Ladies and gentlemen, welcome to the Handelsbanken Q2 Report 2017 Conference Call. Today, I'm pleased to present Rolf Marker, CFO. For the first part of this call, all participants will be in a listen only mode and afterwards, there will be a question and answer session. Speaker, please begin.
Good morning, everyone, and welcome to this conference call for the Q2 2017. Joining me today, I have Michael Hallacher, Head of Investor Relations Das Hoglund, Head of Debt Investor Relations and Annika Engler, Head of Group Accounting. The slides used for my presentation are as usual available at hammersbanken.com. Let's start with Slide number 2. When we add another quarter, we can conclude that positive trend in the value creation of the bank continues.
The picture is familiar to most of you and shows the equity per share and dividends paid to shareholders since the beginning of the financial crisis back in 2,007. On average, the value creation for our shareholders has been 15% per year. The interesting thing about this picture is not necessarily the number 15%, but rather the stable outcome that the bank's business model has generated also during the global financial crisis, the euro crisis and more recently in a negative interest rate environment. The stable value creation is achieved through low risk tolerance, stable customer relationships and satisfied customers, low costs and stable growth. This development has continued also during Q2 2017.
On Slide number 4, you can see the income statements for the Q2 compared with Q1 2017. When we summarize Q2, net interest income increased by 3% from Q1. The increase was driven mainly by increased business volumes. Net fee and commission income increased by 7%, mainly thanks to increased fund management and advisory fees and also seasonally higher activity in the card business. Net financial transactions fell back from Q2 to a more normal level after an unusually high Q1 result.
Total income increased by 2%. In Q1, as you know, the pension plan was changed in Norway into defined contribution plan, which resulted in a positive one off effect of SEK 239 1,000,000 in staff costs. Adjusted for this, the staff costs increased by 3% in Q2. When adjusting also for FX effects, the increase was 2%. Other costs, including amortizations and depreciations, dropped by 2%, primarily explained by lower property and premises costs.
Loan losses amounted to SEK 186 1,000,000, which meant a loan loss ratio of 4 basis points. The underlying credit quality remained stable. In summary, the operating profit dropped by 2% during the quarter, but adjusted for the one off effect in Q1 in Norway, the profit increased by 3%. On Page 7, you can see the growth in our home markets in the Q2 compared to the same quarter last year expressed in local currencies. Our growth model has continued to deliver a steady outcome.
Compared to Q2 last year, the bank grew both lending and deposits in all home markets. And as expected, the business is growing faster in the UK and the Netherlands. The group's total lending in our home markets grew by 5.5%. We also note that deposits have grown faster than lending in all home markets, not least in our younger markets. But also Sweden shows a double digit deposit growth.
The development reflects that we are getting a bigger share of our customers' total business in the newer home markets. In total, deposits increased by 15%. In addition to the increased lending and deposit volumes, the net fee and commission income also grew by 9% and reached an all time high level. Growth has been particularly strong in the UK, Denmark and the Netherlands. Back to Slide 6, where you can see the development of net interest income since 2,009.
In Q1 this year, the Swedish Resolution Fund fee was doubled, which of course affected net interest income negatively. At the same time, the positive trend in the underlying business continued and we reached the highest net interest income level ever in Q2 despite the increased governmental fees. Now moving to Page 19. You can see the quarterly development in the net interest income. The main driver behind the increase in net interest income by SEK 240,000,000 was increased lending and deposit volumes in our home markets, which together added SEK 106 sorry, SEK 107,000,000 in the quarter.
In Sweden, net interest income increased by SEK 130,000,000, which is mainly explained by growing lending volumes and lower funding costs. The lower funding costs are the major part of the item other. This reflects the net interest income that arises in group treasury if the actual funding costs deviates from the internally applied interest rate paid by the business units. If there were no differences between the internal and external cost, which is hard to achieve with a big balance sheet, the impact would be shown in the deposit and lending margins. Lending margins in Sweden were more or less flat and the mortgage margin was unchanged at 106 basis points.
In some of our home markets outside Sweden, spending margins improved somewhat and added $16,000,000 but deposit margin pressure gave a slightly negative impact of $24,000,000 In the U. K, there was a one off positive impact of SEK 37,000,000, which relates to an adjustment of the treatment of net interest income generated on the impairment loan book. This impact is shown under other in home markets outside Sweden. Apart from that, FX and day count impacts summed up to a positive contribution of SEK 4,000,000,000 and the benchmark effect, which over time is 0, gave a negative contribution of SEK 23,000,000. Then back to Page 10, where we take a closer look at the Swedish operations, where the business development continues to be strong.
Net interest income increased during the first half of the year by 6% compared to last year. The mortgage margin has increased by a few basis points year on year but has been more or less stable during the last few quarters. Net fee and commission income grew by 4% and total income was up by 5%. The costs increased by 2% year on year when adjusted for the SEK 700,000,000 restructuring reserve booked in Q1 2016. It should be noted that the staff costs shown an underlying decline of 7%, which is driven by the ongoing efficiency improvements.
At the same time, the bank's investments in IT development is increasing, which explains the increase in other costs. All in all, revenues have grown more than costs and the income costincome ratio in Sweden was down to 33.5% in Q2 from 35.8% in Q1 this year. Loan losses decreased by 8% and the loan loss ratio was unchanged at 2 basis points. In summary, the operating profit in Sweden increased by 7% when adjusted for the restructuring reserve last year. Slide number 8 shows the development in our Swedish Mutual Fund business.
You have seen this slide before, and it's very encouraging to see that the positive development continues. Since 2010, the bank has taken 24% of all net inflow into the Swedish fund management market and thereby, by far, been the biggest player. At the same time, our market share mutual fund volume in Sweden has only moved from 9% to 11%, which underlines the further potential the bank has to continue to grow in the savings area. The asset management operations in our home markets outside Sweden have also had a strong development. During the first half of twenty seventeen, the net inflow was SEK 4,400,000,000 in Norway, Denmark and Finland combined.
In all home markets, the funds under management reached an all time high level in Q2. On Slide number 11, you can see that our positive development in the UK continues. Operating profit in local currency increased by 9% compared to the first half of twenty sixteen. Business volumes continue to grow steadily despite the fact that we have not opened any new branches lately. All branches still have comparably small market shares, and we see good growth potential within our existing branch network.
In local currency, the net interest income increased by 9%, while the net fee and commission income increased by 24%. In Hartwood, funds under management increased by GBP 300,000,000 since the beginning of the year and now amounts to GBP 3,200,000,000 which is the highest volume ever. Alongside the positive development for our fund management operations, the average household deposit volume increased by 54% compared to last year. All of this shows that our branches managed to capture a larger share of our clients' business apart from the inflow of new clients. A key reason for this is, of course, that Handelsbank and also in the UK has the most satisfied customers of all banks.
The loan loss level dropped to 4 basis points in the first half of twenty seventeen. As we talked about in Q1, there is a scenario where we may need to turn the U. K. Branch into a subsidiary on the back of Brexit. We still don't know for certain if that will be the case, but we are making all the necessary preparations.
A part of the cost increase in Q2 was also related to these preparations. Slide number 12 shows the Netherlands, where development has also continued to be good. Operating profit increased by 86% in local currency compared to the first half of 2016. During the Q2, we opened branch number 27. Business volumes grew strongly.
Lending was up 34% and deposits 73% compared to 2016. On the corporate side, most of the growth is within the SME segment. Also in the Netherlands, the bank has the most satisfied customers. The gap to peers is particularly substantial customers. Optimix was that we acquired last year has now EUR 2,100,000,000 under management and contributes highly to the increase in the net fee and commission income.
Cost income ratio fell by 5.3 percentage points and return on equity was 12% in the quarter. The loan loss ratio was 0. We are obviously happy about the development in the Netherlands and continue to have high expectations on our Dutch business. Slide number 13 shows the capital and liquidity position. The bank CET1 ratio dropped by 0.4 percentage points during the quarter to 23.4% and the total capital ratio was 29%.
As previously mentioned, it is the bank's ambition to deepen the relationship with existing customers but also to grow in especially our younger home markets. In Q2, increased corporate lending volumes led a reduction of the CET1 ratio by 0.3 percentage points. In Q2, the bank received approval from the FSA for new IRB models for sovereign exposures. The impact was minus 0.5 percentage points on the CET1 ratio since these exposures previously were in the standardized approach with a 0% risk weight. The CET1 ratio requirement from the Swedish FSA was 20.3% at the end of Q1.
The actual common equity Tier 1 ratio was therefore slightly above the target range of 1 to 3 percentage points above the FSA requirement. As you can see on this slide, the liquidity continues to be very strong for the bank. LCR was at 120% and the NSFR was well above the expected upcoming minimum level. So to summarize on Slide 14. When adding another quarter, we see that the stable trend continues with an average annual growth in equity per share, including dividends, of 15%.
The Q2 was another stable one, where operating profit increased by 3% from Q1 when adjusted for the one off effect in Norway in Q1. We reached the highest level so far in both net interest income and net fee and commission income. The common equity Tier 1 ratio was 23.4%, which means somewhat above the target range. The business activity was high and the bank continues to grow both lending, deposits and the net fee and commission income generating conclude my presentation and open up for questions. Thank you.
Thank you. The first question comes from Jan Wolter from Credit Suisse. Please go ahead. Your line is open. Jan Wolter from Credit Suisse.
Your line is open.
Thank you. Jan Wolter from Credit Suisse. Can you hear me okay?
Yes.
Hi. So a couple of questions, if I can. The first one on the buyback and special dividend, which I think in the previous quarter, Handelsbanken in the interim report explicitly talked about the potential for buybacks and or special dividends. Given that, that language now is not in the second quarter report, how do you see the outlook for capital repatriation visavis the growth targets? So that's my first question, please.
Okay. Yes. So first of all, and I want to make this very clear because we have received this question already. And we haven't changed the strategy at all. So we have exactly the same message as we communicated in Q1.
And that is if we are continue to be above the target range, the intention by the board is to take us back into and calibrate ourselves back into the target range going forward. And we have no preference when it comes to doing that through dividends or share buybacks. We have no preference regarding the way of achieving that. So and the reason why we communicated so clearly about this in Q1 was actually that at that point in time, we were 0.5% above the target range. So we felt and have communicated previously that if we were above the target range, we should communicate our strategy and our thinking about that.
And this time, we are 0.1% above the target range. And so and then we didn't make that as explicit as we did in Q1. But the strategy is exactly the same and unchanged.
Okay. That's very clear. And then maybe a detailed question. So this quarter, it looks like lower funding cost helped the net interest income line. How do you see maturities going forward even if the bank doesn't give any projections?
You see maturities supporting the NII with lower funding cost in the second half perhaps? Or have we seen most of that impact already in the first half? Thank you.
Hi, Jan. It's Lars here. I mean, we did have 1 large Swedish domestic benchmark in Stadsepootek maturing towards the very end of Q2, and we also had some senior maturities maturing early in this year. And if you look at our profile going forward, you will see that we still have some senior funding maturing in the second half of the year and then, of course, also going into next year and onwards. So we will have volumes of funding maturing over the next quarters and next year.
Thank you. And that funding, is the new spreads meaningfully below what you have in the back book do you think Lars?
I mean if you look at what is maturing now in terms of senior funding, most of that was obviously issued back in 2012, 2013 and even before that. So those were issued at those days' levels. And today, the levels are completely different.
Okay. That's very clear. And the last question is just the outlook, if any, on the UK margin environment. So the NII was strong this quarter in the U. K, but there was a small one off there.
But if we adjust for that, how do you see the outlook on the margin side?
So when it comes to corporate margins, lending margins in the UK, those have been quite stable also during Q1 and now in Q2. And then regarding mortgages on the private side in the UK, we have seen some margin pressure for a series of quarter, but that has also stabilized. So I would say that the margin development in the UK has stabilized during Q2. And we don't forecast the development, but that's what we have seen so far.
Okay. No, that's very helpful. Many thanks.
Thank you. The next question comes from Matti Ahokas from Danske Bank. Please go ahead. Your line is open.
Yes, good morning. Two questions from me as well, please. The deposit volume growth, as you say, has been extremely strong. Is this in line with your targets or is it the kind of accident that people just bring money to Handelsbanken? What's the proposition.
The second question is also continuing on the UK side because previously you have said that there's been very strong margin pressure and kind of tough competition among the UK banks. So can you confirm that, that has clearly decreased and because at least the figures suggest that? Thanks.
Okay. So to start with the deposit growth, that is so we don't make any specific targets on growth and so on. So we have no opinions about it, but what we do is, of course, to pay the market rates needed and so on. But I mean, the deposit inflow, to a very large extent is coming from core clients that and our stable deposits. And that is not bad business.
So because I mean the stable deposit is something that is useful for us funding wise. So that is something that is positive. Really short term money is, of course, something that is a different story. So we don't see that as a problem. And also in some we are happy about the deposit inflows we do see in markets outside of Sweden because that's also a sign of getting deeper into those markets and improving the relationships and building business to also get the deposit side.
And that also helps the balance between loans and deposits. So we have no targets in that respect, but it helps. And I don't know if you have any other questions regarding on that topic or if I should move over to the U. K. Margin pressure.
That's fine. Thanks.
Okay. About UK margins, well, I mean, that is it's a market that is characterized by on and off mode in a way. So and what we have seen during the last quarter is significantly increased activity from our U. K. Peers and that is and it's a volume oriented growth, you could say, and that feeds into margins.
It does, but now it seems to have been leveling off and lately.
Great. Thanks. If I just may have a quick follow-up on the capital side. Are there any other kind of future model implementations or factors that might have a one off positive or negative impact on the core Tier one ratio in the coming quarters?
So first of all, no, we don't have anything that we know about that, that should change. So we have had made this application for sovereign exposures and that was actually a request from the Swedish FSA. And so we have known that. What we didn't know and didn't really expect was the magnitude of the change. And that is totally related to the fact that we also do now have capital requirements on the overnight deposits we make with central banks.
So that part was something we didn't know about, but that's where we are now. But apart from that, no known changes.
Great. Thanks a lot.
Thank you.
Thank you. The next question comes from Woody Saramo from Goldman Sachs. Please go ahead. Your line is open.
Hello, Woody.
Sorry, Guilherme from Goldman Sachs. Thanks for the presentation and taking my questions. The first one is on volume growth on the lending side, which was quite strong. I was wondering if you could elaborate a little bit on if it was spread evenly over the quarter or if most of it come at the end and if we should expect some lag in revenues associated to it to come later in the year? And also about the growth prospect in general for the going forward if this is the kind of volume growth which we'd expect for the rest of the year and the years to come?
Okay. So the volume growth we have is well spread over the quarter. And I think you can also get an idea about that if you look into the figures in each of the home markets because what you can see there is that we do grow at a very steady pace in many of the home markets. So it's a steady growth and it's also natural outcome of how we from how we work. But I mean, this is day to day business in all the different branches where we try to get new customers on board and try to get new business and that's an everyday business.
So it's a stable growth. And regarding the growth prospects, I mean, as you know, we don't forecast and it's hard to do. But once again, if you look at the pace we have had during the last quarters, I mean, we are growing at a pace that is have been growing at a pace of around 5%, sometimes slightly higher pace and sometimes slightly below that. And that is what we have seen so far also late in the quarter.
Okay. And if we split the corporate lending, is there anything to mention what kind of lending to corporate or SME you're seeing? And if you see some demand arising, especially in Sweden from specific sectors?
So what I think is something that we like and we have seen and we started to see in Q1 already to some extent is a pickup in the lending to corporate clients and then not including property management companies to ordinary corporate customers. And that developed and that is in Sweden. And that is something that has continued during Q2, and that is something we think is encouraging. So that is one trend. Apart from that, the trends have been the same as we have seen for quite a long time.
So increasing lending to property management companies and also mortgage lending to private individuals, And that continues, but at a slightly slower pace than you saw a year back.
Okay. Thank you very much for the answer. And my second question was on the cost trajectory and what we should expect for the second half of the year if we could expect some kind of stabilization? And also if we could if you update us on the cost saving program, if you are in line with what you were expecting and remind us about the target for next year? Thank you.
Yes. So we don't make any cost projections. So I'd like not to do that. But regarding the efficiency improvement program, we do have the target remains that we should all else equal bring down the cost by SEK 600,000,000 to SEK 700,000,000 a year. And that remains and we have come quite a bit in that program and that is also something you can although we haven't displayed exactly how much and how far, you can get a feeling for that looking at the headcount numbers we have in Sweden and the change, particularly in Sweden, I would say, over the last 2 years over
the last year.
Thank you very much.
Thank you. The next question comes from Amal Shah from Redburn. Please go ahead. Your line is open.
Hi, good morning. This is Amal Shah from Redburn.
I have
a question also relating to the UK. The branch numbers have been flat for a while, but the number of employees have been increasing. So if you could say more about how to reconcile this, that would be great. Thank you.
Hi, Marcio. Yes. So we the number of branches have been stable, and we haven't opened up any new ones. And the growth in the number of employees is actually related to 2 things. So first of all, growing business because growing business also requires more people even though we haven't opened up any new branches.
And then to some extent also, not significant, but to some extent also to as a consequence of administrative work and then partly related to Brexit actually. So that is the 2 major explanations. But mainly, I would say, business oriented recruitments.
I see. Okay. And I have a second question on corporate repricing. So now that you've had your PD models approved by the FSA, do you have any kind of updates on repricing efforts from the branches?
Yes. What I can tell you is that we have done it the way we always do. So when we have changes and know about requirements in the future and the capital requirements is one of them, Then we introduced that into our internal charging system. So the branches now have to pay internally for that, which gave them the incentives to pass that on to customers. And then to what extent they will be And what I also think impacts this, And what I also think impacts this is to what extent our peers are doing the same.
And what did surprise me to some extent when we got the approval in Q1 was that we was the only bank to get that. So the other banks seem to be in that process, the approval process. And potentially, they could have add ons that I don't know about, and they could have started to carry out with that change even before they have the FSA approval. I don't know that, but that is something that I think will matter when it comes to the competitive landscape and the margin development in the market.
Okay. So do you think that this is a positive development going forward?
I don't want to make a forecast about that. I think it's hard to do and but so far, it has been stable in Sweden, modern development in the corporate side.
Thank you. The next question comes from Rajesh Kumar from Societe Generale. Please go ahead. Your line is open.
Hi, good morning. This is Rajesh Kumar from Societe and Credit Research. Just one question for me please on your funding plan. Do you intend to issue any sub debt or say a regular senior in non nautical sea for the rest of 2017? And what about nonpreferred senior?
Where are you on that? Thank you.
Okay. Hi. No, we haven't made any decisions about subordinated debt issuance. So we have nothing to communicate in that respect.
What about NPS non preferred, anything on that?
That is something we will start doing when we have legal clarity. So and that will take some time. So we don't foresee anything this year. And we now we are happy to learn that the EU seems to have a fast track to create that legal certainty, but we want that to be in place before we start the issue if we can.
Okay. That's very clear. Thank you.
Thank you.
Thank you. The next question comes from Jay Koos from Autonomous. Please go ahead. Your line is open.
Hi, thank you. Just two questions. First, on the cost side. Could you say anything about how much cost savings you have achieved from the CHF 700,000,000 restructuring charge that you took last year? And I guess related to that, how much your what is the kind of pickup in IT spending that you see on the staff side?
I guess we can see the IT cost on the other cost side. And then my other question was just on the risk weights. You had, I think, a 1 percentage point increase in your corporate risk weight, so about SEK 8,000,000,000 quarter on quarter. Is that credit migration or are there model changes that drive that? Thank you.
Okay. So I will start with cost development. And I we haven't communicated exactly how far we have come in reaching the target of SEK 6,000,000 to SEK 107,000,000 in savings on an annual basis, all else equal. But we have done a lot, I could say. And then when it comes to the restructuring reserve, we haven't communicated exactly how much we have used so far.
So you seem to have to wait and see about that part. IT spending, yes, it has been increasing slightly and you can also see that behind so when it comes to the number of the headcount issue, we actually see 3 different paths of development. The first one is the reduction of in headcount in Sweden in particular, to some extent also actually in some of the other home markets that is related to improving efficiency. And then the second path is that we are adding on number of employees in the home markets where we are growing. And the third one is that we do grow when it comes to IT spending and we have recruited people and also started to replace consultants and so on.
So we are growing in that. And so that is related to the increased activity in IT Development. Regarding the risk weight and the corporate risk weight, that is related to the density risk weight density, so we have increased corporate lending with a slightly higher average risk weight. So that is one explanation to the risk weight development. But I don't know if you also had other things in mind in that question or is that
No. So you're saying the that
shift is simply new volumes coming in at a higher risk weight than the old volumes?
Yes. That is one of the tendencies. So we have three things that actually impacts the capital ratio. And the first one is, of course, the sovereign exposures that were added on. So that's minus 0.5 percentage points.
And then we have corporate lending that increased and that is a slightly higher risk or risk weight density. So that brings down the capital ratio. And then we have also had a few credit migrations in a negative direction in a good part of the book. So it hasn't impacted, I would say, the quality credit quality of the portfolio. And it is actually related to a small change in the criteria we use for ratings.
So and that has caused a small credit migration. And that is a one off thing.
Okay. Thank you.
Thank you. The next question comes from Riccardo Robert from Mediobanca. Please go ahead, please.
Yes, good morning. Good morning to everybody. A couple of questions, if I may. The first one is if you have an idea what could be the impact on your capital first time application of IFRS 9, whether you think this is going to be based in? And the second question I have is still again on the capital.
They still have not agreed anything on Basel IV. The statements you made before on your capital return strategy, are those valid even if maybe a decision on Basel IV is going to come over the next few months? Thanks.
Okay. So regarding the implementation of IFRS 9, that is something we will come back later on. So we haven't communicated any impact from that now. We don't expect that to be a major impact for the bank, but we'll come back with more information later on. Regarding Basel IV, so I mean, I'd like things to be more clear on this point and we receive many questions about it as you understand.
But I think, so first of all, I'd like to say that, well, we are not worried about this, but the situation is also very unclear. And there are 3 things that make the situation very unclear. So first of all, we don't have a decision and we don't know where the Basel Committee will end up. And it seems like the European side has come together and has quite strong opinion about where and what maximum floor level they will want to would be willing to accept. Around 70% is the latest we've heard.
And the same goes for the American side of the table that more allude to 75%. So we don't know about that level. That's the first thing. The second thing is that we don't know about the outcome of CRD V work in going on in the European Union. And we don't know about the implementation of potential Basel IV agreement within the European legislation.
So that's the second unknown topic. And then 3rd, but not lastly, how that is going to be implemented in Sweden and how the Swedish FSA will actually act. So a lot of uncertainties. But what you could when you look at this and you also have to keep in mind that many of the buffer requirements we do face in Sweden are requirements that are strictly related to the IRB approach. And then what I'm referring to is in particular is, of course, the mortgage risk weight floor.
Also the add on, the maturity factor add on that we have and also some minor requirements within the Pillar 2 framework are related to the IRB approach. And then on top of that, you have the issue of the systemic risk buffer that we do face in Pillar 2 of 2%. That is could be there, but that could also go away. And we don't know exactly where we'll end in the long run when it comes to the buffer requirements, but those are the things you could keep in and should keep in mind when you look at this. So will this have an impact on our thinking about the distribution and so on.
And I would say, at this point, no, we don't think so. And that's because we will have we have a I mean, we have a strong situation as a bank. We have a strong balance sheet, strong high asset quality. We have a strong ability to generate capital and the phasing in time will be significant if agreements will be reached.
Okay. If I may, just to understand your wording, it's like saying the day these guys will decide what they want to do when they grow up, then the Basel IV, you will take that into account for the good or for the bad. In the meantime, given there is so much uncertainty you speak to the capital strategy that you have illustrated before. The day something changes that day you will take that into account. Is it fair understanding of what of your words?
So I mean, we of course, we see what happens and we follow that closely and we assess how we would be impacted from that. But and of course, the day when we have an agreement on the table, we have to take account of that and can know it better. But we will also be impacted by the implementation work that will start in the EU and then in Sweden.
Okay. Thanks.
Thank you. The next question comes from Jessie Kia from Citigroup. Please go ahead.
Hi. It's Yafei from Citigroup. I have two questions. The first one is on net interest income. You mentioned that this quarter the mortgage volume mortgage margin is roughly flat Q on Q.
But when I look at the average listing price that you have this quarter, there is a downward trend. Could you help to explain a little bit on the competitive dynamics in Sweden at the moment? And how do you see margin going forward in the mortgage side? And then secondly is a follow-up question on the increased corporate lending volume that you mentioned. Could you give us a little bit color?
What segment? Is it SME corporate or is it large corporate? And is this increased lending related to CapEx spending or M and A acquisition? Or what kind of activities corporate activities is stimulating this credit demand? And then thirdly is a small question on Denmark.
I noticed somewhat reduction in the capital allocated to Denmark. Is there any reason for that lower capital allocation? That's it. Thank you.
Hi, Jason. Thank you. So first of all, net interest income and mortgage margins, yes, they have been stable and they have been stable over the last quarters and that is what we see. The listing price is not the end price, I would say. And if we look at the average price that we actually do charge and that is also being published externally, that has been quite stable.
So I would say that we are quite stable in that end. And I think if you look at the development in the Swedish mortgage market and how much new lending we get and so on, that has I mean, there were a few months where we received less, but now we are receiving more again. And this is something we often see that sometimes we have players that really start to play the price game and then that increases the competition and so on and then it goes back again. And that is what we have seen this time as well. During this time, we have been quite stable on the margin side, I would say.
It's hard to forecast what will happen in the future, of course. So that's what I want to. Regarding corporate lending and the segments and so on, no, we don't communicate that. And it's so we don't see any particular industry that sticks out and so on and any very specific tendency in that. So I would say that it is across the board actually.
And then the Danish capital allocation.
Michael? It's Mike. If you look, it's not only Denmark, actually, it's Norway, Sweden, it's all the markets. And of course, we did pay out since we allocate all capital, then we did pay out dividends, obviously, at the end of the Q1. So we have less really less Thank you.
Thank you. The next question is from the line
of Pavel Molchanov.
Please go ahead. Okay. Thank you. That's
clear. Thank you.
Thank you. The next question comes from Adrian Chigi from RBC. Please go ahead.
Hi, there. This is Adrian Chigi from RBC. Thank you for taking my questions. Two follow-up questions, please. 1 on capital, 1 on NII.
In terms of the models for the sovereign exposures, which you've implemented this quarter, is there any room to optimize the capital consumption for relatively limited cost? And if so, how much can you offset that limited to maybe no cost? And then on net interest income, you had a contribution of
€106,000,000 from
other, including treasury.
Can you give
us any color on $1,000,000 from other including treasury. Can you give us any color as to how sustainable you see these contributions in the coming quarters? Thank you.
Okay. Hi, Iren. So capital and sovereign exposures and optimization, and I don't want to make any forecast about that. I mean, we when it comes to sovereign exposures, we do have that as part of our liquidity portfolio, of course, and that is something we need to continue to keep. We do have sovereign bonds in order to service our customers that have those needs as well.
That will also continue, so it won't change. And then we have placed quite a big part of the excess liquidity we do have with central banks, and we will continue to have excess liquidity. So but I don't want to make any forecast about how much we are going to what we are going to do in the future about that. I also think it's important to keep in mind here that the risk weights we do face, although we don't like it and the capital impact and risk weight impact, risk exposure amount increased by nearly SEK 10,000,000,000. The risk weight is approximately, I mean, 1 percentage point, so 1%.
So it's not that big, but we also have significant volumes, of course.
That's fair.
Thank you.
And then regarding net interest income and other. So, while you're referring to the total yes, okay. So and then I would say quite a significant part of the item other is actually to margin in a way. So and as we I explained previously, I mean, that's also that's then what arises when we have another price internally than we do pay when we go to the market to fund the bank. And that is representing a margin, a true margin.
But then we also had a one off effect in Q2 of SEK 37,000,000, which you also should take note of. And that was in the UK and previously interest income net interest income that was not booked in NII from previous quarters and now was booked. So that's a one off. Okay.
Thank you very much.
Thank you.
The next question comes from Polina Sokolova from Barclays. Please go ahead. Hi.
Thank you for taking my questions. I have two questions. The first is you mentioned that it's the board's intention to calibrate the CET1 ratio back into the target buffer range of 1% to 3 percent at the end of the year. Given the buffer range is quite wide, how should we think about this? Would you be planning to move back into the middle of the buffer range?
Or would you rather prefer to stay at the top end? And the second question is, you said that your efficiency program targets a reduction in the cost base by $600,000,000 to $700,000,000 per year. Is this a net number? So does it take into account any inflation related to things like increasing IT spend and Brexit related costs? Thank you.
Okay. So first of all, the target range. We regarding that, we the only communication we make is that we will we aim at calibrating ourselves into the target range if we stay above. And that was what we communicated clearly, as you know, in Q1. To what point is something that we do not communicate and that is something we that is a managerial buffer in a way.
And but the thinking behind this is that, I mean, we have 2 major reasons to keep the buffer we do have and the quite wide range. And first of all, it is to be compliant, as you know. And in order to be that, we have to also be able to manage some volatilities that we could potentially be exposed to. And secondly, we want to be able to grow and to service our customers. And as you saw this quarter, we that growth, which is really something we're aiming for, also has an impact on the level of capitalization.
So we want to have a buffer to be able to grow. And growth is something that is dear to us, of course. And so we want to be able to do that and also to be able to service customers in bad times where you could also have a pressure on these capital numbers. So that is what we keep in mind when we make those decisions. And regarding the efficiency program, that's the net saving all else equal that we are targeting and that is what we have been aiming for, of course, yes.
Anne, could you repeat? I think I missed something else in your question.
No, I think that was it. Thank you. I was just checking that kind of costs like increasing IT spend or Brexit related costs are in that net number. So I think you answered it.
Yes. And I think yes, and regarding Brexit costs, well, that's not included. I mean, the savings we are aiming for when it comes to the efficiency work and so on, it's restructuring reflecting that customer behavior has been changing over time and an adjustment to that. So regarding Brexit and potential some potential costs that might come from that and other things, that comes beside or on top.
Okay. Thank you.
Okay.
Thank you. There appear to be no further questions. I'll return the conference back to you, Rolf.
Thank you very much.