is how it's going to be done. It's up to the branch and the regions to go about that.

But I think that that is an element.

Sure. Thank you very much, and is?

Because I saw some article in Dogens in the street today, they are talking about 50/60 branches less in a couple of years, does that sound reasonable to you?

Yes. I think that could well be reasonable.

But again, the important thing is the number is not important. The only really important thing is that it's done so that the customers get more happy and the people that are working with their clients are getting more happy and get better instruments, better circumstances to make the customers satisfied.

And to really use the time on more value-creative things, because that's what this is all about. Digitalization means that the client can themselves do more of the ordinary transactions, check the balance in an account, and so on.

In the old days, you went to the branch. Now, we have only 1% of our interaction in terms of number of interactions is actually done through the physical visit to the branch.

99% is done through digital ways or app, Internet, or so on, which I think is extremely important to stress, or choose from the branch. It's just another way for the client to reach the branch.

So the branch is not only for physical visits. The branch is responsible for the client regardless of how the client contacts the branch.

And this setup, I think, I haven't seen any other bank that has this thinking, and that gives so much power to the whole digitalization theme and possibilities. And combine that now with our large, large potential when it comes to savings products and the reinforcement we are now doing with the 10 new local regional hubs for private banking, savings and pension.

Just a couple of quick follow-ups, I guess. Firstly, when you say you're compliant, I know you don't want to go into any numbers, but does that compliance include an element of your 1% to 3% management buffer?

So is it basically the FSA, whatever that comes out at after Pillar 2, are discounted plus at least 1% management buffer? And then my second question was, we should get an EMRA regulation in the next couple of days from Swedish -- from the Swedish Debt Office.

Have you gotten any indication on how that will be treated and how senior debt will be treated? And then lastly, with this digitalization drive, how comfortable are you with your current IT platform?

I don't know if you can say anything about when that was built or how -- if there is any need for additional investment into that platform. Thank you.

On the first question, yes, we are compliant with the regulation. I am not talking about the amount of buffers over the regulation when I say we are compliant.

I mean we are compliant with the regulation. And, yes, there is some buffer, but whether it is enough and how the exact numbers will come, then we have to know the regulation before we can get into that.

But as we said and as you've seen from the figures, we want and we have been building capital in order to be compliant. We've done that in the first quarter and we have a good ability to continue to do that in my opinion, going forward.

The EMRA the answer is, no. We don't have any more information than you on the EMRA and I don't what to speculate on what National Debt Office is coming with.

They are coming -- they have said that they should come soon, as you know. Digitalization and platform, yes, that's very interesting.

Yes, we have a very good platform and I think that has to do with the fact that always long-term as Handelsbanken, we have constantly been investing every year regardless of the business cycle. I see so many banks that have gone to zero because they don't have the money to invest.

But I think this kind of long-term-ness you get with a bank like Handelsbanken where the employees are the larger shareholders. Of course it's very dangerous if you do not constantly invest.

So I would describe our IT platform like a plane coming in every night to the airport, and as you know, because of flight regulation, you have to choose a couple of bolts and two seats and meter and so on every night. And then after 10 years when the same plane lands, it's basically a totally new plane.

It has got the same sort of number in the tail, but actually, all the parts have been shifted. And that's how you have to do it with IT or you will get -- we've got one example, I think you know which I mean in the Nordics, with an incredible amount of work to shift almost everything at the same time.

Very dangerous, very complicated, and so on. We would never like to be in that kind of situation.

But it takes a lot of -- you have to be very stubborn to do this year in and year out.

And is that platform common across the geographies that you operate in?

You can say that there are common denominators and there are parts of it that are local. So it's a combination.

The way of thinking and like, and the cash management systems and so on are all the same. But you seem to be very detail interested so we would be happy to set up a special session with you if you want to know more.

Thank you. Okay.

Then I thank you very much for attending today, and as usual, if you have any more questions that we have not had time to cover, please don't hesitate to call us. And we look very much forward to meeting with you in Q2 and hope really to also talk before that.

So thank you very much for attending today. Bye-bye.