In a recent earnings call, the company reported a decrease in net interest income due to reduced credit demand and increased competition, resulting in a 3% decline in total income. Despite these challenges, net fees and commissions held up well, and the company maintained a strong credit quality with net reversals of 95 million. The common equity tier one (CET1) ratio remained robust at 18.8%, well above regulatory requirements. However, operating profit declined by 7%, and expenses rose by 6%, attributed to non-recurring factors and increased staffing. The company is implementing a new organizational structure to enhance efficiency and cost management, with a focus on the balance between business generation and support units. They also aim to improve their savings business in home markets and maintain a strong capital buffer to support credit supplies and business growth.
Key Takeaways
- Return on equity slightly declined to 14%.
- Net interest income impacted by reduced credit demand and increased margin pressures.
- Net fee and commission income remained strong, especially in savings and private banking.
- Expenses rose by 6%, largely due to non-recurring factors and additional hiring.
- Credit quality stable with net reversals of 95 million.
- Common equity tier one ratio robust at 18.8%.
- New organizational structure implemented for better efficiency and cost management.
- Operating profit decreased by 7% amidst increased competition and lower interest rate margins.
- Company focusing on customer satisfaction and improving savings business in home markets.
Company Outlook
- The company is focused on maintaining a strong capital buffer for business growth.
- A new organizational structure aims to improve efficiency and cost management.
- The bank plans to focus on building a more balanced business mix and improving profitability, especially in Norway.
- In the Netherlands and Sweden, the focus will be on mortgages, property financing, and reducing administrative costs.
Bearish Highlights
- Increased competition has led to lower interest rate margins.
- Decrease in net interest income and net fees and commissions, resulting in a 3% decline in total income.
- Operating profit decreased by 7%.
Bullish Highlights
- Strong customer relationships and decentralized business model emphasized.
- Net fees and commissions show a stable and growing trend.
- Historically low credit losses indicate strong credit quality.
Misses
- Net interest income and total income declined.
- Increased expenses not fully offset by business growth.
Q&A Highlights
- The company is not basing branch pricing on future rate cuts, but on central treasury decisions.
- IT investments in Norway will decrease, but overall costs will not due to amortization.
- Focus on reducing full-time employees and phasing out consultants to manage costs.
- Pension expenses expected to remain flat in the coming quarters.
The company, which trades under the ticker symbol provided in the context, is navigating a complex market environment with an eye on cost efficiency and customer service to maintain and grow its market position.
InvestingPro Insights
InvestingPro data indicates that the company, trading under the ticker SVNLF, is currently facing a challenging market environment but also shows some potential for value investors. The company's market capitalization stands at 21.73 billion USD, and it is trading at a low P/E ratio of 8.21, which when adjusted for the last twelve months as of Q1 2024, further decreases to 7.07. This low P/E ratio, especially relative to its near-term earnings growth, suggests the stock might be undervalued. Moreover, the PEG ratio for the same period is 0.27, which could imply that the company's earnings growth is not fully reflected in its current share price.
In terms of performance, the stock has experienced a significant drop over the past week with a price total return of -5.2%. This recent decline is part of a broader trend with a one-month price total return of -8.43% and a three-month return of -14.45%. Yet, it's important to note that the six-month price total return is positive at 11.55%, indicating some recovery from earlier lows.
An InvestingPro Tip for SVNLF is that the stock is in oversold territory according to the Relative Strength Index (RSI), which might interest contrarian investors or those looking for potential rebound opportunities. Additionally, SVNLF has a history of rewarding shareholders, having raised its dividend for 4 consecutive years, which could appeal to income-focused investors.
For readers interested in a deeper analysis, there are additional InvestingPro Tips available, including insights on the company's position within the Banks industry, profitability predictions for the year, and its gross profit margins. To explore these further, visit the InvestingPro platform for SVNLF, where you can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
Full transcript - Svenska Handelsbanken-EXCH (SVNLF) Q1 2024:
Operator: [Foreign Language] [Multiple Speakers]
Unidentified Company Representative: [Foreign Language] [Multiple Speakers] Income is down, expenses are up and we are far from satisfied. We are never satisfied when development goes in that direction. Return on equity in the quarter amounted to 14%, which is somewhat down from the previous quarter and just below the average of the past ten quarters. Net interest income was generally impacted by a continued reduced credit demand and a high rate of amortizations in our home markets. But we also see quite a significant increase in pressures on the margins, especially on deposits in all of our home markets. Net fee and commission is holding up well. We see a continued good trend in savings and particularly in private banking and occupational pensions; these are areas, of course which are very significant for our growth, which is to be balanced both against lending growth and fees and commission business. We have a cost increase of 6% in the quarter. Some parts of this were non-recurring in nature, such as a major component to the profit sharing system Oktogonen and mostly from 2023 and what's pleasing to note however in terms of the cost increases is that our branches are hiring more people. There is a demand for services out in the country and this is met by somewhat increased level of employees. CI ratio amounted to 42% and credit quality is, as expected, continued very stable and we report net reversals of 95 million; yet again a sign of the fact that the bank's model with lending to strong resilient customers and our proximity to our customers is a way for us to manage, for example, balancing credit losses. Credit losses are all about how you manage credits over time and our branches do this in a very, very good way with a strongly entrenched organization locally. The proximity to our customers is not only building our customer satisfaction, but we can also operate close to the bank's customers, make necessary adjustments and reduce the risk as a result. The common equity tier one ratio was 18.8%, 4 percentage points above the regulatory requirement. In house, in the bank where we are right now, there's a very determined work of change ongoing to improve efficiency and strength in our organization. And as of the 1st of April we have a new organization in place. We've moved central business supporting units and components closer to our business and you know that we want to keep costs and expenses as close to income as possible. So business support operation costs are transferred close to business decision and we strengthen and expand the decentralized responsibility for the implementation of efficiency improvement to improve our abilities. In 15 years, our corporate objective has been to have a higher return on equity than our competitors in our competitive home and comparable home markets. We have five main areas where we work in a very focused manner right now. The first one is the fact that we need to find an efficient operation and we require a good balance between business generating and business supporting units. And we're now reviewing very, in a very focused manner how we can improve efficiency, mainly in the business supporting component, and deliver everything that we need to drive our business forward, but no more than that. IT development expenses have been at a high level for a number of years and as a result, we have a number of new tools for our people to use, such as a CRM system. We've worked with Microsoft (NASDAQ:MSFT) 365 that we've implemented, amongst many other things, and we've worked a lot with regulatory-based requirements to be compliance -- in line with compliance, and all of this is obviously reflected in our development costs. Intense work is ongoing to make our IT development work more efficient. We're reviewing what to develop further and I look forward to a situation and I expect that we will reduce the pace of IT development to some extent part of the bank which moves back and forth depending on competitors’ requirements on a regulatory basis, what the customers are asking of us, et cetera. But we've been at a very high level and we will probably reduce the pace and focus on what we really need to deliver upon in particular. We are not like any other bank and our business model stands out. We're always using, as our point of departure, our customers. We have a strong belief, we're convinced that we have this decentralized business model for reasons, strong power to make decisions locally. We're personal. We value long-term relations with our customers. We also value our financial stability and low risk tolerance. And in a word, where more and more banks are becoming more and more alike, it's very important that we communicate our special nature for this bank ever more clearly in all the communications channels in the bank, externally, internally. And I will continue to work to make sure that we clearly stand out in showing what the core of Handelsbanken really is. Savings business is a very important part in our bank and there's more to gain here when it comes to our home markets. If we look at the UK, Norway and the Netherlands, we see that there's more that we can wish for. It's very important when we build this bank that we do this in a balanced way, with a balance between deposits, lending, net fees and commission, mainly in savings, but also in payments. And we have real opportunities to see increases in all our markets. We have excellent customer satisfaction and very skilled people. We're close to our customers in all our home markets, so we have opportunities to improve our situation in net fees and commissions, not least in all of these home markets. And as I mentioned already, for Q4 we've had a focus on the Norwegian operations. They saw a Q4, which was on the weak side and in Q1 as well we can see that the poor performance in the Norwegian business has continued and we need therefore to be focused and have a new strategic refocus. I'm going to get back to that in more detail, but it is really about having even clearer focus on the fees and commissions and savings and deposits, stepping down potentially a little bit on lending. If we look a little bit closer at our result development for the first quarter we see that ROE amounted to 14% approximately, net interest income down by 5%, mainly due to lower interest rate margins. The net fees and commission was also down somewhat. Increased savings in advisory services, fees and commissions counteracted by seasonally lower payment commissions and total income down therefore by 3%. Expenses up by 6%, but adjusted for the Oktogonen by 4% and it is in particular the annual salary adjustment and a somewhat increased number of employees, which are the reason for this. The C/I ratio up to 42%. Credit losses were net reversals and credit loss ratio was negative by 0.01% and all in all, underlying operating profit reduced by 7%. Let's have a look at our results compared to the previous period last year. Income was up by 2%. Cost increased by 12%. The cost increase was in addition to it being a year with unusually high cost inflation in all our markets, mainly due to the salary adjustments, an increase in the payroll and in particular in our IT department and also in other markets, not just Sweden, where the work to combat financial crime is gaining in importance and we're hiring more people, in fact, to strengthen our business in that. But we also see that in the branch operations, they're also hiring more people. Credit losses were low also last year. All in, our operating profit down by 3%. Net interest income during the quarter, as I mentioned, is down by 5%. And this reduction is mainly explained by lower interest rate margins as a result of an increased competition in our markets. And competition, as you know, is something we face every single day, but we have very skilled people and heads of branches and they're always focusing on the local situation, local competition, ensuring that we don't lose business with our excellent customers. And we know that this, of course, is going to cost us a little bit on the interest rate, but we have a long-term focus on our customers and it goes up and down. We adapt to competition and our branches have tackled this issue head on, working with pricing and offering customers the right options at any given point in time. And we're also seeing a transfer where our customers are moving from low interest rate accounts to accounts with higher interest rates and it's a perfectly rational move and it's building long-term customer satisfaction of course. All in all, we saw an impact from the net effect of margins and funded costs to the tune of minus 392 or 3 percentage points of reduction in net interest income. A change in business volume also had an impact of 87 million or 1% of net interest income. Credit demand generally seen still modest in most of our home markets and there's a high rate of amortization we see in our customers in Sweden and in the UK as well in particular. That is a good thing at the end of the day because we have customers who are able to pay off on their mortgages and their debts. It's a rational decision and it's good for our customers underlying there's a better tone with somewhat stronger demand for both mortgage and real estate funding and other factors. That's what we're sort of perceiving under the surface right now. We also have a day effect between the quarters, which means that we have 105 million kroner lower. And the government deposit guarantee scheme fees up by 72 million to 61 when the comparison quarter was impacted by the final fee for 2023, which was in fact lower than had been anticipated during the beginning of the year. Liquidity portfolio, foreign currency effects and other effects saw a smaller effect than in previous years. The net fees and commissions, with the exception of the pandemic period, have been a stable and growing. Savings commissions two-thirds of the net and stable trend in spite of volatile stock exchanges and not on reasonable explanations in the stable net inflow in our funds and net payment commissions also growing gradually. For the first quarter we saw the normal seasonal pattern and it was down a little bit from the fourth quarter where our customers spent a little bit more. We've seen a long positive trend when it comes to net savings in Sweden, and this continues. The Handelsbanken market share of accumulated net inflows in neutral funds that's 12% of the market. But since 2010, we've had a market share of 25% of net inflows in mutual funds new savings, and we see that net inflows are significantly higher than the market share outstanding volumes and savings is important when building long-term growth, and of course, this is something that builds profitable growth over time. An important explanation to these nice flows, of course, is our way to meet customers in our branches, where we reach customers in a very efficient manner. We have a good combination with digital services that customers like. And that is also where we have savings as a very important part of the business and oftentimes this is where we have the first conversations with our customers. Within savings we also see, and I've said that before, that we have a positive trend within private banking and the occupational pension business. For a few years back now, our advisors have been working out in the branches together with the co-workers in the branches, and this has proven to be very successful. We have a nice growth. Compared to last year we have an increase in the customer base with 16% in the private banking business and we see occupational pension plans up 20%. Looking at expenses, they are up 6% in the quarter, but underlying it, significantly lower. And we can see that we have staff costs to the left, where we have provisions to the profit sharing system Oktogonen with 233 million and 170 of that was an adjustment from the year 2023. Pension expenses were up 76 million and this is due to costs for pensions earned that are up with a lower discount rent compared to the previous year. And expenses charged to expenses for IT were up 55 million and this is a result of us having replaced consultants with employees but also the fact that we charge this to expenses to a higher degree compared to activating it in the balance sheet. Other expenses, roughly around 3% of that increase is explained by the annual salary review and the fact that we have more employees. And overall staff costs were up 2%, more employees as part of the explanation and we also have more preventive work combating financial crime and we're developing our business and IT, and we see an increase 4% between quarters. Development costs were down to a certain extent because of the switch from consultants to employees, but we also see seasonal effects. Credit losses, and I've mentioned this before, we have reversals of 95 and you see down to the right that we have a credit loss level that has been around zero for the last few years. In this quarter we had a 75 million reversal, the so called management add on and this was something, a reversal that -- reserve that we started with the pandemic, but we haven't had to use it to meet losses and that was why we could reverse 75 million. And the end of the quarter, the remaining reserve was 529 million krona. Historically speaking, we have seen that in economical down and turns, we have lower credit losses than other banks and this is not by coincidence. It's a result of our lending portfolio and the strict view we have on risk, where we take responsibility locally and we can early on identify risky situations and we can act early and thereby limit risks. And we feel that we're very safe and secure when it comes to the credit quality in our lending portfolio. Then, looking at the capital situation, we have CET one ratio that is 18.8%, 4 percentage points above the regulatory requirements that we have from the Financial Supervisory Authority. And in the previous quarter, we communicated that we look at the world around us and feel that these are troubled times and we want an extra capital buffer over 1 percentage point long term, 1.3% above the target range. We want to be a first class partner in uncertain times and that is what we also see in the ratings we get from rating institutes. We have an extra buffer and that means that we have capacity. Notwithstanding what happens in the world around us, we can take responsibility for credit supplies and we can grow our business. The bank will year end look at what is necessary in terms of a buffer for next year looking at the world around us. To calibrate the level in the quarter to 18.8, well, we anticipate a dividend of 1.3 krona per share, which corresponds to around 40% of the result for Q1. But as always, this anticipation should not be seen as guidance for what the dividend will be but rather this anticipation was negatively impacted in Q1 because of the risk exposure amount and what we see in open, rational risks under the structural currency position, and these to a certain extent are of temporary nature. And then our home markets, starting with the UK, representing 17% of the operating profit of the group, and the C/I ratio was 53%, and return on allocated capital 17%. We see falling volumes within consumer and corporate lending alike and this has an impact, of course, of the market development. We see a high degree of amortization, but we have a low demand that we've seen when it comes to new loans. At the same time, UK is where we have the highest level of customer satisfaction and stands out in the local market. We have local decision making and we have easy access to advisory experts, which is unusual in the UK and that is why we stand out. Looking into the future, we want to upgrade our digital channels in the UK and we want to strengthen the local competencies that we have in the branches. We have a small market share as of today and we have great potential to grow. Looking at Norway, Norway represents 6% of operating profit and C/I ratio is up to 52 and the return on allocated capital is down to 7%. And as I have stated, we've stated before, we are not happy with the results and profitability in Norway. We've seen weak development and this is partly linked to major investments to strengthen our offerings for our customers. And we continue working on that. And what we could say being positive this quarter is that we have a volume growth in consumer side and we see growth in mortgages as well, which is promising. And as I said in Q4, analyzing the Norwegian businesses, well, that is something that we have done and we have decided to look at the strategy that we have in Norway and we're going to become more of Handelsbanken focus on the branches and we're going to focus more on our savings business and perhaps slow down a bit when it comes to the growth ambition so that we can grow, but not too fast. We will become more of a Handelsbanken and we have developed a business in, to a certain extent, in new ways. We have a new manager as of May 2nd and the work will begin with evaluating changes that need to be done and this will be done together with a strong branch business that we have in Norway. And we should not forget that Norway underlying has a strong business with satisfied customers, skilled coworkers and this is the country where we want to be and where we are to grow and become more of Handelsbanken. Netherlands representing 3% of operating profit of the group C/I ratio of 53, return on allocated capital 12. And as you know, this is a more narrow activity where we focus on mortgages, property financing and we're going to continue to deliver when it comes to the Netherlands. And here as well, we have seen that costs have increased, number of employees have increased and we're also working with the combating financial crime. Sweden represents close to 80% of the operating profit of the group, C/I ratio, 31%; and return on allocated capital, 16. And here, well, we have to do what we promised in Q4 and I've mentioned this, we have in the bank to either do business or help those who do the business and other administrative costs should be reduced as much as possible. As of April 1st, we have a new organization where we have brought together different administrative functions. We are trying to eliminate overlaps and unnecessary bureaucracy and this is work that is being done now to make the bank more efficient and remedy these shortcomings. And we also have an ambitious to continue this focus. And a lot of work is being done with intensifying what we do to make sure that we become even more competitive and help our branches by keeping costs down when it comes to the administration, and this work will continue throughout the year. And my ambition is that this way we'll have more focus on customers, good corporate offerings with good business support, and that we'll also have IT developments that are closer to the businesses so that we overall become more efficient and have more of a business focus in the entire bank. We're moving towards becoming even more of a Handelsbanken. We have challenges, things that we're not happy with. We know what these things are and we're taking action, but we're also very proud when it comes to other aspects, and we're working on becoming even more stronger here. We are in a position of strength and we are working with changes operationally and that creates a foundation for future profitable growth. Thank you.
Unidentified Company Representative: [Foreign Language]. We're going to open up for questions.
Unidentified Company Representative: Hello everyone and welcome back. We are now ready to start taking questions and as always, we would prefer if you would ask one question at a time so that everyone has a chance to ask a question. So operator, we're ready to take on the first question, please.
Operator: Thank you. [Operator Instructions] We will now take the first question. It comes from the line of Rickard Strand from Nordea. Please go ahead. Your line is open.
Rickard Strand: Yes. Hi and good morning. Question on the profitability in Norway. If you could just sort of share some details on your current assessment there. If you think that the main problem is primarily due to the household or the corporate segment and what do you think you could do to, as Michael commented in the press conference, grow more in Handelsbanken fashion? What do you mean with that? Thank you.
Unidentified Company Representative: Yes, thank you Ricardo, for that question and good morning. Yes, as you know, I mean in Handelsbanken we work with trying to build profitable growth and we build it by the branches. The branches choose their clients and build their business with the client name by name. And obviously, as we've kept reiterating for some time now that Norway, as it is right now, is unbalanced in the business model, quite a lot of lending, much less of deposit and much less of savings business. So we want to build a more balanced mix there, but it is of necessity that we try to build it from the branches name by name. So you should expect a higher emphasis on profitable growth. And of course, we want to build a better business mix, and that business mix will imply both a higher focus on savings business and deposit.
Rickard Strand: Sorry. And just a brief follow up there. Is it primarily then on the household segment that you need this improvement or what is your assessment there?
Unidentified Company Representative: No, I think it's fair to say that if you look at our business mix, I mean, we have a high tail towards corporate sector. So we want to -- of course, we want to grow in the privacy sector, but we want to do it with the branches in the leading roles. The branches choose their clients they bank with. And yes, a more balanced business mix will imply a higher degree of private individuals, most likely, and a higher degree of savings business and capital light income.
Rickard Strand: Thank you very much.
Operator: Thank you. We will now take the next question coming from the line of Magnus Andersson from ABG SC. Please go ahead.
Magnus Andersson: Yes, good morning. I'm sorry if you touched upon this already at the press conference this morning. I didn't have time to listen into it. So I would just like you to explain how the net funding and margin effect could go from plus 245 million in Q4 2023 to minus 392 in Q1 2024. And also, if you could say something about what you expect in terms of migration or any other effect, we should be aware of going forward for the year, whether this is actually the correct starting point for NII, and also whether you were surprised or not about the development in Q1.
Unidentified Company Representative: Thanks, Magnus, and good morning. Well, first of all, I mean, the way we treat our NII is obviously that the branches treat the relationships with the clients, and they both choose their level they land on and what they pay on their deposit mix. And what we've seen this quarter is obviously quite a bit of a hit. And even though we don't normally divide it in, it comes from pressure on deposit margins and that coordinates with a movement from transaction account into savings account and primarily like three months savings accounts. It's been quite a tough competition landscape there, as you've seen for a long time. SBB has taken quite a bit of market share. Our branches will never ever want to lose a good client on price, so they've done what they normally do. And this quarter, we see a bigger movement than usual. I don't think you can put a meaningful estimate on the future if that's consistent, if it's going to move, because all the branches will each and every time will try to stay competitive and do the best to build a long--term relationship, but margins do go up and down, but this quarter, obviously, it's a high number in margin drop there.
Magnus Andersson: Yes, but I mean, if you look forward throughout the year, do you think, is it unusually large this quarter? Because it seems like it's larger than you kind of indicated during the second half of 2023, this impact in terms of migration?
Unidentified Company Representative: [Multiple Speakers] like you say, yes, it is larger than you would expect, and it's not from a central perspective done, so it is branches who -- in the aggregate of the branches, their decision has come up to this solution, this quarter; and, yes, that might change. And I think the important message for us is as well, we really believe in this business model. This is what is taking us to the situation of having really, really strong client satisfaction. So we really want the branches to keep doing what they do, but margins will go up and down with their business.
Magnus Andersson: Okay, thank you.
Operator: Thank you. We will now take the next question from the line of Andreas Hakansson from SEB. Please go ahead.
Andreas Hakansson: Good morning, guys. Questions on costs. I mean, costs are rising very quickly. I mean, if I take out Oktogonen and you have, what is it, almost 10% or 9% Q1 over Q1? And when I listen to your CEO, sometimes it sounds like he wants to reduce costs, sometimes he sounds like he wants to invest. Could you tell us a little bit where should we expect costs to go from here? Are they going to go up or down or sideways or what's your feeling? Could you help us a little bit on that?
Unidentified Company Representative: Yes. Thanks and good morning, Andreas. I think it's fair to say that we in the bank view cost in two different ways, more or less. We really like cost where the business is generated. If branches see more business possibilities, we really want them to go out there and hire and do more business, and thereby we expect it to come with quite decent key ratios and business outcomes. On the other hand, we obviously know that cost in the banking system is a lot more than just the distribution at the branch level and all the other costs, we really try to stay really conservative around and try to be efficient. So, yes, I think you understand Michael correctly. He do appreciates cost if it increases income, but we don't like cost, which is just increasing cost. So what we will spend and what we do spend a very large focus on now is obviously that first of all trying to merge a few operations, which is support functions we merge them between the group functions and the Swedish operations and thereby we can increase the efficiency and go down in a NFTs and costs there. So that is one of the key targets. Another key target is obviously to improve the way we do IT development. We built an agile way of developing over the last five to -- five plus years and we think that can be merged and streamlined by the way we steer the rest of the bank and we think that will create efficiency gain on that one, bringing down costs. We also think that over a few years now, we invested quite heavily both in CRM and like the toolbox for the employees and we think we can spend a bit less there. So all else we will do our utmost to actually bring down both consultancy levels and NFT levels. We won't guide on it, but that's our main focus and thereby I'm expecting to see cost basis to move in a much better direction whilst also seeing reallocation from central costs to allocating more of the cost base to where the income is generated as well.
Andreas Hakansson: Okay, just on Oktogonen, is this related to cost? I mean, your profitability in Sweden, Norway is below peers and the UK and Holland, I would say I'm not sure they are comparable to the local banks in those markets. So I don't quite understand why you allocate any money to Oktogonen. When you compare to the other Swedish banks, are you adjusting for something to reach a higher ROE than the peer group?
Unidentified Company Representative: We are measuring our ROE vis-a-vis peers in the markets, in the comparable markets. So I mean, we think we have really good ROE in our Swedish operation. We definitely trail RPS when it comes to Norwegian ones, but we have good ROE as well when it comes to the British and the Dutch one.
Andreas Hakansson: Okay, thank you.
Operator: Thank you. We will now take the next question from the line of Namita Samtani from Barclays. Please go ahead.
Namita Samtani: Thanks for taking my question. I don't really understand the comment that net [inaudible] negatively impacted from heightened competition, particularly on custom accounts. Because if I compare your personal customer deposit rates listed on your Swedish website at present versus July last year, the six month deposit rates have come down by 50 [Phonetic] BPs of average savings, account rates of 2% haven't changed [inaudible] and only the three month rate is increased by 35 BPs. So please can you explain to me how much of this impact is related to interest income as deposit mix shifts are dominant with mortgage margin pressure. Thanks.
Unidentified Company Representative: I'm sorry, Namita. And good morning by the way, but we couldn't really hear your question there. Could you repeat it please?
Namita Samtani: Sure. So I just wanted to understand that comment on net interest income where you're talking about heightened competition on pricing, particularly on customer deposit accounts. Because if I look at your personal customer deposit rates posted on your Swedish website at present versus July last year, the six month to five year deposit rates have come down by 50 BPs on average. The savings account rate of 2% hasn't changed so below 50,000 kroner and only the three month rates by 35. So please can you explain to me how much this impact is really impacting and it's [Technical Difficulty]?
Unidentified Company Representative: I'm sorry Namita, your line is occasionally breaking up, but we'll try to answer what we think is your question at least. If I understand correctly you wondering about the quantification of the impact of deposits related NII, if I get it.
Namita Samtani: Yeah.
Unidentified Company Representative: Yeah. Now what you saw in this quarter was that an increasing share of the customer deposits were put on short-term savings deposits. And we have one product, for example, or it's called [inaudible], it would be like a savings investments account. It's a three month fixing. It's currently paying 4% interest. So what we saw during the quarter was that an increase in share of customers moved from transaction accounts into this short-term savings accounts, so moving from 0.25% interest rate to 4% interest rate and that, I would say, would be the main impact for the squeeze in overall NIMs.
Namita Samtani: Thanks very much.
Operator: Thank you. We will now take the next question from the line of Sofie Peterzens from JP Morgan. Please go ahead.
Sofie Peterzens: Yeah, hi, here is Sofie from JP Morgan. Thanks for taking my question. I know you didn't go net interest income and freight sensitivity, but maybe if you could just talk us through the moving part. Going forward, how should we think about net interest income growth? What will be the main driver? Is it loan growth? I assume margins are not really going to move much from current levels unless we have rate cuts. But if you could just kind of talk about the different building blocks to help us model the net interest income going forward. Thank you.
Unidentified Company Representative: Yes, thanks Namit -- thanks Sophie and good morning to you. Yes, obviously we've seen slow growth. We've seen slow volume development that holds for most of our home markets. And it's both slow gross growth, but it's also high amortizations happening in the system still. One could expect obviously amortizations to drop off once rates starting leveling out. And it should also drop off with -- when we've gone through a rate cycle, more or less, and the whole loan book has matured into a new rate level, you could expect as well amortizations to drop off, but they're still at elevated levels. And we don’t as of yet foresee -- we don't see growth picking up, but I mean, as you know quite a bit of the other liquidity factors or growth factors point to that, we're closing in towards it, but so far slow growth. Then the exemption there is obviously Norway where we see strong growth both in households -- or especially in households, I should say. On the deposit side, we've seen on the household side, the deposit growth has obviously mirrored the household lending and that's what we expect to keep on seeing. On the corporate side, we've seen obviously quite a lot of deleveraging, so paying off both lending and taking deposits and using it to pay off their borrowing, that could obviously slow down when rates are now perhaps moving downwards again. When you go to the margin situation, yes, I think it's likely to see if rates start dropping down, there should be a pressure on deposit margins, as we've seen, obviously, but with some volatility over the course quarters, obviously, based on the branches decisions, we haven't -- we're likely to see a movement from -- if rates move down, obviously we can't guide on the outcome because that's a factor of competition. But on the upside at least it is deposit margins has increased and lending margins has decreased; the opposite wouldn't surprise us. So that I think is -- and then a few things to mention, we have the notice periods in Norway. They should be a positive benefit going forward. We see some signs of positive margin development on the corporate side and obviously, yes, we start seeing some spring signs or some positive signs on the mortgage business in Sweden and Norway.
Sofie Peterzens: That's very helpful. Could I just ask another follow up question? In terms of rate cuts, what's your expectation? When do you expect Sweden to cut rates?
Unidentified Company Representative: Our economist view is that Sweden will cut three times this year and that they start in the summertime. But obviously that's our economist view and we don't base our business model on these decisions.
Sofie Peterzens: The branch leads are not basing their pricing on future rate cuts.
Unidentified Company Representative: No, no. What we do is, as we've kept saying, is that the central treasury, they price their marginal funding costs and obviously the marginal funding cost will have an implication of the future rate expectations, but that's what they give to the branches and then they decide their margins.
Sofie Peterzens: Thank you. That's very helpful.
Operator: Thank you. We will now take the next question from the line of Nicolas McBeath from DNB. Please go ahead.
Nicolas McBeath: Thank you and good morning. I wanted to ask about your comments that you made that the branches are recruiting more FLEs that indicates rising demand at the branch of this level. But looking at the volumes for you, in a quarter, they're actually mostly declining, nor does it seem that you're actually taking market share on demanding our deposits. So I'm just wondering by what metric you look at when you say that you see customer demand, that the customer interaction levels are increasing, and whether you also could say anything if we should expect FTEs to continue go up during the year. Thank you.
Unidentified Company Representative: Yes, thanks, and good morning, Nicolas. First of all, obviously the branches do have their own decisions if they're going to hire or not. And they're quite -- how should I put it? They're quite sensitive to the business climate and they're obviously cost conscious as well because they are benchmarked vis-a-vis all the other branches when it comes to cost-to-income development. So that's quite a neat system which has proven to work for many, many years. If they decide now to hire, I mean, you won't see that in historic figures; that's future looking. If the FTE level right now is moving upwards, that implies that they see a better situation going forward. What we can say is that we've seen, obviously, the number of advices done in the bank has grown quite materially in the start of the year and the number of private banking advising, which is happening at the branch levels, and also the occupational pension advising. These ones has moved in the correct direction. So, therefore, that could imply that they keep on hiring. But we -- and we don't have any guidance on that one going forward. But, I mean, we as a bank will be cost conscious, definitely moving forward as well.
Nicolas McBeath: Perfect. Thanks.
Operator: Thank you. As a reminder, please ask one question per person. We will now take the next question from the line of Gulnara Saitkulova from Morgan Stanley. Please go ahead.
Gulnara Saitkulova: Hi. Good morning and thank you very much for taking my question. It's Gulnara from Morgan Stanley. I have a follow up question on the competition, please. You mentioned the intensified competition on the pricing and in particular on the deposit accounts. I wanted to ask, what are you seeing in terms of the competitive behavior on the lending side? And would you potentially expect the competition to ease once the rates start to decrease. And also, can you talk about what, in your view, is the main underlying driver behind these competitive pressures? Is it driven mainly by the smaller competitive peers like SBIB [Phonetic] or do you think the core reason is overall the muted demand and the volumes? And, yeah, can you please talk about the underlying reasons and what is your outlook for the competitive environment going forward? Thank you.
Unidentified Company Representative: Yes, thanks, Gulnara. I think it's fair to say that the way we run our bank is obviously that we run a long-term business model. We try to build long-term relationships with our clients and that's really been proven over the years that that one works. But then in each and every time we will face different competition and some of our peers, which is more top down driven, will run with various initiatives. Right now, obviously we see some campaigns when it comes to the mortgage business that some of the peers might off for a few months for free or so. Other times we might face other kind of campaigns. It's fair to say that on the deposit side, we've obviously seen that SBIB has always been really competitive for the last year. On the lending business, it's been other peers more near niche banks. I can't say that -- so we don't foresee this structurally to be one of the competitors which will be the main competitor going forward. Rather, we expect to see a competitive landscape, and that's for our branches to compete in and we're used to doing that. It's going to be a moving competitive landscape going forward. But having said that, I mean, if we have low margins on lending and we have the banking system has higher margins on deposits, obviously. So that should probably point to the competitive toughness will be tougher on deposits vis-a-vis mortgages.
Gulnara Saitkulova: Thank you.
Operator: Thank you. We will now take the next question from the line of Riccardo Rovere from Mediobanca (OTC:MDIBY). Please go ahead. Thanks.
Riccardo Rovere: Thanks for taking my question. I hope you can hear me well. Just a quick one; in your report, you say that credit risk migrations had an impact of 0.1 percentage points on the capital but you are -- so there was negative risk migration, I understand. But on the other hand, your credit loss has continued to be positive, zero or positive. How can this be possible that you have a negative impact on credit migration and positive credit losses when both technically should be more or less based on the same parameters, probability of default and loss given defaults. I mean, if risk credit assets go up, why we see nothing on the credit, on credit losses? And sorry to just a quick follow up, there is no guidance on cost, right. Correct me if I'm wrong. Thanks.
Unidentified Company Representative: Well, no, there is no guidance on cost. You are correct in that one, and we hear you loud and clear and good morning, Riccardo. First of all, obviously we've seen obviously negative credit migration for quite a few quarters now. That is obviously very intuitively understandable. When rates are increased, clients’ cash flow outlook will become a bit more troublesome and that implies in many times a negative credit migration. We've also said that since we have good clients with good owners, with good financials, even though we see a negative credit migration, that might not imply a higher credit risk, and especially if we have collateral in place with low LTVs. And this has been obviously something which has happened during the last years that we've seen stage two volumes going up without stage three reservations going up. So that's exactly what is happening in this quarter as well. We don't see credit losses happening. We see very little actually -- actual credit losses. There is like single digit ones with low nominals on them, so a really good credit situation. Having said that, if we obviously increase the stage two volumes and we see a negative credit migration, that will have an impact when you calculate the credit losses in the capital, and we have an opposite side of that one, which are the risk weight floors. So I don't see any, there isn't anything strange in this. You can definitely keep on seeing negative migrations whilst not see any problem with the asset quality or credit losses and that will have an implication on the capital calculation. And just to add the Riccardo, also, if you look in the slide deck on slide 21, you have a breakdown of the credit losses recognized in the quarter. And you can see there in that table or that picture that rating migrations accounted for 49 million of additional credit losses, but those are offset by the reversal of the expert-based add-on, better quality on new loans coming in compared to the old ones, and also macro assumptions and so on and so on. But you have the breakdown of slide 21, which clarifies the issue.
Riccardo Rovere: Thanks.
Operator: Thank you. We will now take the next question from the line of Hugh Moorhead from Berenberg. Please go ahead.
Hugh Moorhead: Hi, good morning. Thanks very much for taking my questions. Just a quick follow up on Norway, please. You've obviously spoken about how you'd like to increase deposit volumes there. What's your strategy going to be for doing that in what's a very competitive market and perhaps what's worked, or what has to work at Q1 in terms of increasing household deposit volumes there? And adjacent to that, are you still guiding for investment -- IT investment spend in Norway to drop down this year, which I think you've previously guided for. Thank you.
Unidentified Company Representative: Yes, thanks, Hugh. Well, I mean, Norway as a country is obviously a country with quite wealthy people and we think our banking offering should suit that market quite well. So, I mean, we're used to working with the branches close to our client, working with all of their balance sheet, more or less. We both lend to them and we take on their deposits and we take on their asset management business. So nothing extreme in a strategy, apart from being very close to the clients by the branches and doing a lot of advisory. So fairly similar to what we do in Sweden. Yes, the IT investment in Norway will obviously drop down over this year. Having said that, obviously we will have the amortization effect of the investments we've done, so the cost side of it will obviously not drop down as of yet.
Hugh Moorhead: Okay, thank you.
Operator: Thank you. We will now take the last question from the line of Jens Hallen from Carnegie Investment Bank. Please go ahead.
Jens Hallen: Thank you and good morning. If I guess is the final follow up then on costs and trying to establish a point for the future. So my question is, in the quarter, is there any double counting of costs given that you're moving away from consultants to employees, the merging of group functions, or maybe if we can use slide nine, what do you consider to be recurring on that side, particularly given all the comments you have on focusing IT and centric function on the important things, at least it sounds like you think it's on the high side.
Unidentified Company Representative: Yes. Thanks, Jens. And if you look at slide nine, obviously first on the left hand side, obviously we're starting then on the pink boxes here. First of all, obviously we had the yearly salary and we've also increased the number of FTEs this quarter. So we will work quite a lot on bringing down the FTEs. That is not the guidance, but still we will work quite a lot on maybe moving them down. When it comes talk to Gordon [Phonetic], that would obviously be decided by the performance as this year, so we can't say anything on that one going forward. The pension expenses, the lower rate will be here for this year. So the pension expenses, if we have the same number of employees that will more or less stay flat for the coming quarters. When it comes to the boxes with the dotted lines on it, what they more or less say between the staff cost and also the other expenses is that, yes, we have made some -- we will let consultants go and some of these more sticky businesses we've hired people for, but we're expecting going forward both to let consultants go and replacing some of them, but not all of them. And the other part of the dotted boxes is that the IT development we've done, they imply a higher level of bringing it over the cost line and less of it over the balance sheet. I don't know if that was the answer to your question, Jens.
Jens Hallen: Yeah, well, I think it was, at least partly. But it sounds like from those boxes there's nothing major like big cancellations on consulted contract that should be coming out in the short term. That should be a gradual process of [inaudible] is coming down. Is that correct?
Unidentified Company Representative: Yeah, agreed.
Jens Hallen: Yeah, okay, thank you.
Unidentified Company Representative: Alright, everyone. Thank you very much for participating and with those words we wish you all a good day. Thank you very much.
Unidentified Company Representative: Thank you.
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