SVNLF - Svenska Handelsbanken AB (SVNLF) Q3 2023 Earnings Call Transcript
2023-10-18 07:27:09 ET
Svenska Handelsbanken AB (SVNLF)
Q3 2023 Earnings Conference Call
October 18, 2023, 03:00 ET
Company Participants
Louise Sander - Chief Communication Officer
Carina Akerstrom - President, CEO & Executive Director
Peter Grabe – Head, IR
Carl Cederschiold - CFO, Deputy CEO & EVP
Conference Call Participants
Magnus Andersson - ABG SC
Jacob Hesslevik - SEB
Alex Demetriou - Jefferies
Jeff Dorse - Societe Generale
Namita Samtani - Barclays Bank
Nicolas McBeath - DNB Markets
Riccardo Rovere - Mediobanca
Rickard Strand - Nordea Markets
Jens Hallen - Carnegie
Piers Brown - HSBC
Jacob Kruse - Autonomous
Sofie Peterzens - JPMorgan Chase & Co.
Presentation
Louise Sander
Good morning, and welcome to Handelsbanken and the presentation of Q3 2023, and we will begin with Carina Akerstrom, our CEO and President. And this will be broadcast live and you'll find the link under Investment Relations. In English, you will find a presentation simultaneously translated by choosing English in the menu.
After the presentation, we're going to have a short break. And then after that, the Q&A session in English, and information as to how to join, you will find on the website. Carina, please.
Carina Akerstrom
Thank you, Louise, and well, good morning, and welcome, everyone, and let's get started. One can say overall that in spite of the economic slowdown, we do see a quarter that can be summarized with stability, efficiency and profitability. Income is growing faster than expenses. And together with, well, basically nonexistent credit losses, this gives us a better profit and profitability. The interest rate situation and volume growth at the beginning of the year, well, that leads to an increase in NII and the savings business continues to grow, and the bank is attracting more than twice as much of the market share to our mutual funds compared to what we have in outstanding volumes.
The C/I ratio is improving to record low levels and the credit loss ratio in our lending portfolio continues to stay good and the credit loss level, as said, was close to 0. Our financial position is strong. And in times like these, they are still very uncertain. This is something that is obvious for us that we have to safeguard those stable finances. Customers in all our home markets yet again have shown their appreciation for the bank in all our home markets and customer service and awards during this quarter, which is very gratifying.
And last but not least, talking stability. No other privately owned bank in the world has better ratings than we from the leading rating institutes to summarize a very good stable position for the first 9 months in this quarter.
Then looking at Q3 compared to the second quarter 2023, we see that C/I ratio is up, and we now have a record low level at 35%. ROE is up to 17.3% and this in spite of the fact that we have a higher capital buffer than we've had for many years, the underlying operating profit adjusted for one-offs, including these FX fluctuations, it ends up at 13%, and income is up 7% and NII 3%. So we see a recovery in Q3, and we also see a slowdown in business volumes in the market as such and for the bank.
Commission income is doing well in spite of the volatilities in our markets up 2% compared to previous quarter and the explanation is our savings business and asset management, and we also see new developments when it comes to payments and advisory services.
Expenses underlying down 1%, and this is something that follows the usual seasonal patterns. And as I've already said, the credit losses have basically been nonexistent in the quarter.
Then looking at the first 9 months compared to previous year. The key ratios are up here as well. C/I ratio being 36.8% and ROE is up to 16.2%. The underlying profit is up to 48% and income is up to 30%, and as I've said already, this is a nice volume growth. And of course, we see this also in this last quarter with interest rates and recoveries in margins.
Our expenses underlying are up 10%, and this is explained by, and as has already been mentioned, that we have increases in the development capacity and also that we have the inflationary situation that has an impact on costs and salaries alike, and we also continue to invest more in preventive work, preventing financial crime and in cybersecurity.
Credit losses yet again at a very low level, 0.01%. Then looking at net interest income in the quarter. We have -- well, if you start to zoom out, of course, this is volume growth, but the bank is growing in a stable manner over time. In the last few quarters, we have seen a slowdown in the market with a dampening in growth in deposit and lending volumes. Amortizing levels remain at a high level for households and corporate alike. And that, of course, has an impact on deposit and lending volumes.
However, we continue to do the business that we wanted to do and we do that together with customers with strong cash flows that are resilient.
Looking at the net interest income for the quarter compared to the previous quarter, it's up with just over 4%, and underlying adjusted for FX 3%. And you see in the slide that volume changes are neutral and volumes are more or less stable, but we see mainly recovery in margins, and that is what is driving the NII in the quarter.
If we continue with net fee and commission income, we see that these are up and were up during the pandemic, and then we have seen a more balanced growth since then. The savings business payment and capital management, that is stable, and we see a trend with stable growth since about a year and that continues. We also see, looking at the payment fees and advisory services, that we continue to see a nice growth.
And then looking at the savings business in Sweden. And on this slide, we can see the inflows into our mutual funds. We have an outstanding fund volume in market shares that is just over 12% in Sweden, but since 2010, for quite a long time that is, we have had a market share of 26% of the net inflows into new savings in mutual funds. And during the first 9 months of the year, the bank took 31% of all the net inflows on the market into the Handelsbanken mutual funds.
Savings business continues to be a very important growth area for the bank, and we have a high market share of the net inflows and that creates value over time.
If we take a bit of a look at our expenses, we can also see that this quarter's expenses have decreased somewhat when adjusted for FX effects, and that follows a relatively normal seasonal pattern with lower activity during the summer months. Compared to a year ago, the bank is now investing at a significantly higher rate and that is exactly what we communicated just over a year ago. We also maintained development capacity. And therefore, our investment expenses are stable, and this is true for the fourth consecutive quarter.
The C/I ratio was improved, as mentioned previously, and is for this quarter down at 35%. If we continue and take a look at our net credit losses, like I said, they are practically nonexistent for the quarter. And you can see on the slide that historically, during the period, when we've seen economic decline, the bank reports significantly lower net credit losses than the rest of the banking sector. And that is also what we can see reflected in the low net credit losses over time. But for this quarter, very, very low, almost nonexistent net credit losses.
Our capital is very strong. We have strong financial stability, and we continue to continuously generate capital. That's good. That gives us room to maneuver. At the end of the quarter, the CET1 ratio was 19.4% compared to the estimated regulatory requirement of 14.9%, including the announced countercyclical buffer hikes, and that means that now we're in a very good, stable position when it comes to our financial stability.
Finally, it's very nice to see that our customers appreciate what we do and how we do it and not lease through our local presence and our ability to adapt to changes in customer behaviors. And again, this was confirmed by various annual accolades and customer satisfaction surveys that were also published during the quarter. To have satisfied customers is the foundation to building and maintaining long-term relationships, and it provides stable creation of value over time. And the bank is in a very good position now, and we're well equipped for future profitable growth together with our customers.
And here, I would like to end, and I would like to thank you for listening, and I'll give the floor back to Louise.
Louise Sander
Thank you. We'll take a short break. And after that break, our Manager of Investor Relations, will have a Q&A session in English, and the information as to how to connect, you'll find under handelsbanken.com. Investor Relations. Welcome back.
Question-and-Answer Session
A - Peter Grabe
Welcome back, everyone, to the Q&A session. [Operator Instructions]. And with those words, operator, we're ready to take the first question.
Operator
[Operator Instructions]. And your first question comes from the line of Magnus Andersson from ABG SC.
Magnus Andersson
Yes. I was just -- I wanted to ask a question on asset quality. We can all see that you have very low net provisions in the P&L, although the migration to Stage 2 continues both at the group level and within the CRE segment. Could you tell us a bit about the dynamics here and why the provision ratio in Stage 2 is coming down and has done so since Q1 '22. And related to that, perhaps, I note that your loans in the property management segment, if I add commercial real estate to residential, has been flat now for 3 quarters in a row after having increased quite significantly since the spring of Q1 '22. If you have become more cautious there in any way?
Carl Cederschiold
Thanks, Magnus, and good morning, everyone. Well, first of all, yes, you're absolutely correct. The Stage 2 reservations do increase -- or the Stage 2 volumes do increase. The reason behind that one is that obviously, when rates increase, the cash flow outcome becomes a bit more strained for all the companies. So we do foresee that our branches is going to downgrade, more or less decline based on the cash flow outcome. That doesn't necessarily translate into higher credit risk if we deem ourselves having very strong collateral.
So when rates continue going up, we do foresee actually Stage 2 volumes to increase, but that might not be similar to actually Stage 2 reservations or even Stage 3 reservations. So that's the first one. The other one is, to some extent, obviously, we've been more -- we're a bit more -- we keep on doing the business as we do, but nevertheless, we've also adjusted, obviously, standards to the practices in the market. We still like the clients we have and we keep pursuing the business.
I think it's worth to highlight as well, when it comes to the correlation between deposit movement and loan movement, that we've obviously seen corporate deposits shrinking a touch now, and we can obviously see that clients are using their deposit volumes and pay off debt, and that's exactly what you want to see in a deleveraging mode.
Operator
And your next question comes from the line of Jacob Hesslevik from SEB.
Jacob Hesslevik
A follow-up on Magnus' question. So could you please just explain to me how property management Stage 2, which amounted to SEK 79.4 billion this quarter, which represents an increase of SEK 58 billion year-over-year, but your Stage 2 provisions for properties have increased by just SEK 200 million.
Carl Cederschiold
Thanks, Jacob. Yes, and exactly the same answer there. I mean, when rates do increase, the way we do our internal ratings are based on 2 steps. First of all, it is based on the cash flow outcome. And obviously, when rates increase, the cost to carry the business is going up. So you would foresee a down rate of that part of the credit process. On the other hand, it is the financial resilience, and if we now -- as we post in the report, if we have LTVs of 50% roughly, it doesn't necessarily translate to -- if we have really good collateral in place, that doesn't mean that we need to reserve as much. So it's nothing -- the system works as it should. You shouldn't really see -- not a necessity to see Stage 2 volumes and Stage 2 reservations move hand-in-hand.
Jacob Hesslevik
Property prices have come down, so LTV should have moved up, no?
Carl Cederschiold
Yes, from that single effect, yes, but there are many moving parts in the LTV component. First of all, obviously, clients could actually have amortized their debt. So loans go down as well. And then you've obviously seen -- we've kept reiterating at previous calls that we tend to be very conservative when we value the properties. First of all, we don't include land, which is not built on. So we only include the properties which is generating cash flows. Then second, we tend to be more conservative when it comes to the expense line of running a property business. So the transaction we've seen in the areas we were in, we can't say that we've seen a real deterioration in it over the quarter, no.
Operator
And your next question comes from the line of Alex Demetriou from Jefferies.
Alex Demetriou
Just on the CRE stress test on Slide 28, would you be able to provide some color on, firstly, where current bond yields are for these companies, so we can gauge how stress test is stress testing? And secondly, are you able to disclose the average ICR covenants for these companies? So am I right in assuming these around 2x. So if so, what happens if the company drops below its ICR covenant from a provisioning perspective?
Carl Cederschiold
Sorry, we didn't really follow your question. I think you were referring to slide -- Page 28, did you? Can you reiterate your question, please? Sorry.
Alex Demetriou
Sure. So firstly, what would be the average debt for these companies in the market at the moment, just so we could see how stressed the stress test is. And secondly, are you able to provide the average interest rate coverage ratio covenant for these companies? And if so, I'm assuming it's around 2x, and if it does drop below 2x, what does that mean from a provisioning perspective?
Carl Cederschiold
Well, first of all, obviously, yes, you're referring to the CRE stress on Slide 28. And yes, as you say, we're obviously showing there the ICRs, first of all, of the 30 biggest companies. So the reported ICRs from these companies are 3.1x, but our own assessment, which is more conservative, is based on 2.5x, and you can see in the footnotes there the reasoning behind it.
What you can say is that the clients with the lowest ICRs, they have more or less 100% floating debt. On the total of these 30 companies, you can see that they roughly have 50% of their total debt is refixed at the present levels. And there will come -- and this is going out to 2024 majority then. And Peter, do you want to add anything?
Peter Grabe
No. I think you have the pieces of the puzzle that you need in order to get a sense of how the portfolio will develop in a stress scenario, you have on the slide, but we're happy to go through the details perhaps after this call if you have some further questions on it.
Alex Demetriou
Yes, that would be great. Really appreciate that.
Operator
And your next question comes from the line of Sofie Peterzens from JPMorgan.
Sofie Peterzens
Yes. Here it's Sofie from JPMorgan. Sorry, just going back to the Slide 28 and the stress assumptions. So the ICR stress seems to be kind of based on 6% or 7% interest rate in the U.K. But I mean, if interest rates already are 4% in Sweden, some people think they will go 4.5%. In the U.K., you have over 5% interest rate. Does this mean that the stress margin that you would charge for these real estate companies is less than 2% or up to 2%?
And then just the follow-up on the previous question, the ICR covenant that you have in your document, could you just confirm that it is 2x or is it lower than this? What actually happens when the ICR covenant is breached? Do you need to reclassify the exposure as Stage 2, or it does nothing happen. So if you could just talk us through the process.
Carl Cederschiold
Well, first of all, as we've been highlighting, this shouldn't be seen -- Page 28 shouldn't be seen as a stress. You can obviously see the average breakeven interest rate for the clients in the boxes there. Then as you say, yes, market rates are where they are. And what we're saying is that, yes, we have calculated the outcome here with 6%, as you say, in Sweden and Netherlands and 7% in Norway and U.K. And the outcome is the ICRs you can see on the slides. So that's the first one.
The second one, I mean, we obviously have internal covenants, but they're not similar to all of them. So we can't disclose the internal covenants. On the other hand, obviously, what we've been saying is that the negative migrations to Stage 2 this quarter and the previous quarter as well, it's rather based on the probability of default moving up several times. And if -- as we've been highlighting as well, if we start with an extremely low PD value, and that moves up 2.5x or so, we will move it to Stage 2. So the implication might be that it moves from a very, very, very good quality to still a good quality. And if you have a really good collateral at the low LTV, then that necessarily doesn't translate into high credit risk.
So I think that's really worth to highlight. And yes, we won't change the covenant levels. But obviously, when a company is starting moving towards the covenant, being close to the clients, that's when we have the discussions with them, and obviously, we will have a dialogue with them having a plan how to adapt to the current market levels.
Sofie Peterzens
Okay. But maybe just then you mentioned that PD is going up, but how is the PD calculated? Is it based on the credit risk of the counterparty, historic losses, the macro outlook? What factors do you take into consideration while calculating the probability of default?
Carl Cederschiold
That's a question for you to address to the IR people after this meeting. But obviously, I mean, we work with generalized mathematical functions here. It's not a Handelsbanken specific one. But please.
Operator
And your next question comes from the line of Rickard Strand from Nordea.
Rickard Strand
Can you hear me?
Carl Cederschiold
Yes, we hear you.
Rickard Strand
Yes. So a question on the cost development. And we noticed that the FTE growth year-over-year continues to increase in Q3 and is now about 7%. Just if you could give any flavor of what to expect there going forward? If you have been sort of forward leaning in your investment projects? Or if we should expect that this growth continues also into 2024?
Carl Cederschiold
Thanks, Rickard, for the question. Well, first of all, we think that our cost line now moves accordingly to what we want to see. We've been guiding on, obviously, Q4 last year that we were increasing the IT spend, and we keep on following that pace. So we think it's really nice to see that even though we keep on investing to a high degree, cost line has stabilized and moving down a bit in the quarter.
So that's the overall guidance we will give. Then obviously, we will work with the FTE -- the resources we need to do the business we do. That's a component of both FTEs and consultants. So the separate movements on these lines, we will have to wait and see what they play out to. But we want -- we not want the total spend to go up in IT investments, and we want to get as much efficiency as we can out of the investments we do. So that's the ambition we work with. But we don't foresee an increased spending.
Operator
And your next question comes from the line of Riccardo Rovere from Mediobanca.
Riccardo Rovere
Hope you can hear me well. Just a quick 1 on capital. If I remember correctly, over the past few calls, you reiterated the fact that despite having 400, 460 basis above, the requirement at the moment is preferable to stay kind of cautious or prudent. I just want to better understand if this still stands, this kind of position. And also in light of the fact that despite market concerns at the very, very end, your provisioning ratio is 0, it's always been 0, and continues to be 0 with LTVs in commercial real estate below 50% or kind of 50%. So just want to understand what's your position on the capital now?
Carl Cederschiold
Thanks, Riccardo. We hear you loud and clear. Yes, it's true. We haven't changed our stance on capital. It is a Board decision. And historically, we've been approaching these kind of decisions at the AGM time in spring. We're building capital -- even though the capital relation moves down from 19.8% to 19.4%, we're building actual capital in billions. So that's all good. So we're generating a lot of value now for our shareholders.
Having said that, yes, we play it conservative. We think it's a really good situation. We don't think the world has been calming down over the last month, unfortunately. So we don't have that much more message to give you. We will wait until AGM and talk more about the capital. But it is a really good situation to be in, creating the all-time high in P&L and seeing your clients delevering the way you want them to do. That's obviously -- the result is a strong capital generation. So that's all good in our view.
Operator
And your next question comes from the line of Jeff Dorse from Societe Generale.
Jeff Dorse
It's Jeff Dorse here from SocGen. Swedish net interest income is the area I wanted to focus on, and the obvious question would be whether you're at the peak run rate now? And if not, how far away you are from that? I know that's probably too direct a questions. So if you could just give us a feeling for the margin sensitivity from here and whether you are seeing the trends in deposit rates and deposit flows between the mix effects that are starting to eat into your sensitivity? So just to give a -- an impression of Swedish NII would be great.
Carl Cederschiold
I mean, on a relative basis, we've been talking about this during many quarters now that we are approaching -- once the Riksbank are approaching their top in their cycle, obviously, we will start approaching our top in NII margins. Having said that, I mean, we're posting a solid quarter now with good margin expansion. And as we've said as well, in our bank, this is really a decision for the branches and for the countries out there to decide the pricing to their clients. And it's not being done centrally from the treasury in that sense. So we're pleased to see that we keep on posting good margin development. But yes, of course, we are coming closer and closer to the peak. So when that happens, time will tell. We don't foresee it much better than you do, actually.
Jeff Dorse
Great. And just on that deposit mix, if you could clarify on that. So the mix between current account and savings account.
Carl Cederschiold
Yes. Sorry. Yes. I mean we've said right now in Sweden, we have between 25% and 30% still on transaction account. We were 30% during Q2, and now we're slightly below 30%. And we've been saying that, I mean, people will need to have their salary, et cetera, on a transaction account. So we're not foreseeing this to massively go down from these levels. We rather think we're approaching a steady state now. So in that sense, you won't have a negative marginal impact on deposits coming from the movement from transaction to term as much as we've seen for the last quarters.
Operator
And your next question comes from the line of Piers Brown from HSBC.
Piers Brown
Yes. [Technical Difficulty] A question on cost provision -- to what I asked last quarter, but in the landscape in Q2, you're more or less -- provisions, but clearly some underlying deterioration.
Carl Cederschiold
Sorry, Piers, we hear you very poorly. Perhaps you need to hang up and dial in once again. I don't know, but -- or try once again, if we can hear you, but. We will prioritize your call if you hang up and dial in again. Okay. Then we can move on.
Operator
And your next question comes from the line of Namita Samtani from Barclays.
Namita Samtani
I've got two questions, please. Firstly, just a question on your core Tier 1 requirement. So the regulator has given the group a Pillar 2 temporary add-on of around 100 basis points to the IRB model review. Do you expect that 100 bps to come down at all once your models have been approved?
And secondly, I just want to understand aspirations for 11% to 12% over 2024 and 2025. And I wondered whether you think you can do better than that given you've printed 17.3% this quarter granted with 0 loan losses?
Carl Cederschiold
Thanks, Namita. Well, first of all, I have to correct you. I mean, the requirement from the IRB overhaul is plus 0.5%, not plus 1%. And as far as we can -- this is obviously uncertainty around, but far as we can tell, obviously, we see this as once we get approval for the new IRB models, we will obviously have models, which we think will increase the capital. And that might be the same level as this IRB overhaul requirement. Time will tell if the net effect -- if they will net each other out. But it's 0.5 percentage points right now.
Then the -- yes, I agree with you that the markets foresee ourselves having a much lower ROE than we do today, and I can relate to your view that I struggle we'll find the relevance in 11% to 12%. But time will have to tell on that as well. We don't have an absolute ROE target. We think the bank is moving in a really strong fashion now. We're performing more or less in all the lines, and we still are very confident in our asset quality. So we think there's room for improvement.
Operator
And the question comes from the line of Piers Brown, HSBC.
Piers Brown
Yes. I don't know whether you can...
Carl Cederschiold
We hear you loud and clear.
Piers Brown
Okay. Good. I'll give it a try. Yes, so the question is on loan loss provisioning. And it's actually a similar question to the question I asked last quarter, but I mean, if I look at the landscape, you've booked more or less 0 loan loss provisions. There is some underlying deterioration in credit quality. We can see that through -- you mentioned the negative migration. And I guess if I look at the risk weighting on the property management companies, that's moved higher again this quarter. You're up at about 21%. I think you were sort of 16% a year ago.
So the underlying inputs into your IRB models are clearly deteriorating, and I'm just interested that if I look at the reconciliation to Tier 1 capital, you've now got about SEK 1.7 billion deduction for the shortfall of loan loss reserves to expected loss. So your models are telling you your provisions should be SEK 1.7 billion higher than what they currently are and that gap just gets bigger and bigger each quarter. So the question is, at what point do you address that gap? Or do you see a need to address it? At what point do you actually start to provision more in line with what your models are telling you is your current expected loss?
Peter Grabe
Yes. You're referring to some technicalities in the CET1 calculation. And again, I think it would be -- we'll be happy to go through the details on how the framework looks perhaps after this call, because it will be quite technical. But in general, what we can say is that, that number is not an indication of potential credit losses. It's more a technical component. But again, I think we can take this personally instead of discussing it on this call.
Carl Cederschiold
But it is fair to say that, I mean, when you look at Stage 2 and Stage 3 volumes and reservations obviously, they are based on 2 -- or at least dependent on 2 separate things. First, it is the cash flow outlook. And that's obviously that, that becomes a bit deteriorating when rates are moving up. But then it is the second one, the financial resilience as well. And that pictures 2 different sites to the puzzle right now, and being in LTV at 50%, that's a really good starting point. So we don't foresee that -- it might as well be the Stage 2 that moves down going forward.
Piers Brown
Okay. That's helpful color. I'll take it up afterwards with Peter. It's probably slightly technical for the call.
Operator
And your question comes from the line of Jacob Kruse from Autonomous.
Jacob Kruse
So I guess, just two questions left. So firstly, on the Oktogonen, you didn't provide anything this quarter. And I know you have record earnings and loan loss if you say, cost under control. I know this is a relative performance metric. But I guess my two questions here are, a, do you think you need a top-up by the year-end? And secondly, do you think if not, you need to come up with a different type of staff remuneration system. It doesn't seem to remunerate the staff for what looked like a very strong P&L in the quarter?
And then I just wanted to ask the corporate deposit outflows, which I think mostly happened in September. Does that change your funding outlook? Do you need to replace these with other sources of funding like cover bonds?
Carl Cederschiold
Thanks, Jacob. Well, first of all, obviously, Oktogonen, during the year, it is a fairly mechanical exercise, and that points to us before we -- on a relative metric, we didn't reach our corporate goal during Q2-ish. So we will have to wait and see what happens in Q4 and with the other bank P&Ls. So that's just the first question.
Then obviously, we're obviously pleased with the P&L we're producing, and we can obviously see that some of our peers are producing really, really strong P&Ls as well. I mean having a good remuneration system for the staff, the most important thing is that you have that through the cycle and over time. And we will not be -- we will play it very long term in the way we steer the bank.
So having said that, it's a separate discussion, what kind of remuneration system we have, but we're pleased with the P&L, and we can't foresee exactly what happens in Q4. The corporate deposit development. It is, as you say, you can see that, first of all, we're dropping down on the other line between Q2 and Q3 and that's obviously very -- you can see that, that line has historically been quite volatile, and the underlying behind that line is rather our businesses from U.S. and Luxembourg, et cetera.
So what you have there is most likely non-sticky deposit monies, which we can't use as a primary source for funding nevertheless. So that will not have an implication on our funding. Then I would like to stress as well that, as I've been saying, that you can see that from quality deposits, they move quite in line with at least the gross growth in lending as well.
So you can see that obviously, on the household deposits, they move in line with the household lending growth. And on quality corporate deposits, they actually move hand-in-hand with what you would foresee as a strong growth line from bond financing moving to bank. So I think it's a really good situation to be in. We are a bank now producing an all-time high P&L and we see our clients deleveraging. And that's really what you want to see at this stage in the cycle.
Operator
And your next question comes from the line of Jens Hallen from Carnegie.
Jens Hallen
It's Jens here. Can I take us back to net interest margin? I mean, I understand that the expansion can't continue forever. You say it's losing pace. But at the same time, the move from transaction accounts to savings account seems to be over. My question is, what kind of pressures do you see over the next couple of years, if market base stays flat. I mean, consensus seems to think we will have a significant margin contraction over that period of time. What's your take on that?
Carl Cederschiold
I think at least the history tells you that net interest margins correlate quite well with rate levels. That's 1 component. So from a long-term cyclical perspective, I think you see a correlation there. Then obviously, over time, you tend to see a tougher competitive landscape, and that's rather down to digitalization, et cetera.
So I think it's very hard to guide on the outcome of NIM if rates stay the same. So we will see as much as you the outcome on that one. But nevertheless, I think it is a stronger correlation between rate levels than it is from the structural component of competition, because that obviously goes up and down as well now. Do you have anything?
Jens Hallen
Okay. No. That makes sense.
Operator
And your next question comes from Magnus Andersson from ABG SC.
Magnus Andersson
Just a follow-up on costs more on a high level. Just wondering what kind of flexibility you think you have in the cost base to potentially offset stalling income year-on-year in 2024, i.e., are there any lagging inflation effects potentially driving costs in 2024 that we should be aware of? And how would you think about the IT investments in such a scenario, et cetera?
And secondly, on costs, just following up there on Oktogonen. Have you seen staff turnover increase in any way since you put the old Oktogonen in runoff.
Carl Cederschiold
Thanks, Magnus. First of all, the cost line then. Yes, I think if you look over the yearly development here, the cost increase are obviously explained by, first of all, an increase in the development ambition, then second inflation, and thirdly, a weak krona. That's the major contributions. And we think we've been playing this actually fairly well. I mean, being able to increase investments as much as we've done and living in high inflation. And nevertheless, we've been able to keep these lines okay. That's quite good.
Looking forward then, yes, what we can do, we can obviously bring down the investment pace. We also work with creating more efficiency or productivity within our investments. And 1 way there would be to move from consultants rather into ordinary staff. So we think we have some flexibility there. Then obviously, we do foresee that the inflationary trends do come down as well. And you wouldn't -- at least you wouldn't -- you're approaching a level where you wouldn't be surprised to see a krona actually start increasing rather than weakening again.
So yes, we think we have some flexibility to play with there. Then Oktogonen, no, we can't say. First of all, we haven't changed the metrics. I mean the method is still the same. The payment is still the same, even though it's not invested into equity. So we can't say that we've seen any dependence on staff as well. And we keep reiterating that we rather think it is the way we run the bank, which is the biggest motivation perspective of working in Handelsbanken, being -- having an individual mandate where you are in charge of that mandate rather than having a very central steering. We think that's the biggest motivational component.
Operator
And your next question comes from the line of Nicolas McBeath from DNB.
Nicolas McBeath
So a follow-up question on capital, please. So still trying to understand your capital planning and given your current position of strength, do you think it's important to operate within your buffer target interval of 1 to 3 percentage points. And related to that as well, if you could please reflect on your capital generation so far in this year. How has this been relative to your expectation at the start of the year?
Carl Cederschiold
Yes. Thanks, Nicolas. Well, capital planning. Yes, first of all, it is obviously a Board question. So that question might need to be addressed to them. But yes, of course, we haven't changed the target range. And we think, over time, it is important to be easily understandable for investors, so they can view us. So having said that, obviously, we are not stressed moving down into it. We think there are uncertain times. But nevertheless, we haven't changed anything. And obviously, we will have to wait until the AGM to see more.
Then I think the way we reflect around capital, I think a few things are worth highlighting. First of all, just the P&L creation now and the deducted dividend, not saying that this is going to be the ordinary dividend, but just saying by pure mechanics, the deducted dividend. The ordinary dividend last year was SEK 5.5. The deducted dividend is right now running at SEK 7.4, SEK 7.5-ish. So that's quite a big increase.
Second, even though we have deducted that dividend, we built capital and this is equity then. We built equity of nearly SEK 18 billion, and we built core Tier 1 of nearly SEK 13 billion. So we think we're -- and we've also moved down the -- we've decreased the goodwill after we divested Denmark. And we've also reworked the pension system. So we actually think we're in a really strong capital situation, which is, obviously, over time, this is going to be the value for the shareholders of the bank. So we think this is a really good outcome. And we're not troubled that we keep on holding it into the bank in short term, and nevertheless, posting 70% return on equity.
Nicolas McBeath
Okay. But when you say we have to wait until the AGM, does that mean we should not anticipate any kind of update on the capital distributions in the Q4 report? Because that's still before the AGM, right?
Carl Cederschiold
More or less, yes. Most likely.
Nicolas McBeath
So more likely Q4 or AGM?
Carl Cederschiold
More likely AGM. Sorry, Nicolas, more likely Q4.
Operator
We will now take our last question for today. And your last question comes from the line of Riccardo Rovere from Mediobanca.
Riccardo Rovere
Just a kind of philosophical one. Now we have been seeing real estate prices, I mean, flat and villas going down kind of 15% peak to trough. Now they are recovering a little bit. Part of that decline has been recovered. If real estate prices for flat and villas kind of stabilize with rates at 4%, is there any scenario, any circumstance in which commercial real estate prices should go down by 50%, because that's what you would need to see, let's say, to damage your credit losses if the LTV is kind of 50%. How can the 2 things go diversing in such a way?
Carl Cederschiold
Let me put it this way instead, and perhaps I don't answer completely your question. But so far, obviously, the cash flow obviously has been deteriorating due to increased rates. Having said that, we've also seen that many of the CREs has been able to indexate their rents. And the vacancies hasn't deteriorated either. So we've actually seen the cash flows are fairly constructive in their movement nevertheless. And they're also pursuing a lot of cost savings that don't make any new investments. So I actually think there's room to delever just from their cash flow outlook.
Then second, as you say, if rates -- sorry, if prices don't drop, or I should put it this way, being a bank then with loans on an average LTV level, of course, the CREs will need to delever in some sense. They need to adapt to the rate levels, and over time, most likely move down their debt, inject equity, sell off assets, et cetera.
We think we're in a really good situation and negotiation situation to them. We think they realize, the equity owners, that they have a risk of losing equity, but they have an even bigger risk if they're not injecting equity and they need to give collateral to banks with an LTV level at 50%. That's obviously capital destructive for them. So we think we're in a really good situation where we can talk to them, we can find a good solution for all parties, and the outcome of that 1 will most likely be that some way they delever their balance sheet, they adjust with more equity or sell off assets. And that's the journey we're following now to solve this imbalances, which obviously the rate increases has created. So no, we look very constructively to this and we find it hard, at least on where you have LTVs of 50%, we find it hard to see huge credit losses coming from that.
Operator
I will now hand the call back for closing remarks.
Carina Akerstrom
Okay. Thank you very much for calling in, and thank you very much for your questions. And if you have any further questions, please call Peter and his team, and they will definitely give you all the answers to them. So thank you very much for today. Have a good day. Thank you.
Carl Cederschiold
Thank you.
For further details see:
Svenska Handelsbanken AB (SVNLF) Q3 2023 Earnings Call Transcript