Ladies and gentlemen, welcome to the Handelsbanken Q2 Report 2017 conference call. Today I'm pleased to present Rolf Marquardt, 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 second quarter 2017. Joining me today, I have Mikael Hallåker, Head of Investor Relations, Lars Höglund, Head of Debt Investor Relations, and Annika Engler, Head of Group Accounting. The slides used for my presentation are as usual available at handelsbanken.com. Let's start with slide number two. When we add another quarter, we can conclude that the 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 2007. On average, the value creation for our shareholders has been 15% per year.
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 million 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 million, which meant a loan loss ratio of four basis points. The underlying credit quality remains 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%.
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 million 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 million, which meant a loan loss ratio of four basis points. The underlying credit quality remains 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 seven, you can see the growth in our home markets in the second quarter 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, Handelsbanken grew both lending and deposits in all home markets, and as expected the business is growing faster in the U.K. 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. Sweden also 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 U.K., Denmark, and the Netherlands. Back to slide six, where you can see the development of net interest income since 2009. 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 million was increased lending and deposit volumes in our home markets, which together added SEK 107 million in the quarter.
In Sweden, net interest income increased by SEK 130 million, which is mainly explained by growing lending and deposit 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, lending margins improved somewhat and added SEK 16 million. But deposit margin pressure gave a slightly negative impact of SEK 24 million.
In the U.K., there was a one-off positive impact of SEK 37 million, 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 46 million and the benchmark effect which over time is zero, gave a negative contribution of SEK 23 million. 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%. Total income was up by 5%. The costs increased by 2% year-over-year when adjusted for the SEK 700 million 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. The cost-income ratio in Sweden was down to 33.5% in Q2 from 35.8% in Q1 this year. Loan losses decreased by 8%. 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. 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. Thereby by far been the biggest player. At the same time, our market share of the total outstanding 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 2017, the net inflow was SEK 4.4 billion 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 U.K. continues.
Operating profit in local currency increased by 9% compared to the first half of 2016. 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. 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 Heartwood, funds under management increased by GBP 300 million since the beginning of the year. Now amount to GBP 3.2 billion, 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 Handelsbanken also in the U.K. has the most satisfied customers of all banks. The loan loss level dropped to 4 basis points in the first half of 2017. 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. 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 second quarter, we opened branch number 27. Business volumes grew strongly. Lending was up 34%. 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 among corporate customers. Optimix that we acquired last year has now EUR 2.1 billion 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 zero. 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 the existing customers, but also to grow in especially our younger home markets. In Q2, increased corporate lending volumes led to 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 one to three 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. To summarize on slide number 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 second quarter 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 business in all home markets. We see good further growth opportunities in the bank. With that, I conclude my presentation and open up for questions.
Thank you.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero followed by the one on your telephone keypad and you will enter the queue. 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, Credit Suisse. Can you hear me okay?
Jan.
Hi. A couple of questions if I can. The first one on the buybacks 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 vis-à-vis the growth targets? That's my first question, please.
Okay. Yeah. First of all, I want to make this very clear because we have received this question already. We haven't changed the strategy at all. We have exactly the same message as we communicated in Q1. That is if we 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. 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. 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.
We felt, and have communicated previously that if we were above the target range, we should communicate our strategy and our thinking about that. This time we are 0.1% above the target range, we didn't make that as explicit as we did in Q1, the strategy is exactly the same and unchanged.
Okay. No, that's very clear. Maybe a detailed question. 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? Could you see maturities supporting the NII with lower funding cost in the second half perhaps? Have we seen most of that impact already in the first half? Thank you.
Yeah.
Hi, Jan. It's Rolf Marquardt here.
Hi.
We did have one large Swedish domestic benchmark in Statsskuldväxlar maturing towards the very end of Q2, and we also had some senior maturities maturing earlier in this year. 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. We will have volumes of funding maturing over the next quarters and next year.
Thank you. That funding, is the new spreads meaningfully below what you have in the back book, do you think, Lars?
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. Those were issued at those days' levels, and today the levels are completely different.
Okay. No, but that's very clear. The last question is just the outlook, if any, on the U.K. margin environment. The NII was strong this quarter in the U.K., but there was a small one-off there. If we adjust for that, how do you see the outlook on the margin side?
When it comes to corporate margins, lending margins in the U.K., those have been quite stable also during Q1 and now in Q2. Regarding mortgages on the private side in the U.K., we have seen some margin pressure for a series of quarter, but that has also stabilized. I would say that the margin development in the U.K. has stabilized during Q2.
Okay-
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 reason behind it, and how do you plan to address this situation? Because with these interest rates, at least in most countries, it doesn't sound like a very good proposition. The second question is also continuing on the U.K. side, because previously you have said that there's been very strong margin pressure and tough competition among the U.K. banks. Can you confirm that has clearly decreased and because at least the figures suggest that. Thanks.
To start with the deposit growth, we don't make any specific targets on growth and so on. We have no opinions about it, but what we do is of course to pay the market rates needed and so on. The deposit inflow to a very large extent is coming from core clients and our stable deposits. That is not bad business. Because the stable deposit is something that is useful for us funding-wise. That is something that is positive. Really short-term money is of course something that is a different story. We don't see that as a problem. Also, 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.
That also helps the balance between loans and deposits. We have no targets in that respect, but it helps. 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 U.K. margins, it's a market that is characterized by on and off mode in a way. What we have seen during the last quarter is a significantly increased activity from our U.K. peers. That is volume-oriented growth, you could say, and that feeds into margins. It does, but now it seems to have been leveling off lately.
Great. Thanks. If I just may have a quick follow-up on the capital side. Are there any other future model implementations or factors that might have an one-off positive or negative impact on the core Tier 1 ratio in the coming quarters?
First of all, no, we don't have anything that we know about that should change. We had made this application for sovereign exposures, and that was actually a request from the Swedish FSA. We have known that. What we didn't know and didn't really expect was the magnitude of the change. That is totally related to the fact that we also do now have capital requirements on the overnight deposits we make with central banks. That part was something we didn't know about, but that's where we are now. Apart from that, no known changes.
Great. Thanks a lot.
Thank you.
Thank you. The next question comes from Ollie Sarama from Goldman Sachs. Please go ahead. Your line is open.
Hello, Ollie.
Sorry. Ollie Sarama 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. Also about the growth prospect in general going forward if this is the kind of volume growth we should expect for the rest of the year and the years to come.
Okay. 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. What you can see there is that we do grow at a very steady pace in many of the home markets. It's a steady growth, and it's also natural outcome from how we work. 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. It's a stable growth. Regarding the growth prospects, as you know, we don't forecast, and it's hard to do.
Once again, if you look at the pace we have had during the last quarters, we have been growing at a pace of around 5%, sometimes slightly higher pace and sometimes slightly below that. That is what we have seen so far, also late in the quarter.
Okay. Thank you. 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?
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. That is in Sweden, and that is something that has continued during Q2, and that is something we think is encouraging. That is one trend. Apart from that, the trends have been the same as we have seen for quite long time. 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. 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. Also if you could 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. We don't make any cost projections, so I'd like not to do that. Regarding the efficiency improvement program, the target remains that we should all else equal bring down the cost by SEK 600 million to SEK 700 million a year. That remains, and we have come quite a bit in that program. Although we haven't displayed exactly how and 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 year.
Thank you very much.
Thank you. The next question comes from Ameet Shah from Redburn. Please go ahead. Your line is open.
Hi, good morning. This is Ameet Shah from Redburn. I have a question also relating to the U.K. The branch numbers have been flat for a while, but the number of employees have been increasing. If you could say more about how to reconcile this, that would be great. Thank you.
Hi, Ameet Shah. The number of branches have been stable, we haven't opened up any new ones. The growth in the number of employees is actually related to two things. First of all, growing business, because growing business also requires more people, even though we haven't opened up any new branches. Then to some extent also, not significant, but to some extent also as a consequence of administrative work and then partly related to Brexit, actually. That is the two major explanations. Mainly I would say business-oriented recruitments.
I see. I have a second question on corporate repricing. 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?
What I can tell you is that we have done it the way we always do. When we have changes and know about requirements in the future, the capital requirements is one of them, then we introduce that into our internal charging system. The branches now have to pay internally for that, which give them the incentives to pass that on to customers. Then to what extent they will be successful in doing that is a market situation thing. We have done that. That is into play. What I also think impacts this is to what extent our peers are doing the same. What did surprise me to some extent when we got the approval in Q1 was that we was the only bank to get that. The other banks seem to be in that process, the approval process.
Potentially they could have add-ons that I don't know about, they could have started to carry out with that change even before they have the FSA approval. I don't know that is something that I think will matter when it comes to the competitive landscape and margin development in the market.
Okay. Do you think that it is a positive development going forward?
I don't want to make a forecast about that. I think it's hard to do. So far it has been stable in Sweden, the model development in the corporate side.
Okay. Thank you very much.
Thank you. The next question comes from Rajesh Kumar from Societe Generale. Please go ahead. Your line is open.
Hi, good morning. Rajesh Kumar from Societe Generale Research. Just one question for me please on your funding plan. Do you intend to issue any sub-debt or say regular senior in non-Nordic currency for the rest of 2017? What about non-preferred senior? Where are we on that? Thank you.
Okay. Hi. No, we haven't made any decisions about subordinated debt issues. 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. That will take some time. We don't foresee anything this year. 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 issue, if we can.
Okay. That's very clear. Thank you.
Thank you.
Thank you. The next question comes from Jacob Kruse from Autonomous. Please go ahead. Your line is open.
Hi. Thank you. Just two questions. Firstly, on the cost side, could you say anything about how much cost savings you have achieved from the SEK 700 million restructuring charge that you took last year? I guess related to that, 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. Then my other question was just on the risk weights. You had, I think, a one percentage point increase in your corporate risk weight, so about SEK 8 billion quarter on quarter. Is that credit migration or are model changes that drive that? Thank you.
Okay. We'll start with the cost development. We haven't communicated exactly how far we have come in reaching the target of SEK 600 million-SEK 700 million in savings, on an annual basis or as equal. We have done a lot, I could say. When it comes to the restructuring reserve, we haven't communicated exactly how much we have used so far. 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. When it comes to the headcount issue, we actually see three different paths of development. The first one is the reduction in headcount in Sweden in particular. To some extent also actually in some of the other home markets, that is related to improving efficiency.
The second path is that we are adding on a number of employees in the home markets where we are growing. 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. We are growing in that. That is related to the increased activity in IT development. Regarding the risk weight and the corporate risk weight, that is related to the risk weight densities. We have increased corporate lending with a slightly higher average risk weight. That is one explanation to the risk weight development. I don't know if you also had other things in mind in that question, or is that?
No. You're saying that shift is simply new volumes coming in at a higher risk weight than the old volumes?
Yes. That is one of the tendencies. We have three things that actually impact the capital ratio. The first one is, of course, the sovereign exposures that were added on. That's minus 0.5 percentage points. We have corporate lending that increased, and that is a slightly higher risk weight density. That brings down the capital ratio. We have also had a few credit migrations in a negative direction. In the good part of the book, so it hasn't impacted, I would say, the credit quality of the portfolio. It is actually related to a small change in the criteria we use for rating. That has caused a small credit migration. That is a one-off thing.
Okay. Thank you.
Thank you. The next question comes from Riccardo Rovere from Mediobanca. Please go ahead, please.
Yes, 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 from your first-time application of IFRS 9, and whether you think this is going to be phased in. 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.
Regarding the implementation of IFRS 9, that is something we will come back to later on. We haven't communicated any impact from that now. We don't expect that to be a major impact for the bank. We'll come back with more information later on. Regarding Basel IV, I'd like things to be more clear on this point, and we receive many questions about it, as you understand. I think first of all, I'd like to say that we are not worried about this. The situation is also very unclear. There are three things that make the situation very unclear. First of all, we don't have a decision, and we don't know where the Basel Committee will end up.
It seems like the European side has come together and has quite a strong opinion about what maximum floor level they would be willing to accept. Around 70% is the latest we have heard. The same goes for the American side of the table that more allude to 75%. 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 going on in the European Union, and we don't know about the implementation of a potential Basel IV agreement within the European legislation. That's the second unknown topic. Third, but not lastly, how that is going to be implemented in Sweden and how the Swedish FSA will actually act. A lot of uncertainties.
When you look at this, 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. What I'm referring to 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. On top of that, you have the issue of the systemic risk buffer that we do face in Pillar 2 of 2%. That could be there, but it could also go away. We don't know exactly where we'll end in the long run when it comes to the buffer requirements, but those are things you should keep in mind when you look at this.
Will this have an impact on our thinking about the distribution and so on? I would say, at this point, no, we don't think so. That's because we have a strong situation at the bank. We have a strong balance sheet, high asset quality. We have a strong ability to generate capital, and the phasing in time will be significant if an agreement will be reached.
Okay, thanks. 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 in terms of 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 return strategy that you have illustrated before. The day something changes, that day you will take that into account. Is it a fair understanding of your work?
Of course, we see what happens, and we follow that closely, and we assess how we would be impacted from that. Of course, the day when we have an agreement on the table, we have to take account of that and can know better. We will also be impacted by the implementation work that then will start in the EU and then in Sweden.
Okay, thanks.
Thank you. The next question comes from Yafei Xiang 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 margin is roughly flat QOQ. 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? 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? Is this increased lending related to CapEx spending or M&A acquisition or what kind of corporate activities is stimulating this credit demand? Then thirdly is a small question on Denmark.
I noticed a somewhat reduction in the capital allocated to Denmark. Is there any reason for that lower capital allocation? That's it. Thank you.
Hi, Yafei. Thank you. 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. If you look at the average price that we actually do charge, and that is also being published externally, that has been quite stable. I would say that we are quite stable in that end. I think if you look at the development in the Swedish mortgage market and how much new lending we get and so on, there were a few months where we received less, but now we are receiving more again.
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. 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. That I won't do. Regarding corporate lending and the segments and so on, no, we don't communicate that. We don't see any particular industry that sticks out and so on, and any very specific tendency in that. I would say that it is across the board, actually. Then the Danish capital allocation. Mikael, how about-
It's much clearer. If you look, it's not only Denmark actually, it's Norway, Sweden, it's all the markets. Of course we did pay out since we allocate all capital, then we did pay out dividends obviously at the end of the first quarter. We have really less capital to allocate. You see the same trend basically in all the countries.
Okay. Thank you. That's clear.
Thank you.
Thank you. The next question comes from Adrian Cighi from RBC. Please go ahead.
Hi there, this is Adrian Cighi from RBC. Thanks for taking my questions. Two follow-up questions, please. One on capital, one 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 a relatively limited cost? If so, how much can you offset at limited to maybe no cost? Then on net interest income, you had a contribution of SEK 106 million from other, including treasury. Can you give us any color as to how sustainable you see these contributions in the coming quarters? Thank you.
Hi, Adrian. Capital and sovereign exposures and optimization. I don't want to make any forecasts about that. 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, won't change. We have placed quite big part of the excess liquidity we do have with central banks, and we will continue to have excess liquidity. I don't want to make any forecasts about what we are going to do in the future about that.
Thank you.
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 billion. The risk weight is approximately 1%. It's not that big, we also have significant volumes, of course.
That's fair. Thank you.
Regarding net interest income and other, were you referring to the total? Yeah, okay. I would say quite a significant part of the item other is actually to margin in a way. As I explained previously, that's what arises when we have another price internally than we do pay when we go to the market to fund the bank. That is representing a margin, a true margin. We also had a one-off effect in Q2 of 37 million SEK, which you also should take note of, and that was in the U.K. and previously net interest income that was not booked in NII from previous quarters and now was booked. That's a one-off.
Okay. Thank you very much.
Thank you.
Thank you. As another reminder to register for a question, please press zero followed by the one on your telephone keypad. 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%-3% 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? The second question is, you said that your efficiency program targets a reduction in the cost base by SEK 600 million-SEK 700 million per year. Is this a net number? Does it take into account any inflation related to things like increasing IT spend and Brexit related costs? Thank you.
Okay. First of all, the target range. Regarding that, the only communication we make is that we aim at calibrating ourselves into the target range if we stay above. That was what we communicated clearly as you know in Q1. To what point is something that we do not communicate and that is a managerial buffer in a way, but the thinking behind this is that we have two major reasons to keep the buffer we do have and the quite wide range. 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. Secondly, we want to be able to grow and to service our customers.
As you saw this quarter, that growth which is really something we're aiming for, also has an impact on the level of capitalization. We want to have a buffer to be able to grow. Growth is something that is dear to us, of course. 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. That is what we keep in mind when we make those decisions. 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, yeah. Could you repeat, I think I missed something else in your question on that one.
No, I think that was it. Thank you. It was just checking that kind of costs like increasing IT spend or Brexit related costs are in that net number. I think you answered it.
Yeah, regarding Brexit cost, well, that's not included. The savings we are aiming for when it comes to the efficiency work and so on is restructuring reflecting that customer behavior has been changing over time and an adjustment to that. Regarding Brexit and some potential cost 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.