Ladies and gentlemen, welcome to the Handelsbanken second quarter external conference call. Today I am pleased to present Ulf Frykholm, CFO for Handelsbanken. For the first part of this call, all participants will be in listen only mode. Afterwards there will be a question and answer session. Speaker, please begin.
Good morning, everyone. Welcome to this conference call for the second quarter 2016. Joining me today I have Mikael Hallåker, Head of IR, Lars Höglund, Head of Debt IR, and Jörgen Olander, Group Head of Accounting. The slides used for my presentation are, as usual, available at handelsbanken.com. I will start as so many times before by showing our value creation on slide number two. The 15% average annual growth rate in equity plus dividends continued also when the second quarter was added. Interest rates have continued to fall in Sweden and elsewhere, with more negative impact on deposit margins. Our robust business model has continued to handle these challenges very well, as you can see from the chart and this report.
In the second quarter, the good business activity in the bank continued. We also saw some positive developments in lending margins, primarily in Sweden and Norway. Our good development in the mutual fund business in Sweden also continued. Our asset quality remains strong with loan losses on a low level, five basis points. In the quarter, Fitch also upgraded our rating now to AA with no comparable bank at a higher rating. Our capital position has continued to strengthen further with Core Equity Tier 1 ratio now at 23%, which means that we estimate that we are already compliant with the new higher Swedish capital requirements that are expected to come into force in the latter part of 2016. In spite of the strong capital situation, return on equity for the second quarter increased to 14.2%.
On slide number six, you can see the strong volume development of the bank. Lending has grown steadily quarter by quarter since the end of 2013. As you can see, the activity level has increased further during the first two quarters of this year. Lending in the second quarter rose in all whole markets except Finland and corporate lending in Sweden, where the development was flat. Elsewhere, the increase was seen in household lending as well as in corporate lending. On slide number eight, we show the return on equity in our different home markets.
For the first half of the year, U.K. was in top now with 16%, this was achieved in spite of the fact that we have continued to open branches also in the second quarter. Norway, with its challenges in their economy, was at 14%, while Sweden, Denmark, and Finland were all at 13%. Finally, the Netherlands, which is expanding and also took some costs for the acquisition of Optimix, still delivering 9% return on equity. Back to slide number four. Let's look at the second quarter more in detail. Operating profit increased by 6% in the quarter, while net interest income was more or less unchanged sequentially, with new lending volumes and margins offsetting lower deposit margins. Net commission income improved by 5%, this was achieved mainly through higher card fees and increased fees from our mutual funds.
Net gains and losses on financial transactions adjusted for capital gains improved by 32% due to strong client activity in the FX business as a result of the volatile markets. During the second quarter, our sale of shares in Visa Europe gave SEK 81 million in capital gains. The Visa Europe transaction also gave us a dividend of SEK 64 million in the quarter. All in all, the transaction gave a result of SEK 716 million, where SEK 615 million is recorded in other comprehensive income. Revenues all in all increased by 2%, adjusted for non-recurring items and dividends received. Personnel costs dropped by 1%, if you exclude the provision made in the first quarter to enable early retirements. For the first half of the year, underlying staff costs increased by 1% compared to the same period in 2015. Other expenses increased by 3% due to seasonal effects.
Expenses all in all increased by 0.5% quarter-over-quarter and just over 1% year-over-year, adjusted for non-recurring items. Finally, loan losses were five basis points while impaired loans dropped to 17 basis points and credit quality remained stable. Let's turn to slide number seven, as you can see, the good business development in the group continued in the second quarter, all in all, lending increased by some SEK 35 billion compared to the end of the first quarter. The positive NII impact from increased lending volumes was SEK 83 million in the second quarter, this more than offset the decline coming from lower deposit margins in Sweden. We have seen this encouraging trend now for a number of quarters, being a result of the strong activity in our branch network.
Also, I think it's encouraging to see that if you look at the Swedish operation, the Swedish operations show an improved NII in the quarter in spite of even lower interest rates. Still, I think it's clear when you see the slide that our underlying growth is still quite hidden by the falling short-term rates. STIBOR in the quarter dropped another 5.6 basis points. On slide number 22, we dig deeper into the development of net interest income, which for the group was more or less unchanged from the first quarter. Higher lending volumes added SEK 83 million in the quarter, as I mentioned, higher lending margins gave another SEK 41 million. In Sweden, the mortgage margin improved by one basis point, also in Norway, lending margins improved in the second quarter. The bank continues to have a strong inflow of deposits.
In Sweden, interest rates continued to go more negative. The negative rates meant that the increased deposit volume had a negative impact on NII. All in all, NII dropped by SEK 69 million from the Swedish deposit business in the quarter. Outside Sweden, the deposit growth overall adds to NII, which compensated for the decline in deposit margins there. Finally, there were some other positive effects related to lower funding costs in the quarter that compensated for a negative benchmark effect in Stadshypotek and some negative currency impacts. Back to slide number nine, you can see our balance sheet, which again has continued to strengthen. Total capital ratio was 28.9%, up from 28.8% at the end of the first quarter. Core Equity Tier 1 ratio increased to 23%, up from 22.7% one quarter earlier.
That was in spite of a negative IAS 19 effect of 0.6 percentage points due to falling interest rates. The increase was mainly driven by profit generation, which gave 0.9 percentage points, including a dividend from Handelsbanken Liv of SEK 1.8 billion. The second main reason for the increase was the conversion into equity of the 2011 staff convertible, which is up for conversion during a few remaining months of 2016. The conversion in the quarter contributed 0.4 percentage points. Our leverage ratio amounted to 3.9%. The Bank of England, in their recent stability report, provided very good arguments for why cash holdings with central banks should not be included in the base for calculating the leverage ratio. Adjusting our leverage ratio for our huge central bank deposits, that is more than SEK 580 billion. The leverage ratio would be 4.9%.
The Swedish FSA announced in May that they have now decided on the new methodologies for calculating corporate risk weights. The decisions were basically in line with the proposals from earlier this year. The new methodologies imply average corporate risk weights to be at least around 30% in Pillar I, and also a maturity floor of 2.5 years to be added in Pillar II. The more exact final capital requirement for Handelsbanken is not yet decided, hence, some uncertainty remains. Assuming an average corporate risk weight of 30% and a 2.5-year maturity floor, we assess that the bank was compliant with the new capital requirement also at the end of the second quarter. On slide 10, you can see our capital position over time since 2009. The Core Equity Tier 1 ratio, as you can see, has almost doubled since then.
At the same time, as you can see on the right-hand side, our return on equity has been stable during many, many years. Since 2009, a lot of things, of course, have happened in the markets, sharply falling interest rates, a number of financial crisis in Europe. Regulation has kept changing all the time. In this period, with twice as high capital level now compared to 2009, Handelsbanken has continued to deliver a stable return on equity, which for the first half of 2016 was 13.7%. On slide 11, we go back to 2007 to look at our return on equity over time compared with the long-term interest rates. Growing volumes is never a target for the bank. Higher profitability than the average of our peers is our target, as you know.
When we add the right type of business with high-quality customers in our local markets, that of course contributes to profitability and long-term stability. Looking at our nominal return on equity back in 2007, in the early days of the financial crisis, it was higher than today, but so was also the long-term risk-free interest rate. When we look at the profitability premium over the risk-free rate that the bank has delivered over time, you can see it has been very stable. In fact, today it is at 13% and actually higher than in 2007 when looking at the decimal points. This stability confirms the low risk profile of Handelsbanken. If a bank takes high risks in order to achieve short-term profitability, that bank will not show this stable return over time. On slide number 13, we look at credit ratings.
Fitch upgraded Handelsbanken to AA flat in May, which means that we have the highest rating in Europe of all comparable banks from Fitch and also from Moody's. If we add the Standard & Poor's rating to the picture, you can see that there are three banks in the world with an equally high total rating from all three leading rating agencies. Two of them are banks from Singapore and one from Canada. No comparable bank is higher than Handelsbanken. In times when the market is full of liquidity, such a high rating does not necessarily and automatically mean a lot to our funding cost advantage. As soon as the market becomes nervous, just like a few weeks ago, the difference increases quickly to our advantage. A very high total rating like this becomes meaningful for our funding cost and profitability.
On slide number 14, we show the development in our mutual fund business in Sweden, which continues to be strong. During the first six months of 2016, the market as a whole had a very marginal inflow, while we saw a net inflow in our funds of SEK 5.5 billion. Naturally, we see a great potential here since our back book market share of the total mutual fund market in Sweden still is only 11%. It's very encouraging, I think, to see the good performance continuing in this business. As we have said before, we also see a very interesting potential in all our other home markets within the savings area. On slide number 15, we show an update about our Dutch business, which is developing very well. Operating profit in the first half of the year increased by 77%.
The cost-income ratio fell by 6.3 percentage points in spite of costs taken for continued expansion and also related to the Optimix acquisition. We expect that deal to close during the third quarter. We have had the most satisfied customers also in the Netherlands, and lending volumes increased 28% year-over-year, with 39% growth in the household segment. Like in the U.K., we are a niche bank in the Netherlands with a very careful selection of customers that we lend to. Our market share here is, of course, so low that it can hardly be measured. The asset quality is strong. For the first half of 2016, we had net recoveries of one basis point. On slide number 16, let me comment our business in the U.K., also on the back of the referendum vote of June 23rd.
Our successful operation in the U.K. is done, as you know, locally from our more than 200 branches. We provide normal banking products, and we are a true relationship bank for our customers, offering a bespoke service. As you know, we are a niche player and very far from a mass-market bank. As everywhere, we are focusing on the customer and on profitability and not on volumes. With no bonuses and no budgets, there are no incentives for the branches to chase the wrong volumes. We have a high-quality customer base, and our branches really know our customers through the local presence. Our model was tested and stressed in the financial crisis also in the U.K., where our loan losses peaked at 33 basis points in 2010. Since then, we have become even more geographically diversified with a more or less nationwide presence, including several small and midsize locations.
Our growth in the U.K. has been achieved by attracting existing customers from other banks rather than growing with the market. The market share is still very low, which means that there is still a large potential for growth in the U.K. for Handelsbanken in the years to come. On slide number 17, you can see our loan loss history in the U.K. While our loan losses peaked at 33 basis points in 2010, as I mentioned, the U.K. peers on average peaked at about 2% in 2009. The average loan loss level for ourselves between 2008 and the first half of 2016 was 18 basis points, which can be compared with the average of 90 basis points for U.K. peers in the period up until Q1 this year. Still, our asset quality in the U.K. has improved further since the years of the crisis.
This is the same pattern that we see when we look at our history in the U.K., as well as for the group as a whole. Our loan losses have been considerably lower than in other banks. This has been particularly clear, of course, in times of stress and crisis. To summarize, the value creation in the bank continued with an average increase in equity per share, including dividends of 15% per year. Return on equity in the quarter increased to 14.2%. Operating profit increased 6% quarter-on-quarter, and there have been a good level of business activity in the quarter, and lending margins in Sweden and Norway improved. Net interest income in Sweden rose this quarter in spite of even more negative interest rates. We continue to see a good development in our fund management business in Sweden.
Our local relationship-driven business in the U.K. still offers a good potential for growth. The model is well-tested in the latest financial crisis, where also in the U.K. our loan losses were considerably smaller than for domestic peers. Core Equity Tier one ratio increased to 23%, up from 22.7% at the end of the first quarter. We assess that the bank is already compliant with the new higher capital requirements that are expected to be implemented later this year. Credit quality remains stable with a five basis point in credit loss level and impaired loans decreasing to 17 basis points. Fitch upgraded our rating to AA flat, which means that no comparable bank has a higher rating. With that, I conclude my presentation and open up for questions. Thank you.
Ladies and gentlemen, if you have a question, please press 01 on your telephone keypad and you'll enter a queue. We have a question from Willis Paramount from Goldman Sachs. Please go ahead.
Hi. Good morning. Thanks for taking my question. I have two actually. The first one is on Brexit. I understand very clearly how you're well equipped to face the situation. It's probably a bit early to think about how the situation will change, but has anything changed for you in terms of how you see pricing development going forward in the U.K.? The second question is on the capital side, on the numerator. I was wondering how much capital could still be formed thanks to the remaining convertible bond that you mentioned, and on the risk-weighted asset side, could you give a bit more detail on the migration of the credit risk-weighted assets dynamic that we saw over the quarter and how we should expect this to change going forward? Thanks.
Thank you very much. On the second question, I'm afraid I didn't hear the start of your question regarding capital. Could you repeat that, please?
Yes. It was about the convertible bonds by staff that happened during the quarter. You mentioned there were still some to come by the end of the year.
Okay. Thank you very much. Yes. I understand. On the Brexit you asked about the pricing development, that is of course hard to say. Of course, in general, I would say that since we are in a unique position with our rating and our financial stability and the stableness of our business model, we know that every time that there are some sort of turmoil in the market, the differentiation gets wider. That of course means also that our margin gets, in the relative sense, better. That is the only, I think important thing going forward. We can all guess on what will happen in the markets and so on.
I think it's very important as you mentioned, you already know that there is of course no change whatsoever in our long-term view of our U.K. operation, we are as enthusiastic as we have ever been on our long-term prospects. On the road there will be up and down turns, of course. Now it's the Brexit situation that can of course affect a lot of general things in the country. Second question on convertible bonds. Yes. The stock convertible 2011 is possible to convert up until November. I think that of the outstanding amount, about SEK 600 million is still to be converted, and it has to be converted before November because it expires after that. It's pretty certain that the SEK 600 million will be converted. You talked about risk-weighted assets, yes, we have a small migration in the quarter.
It's a small one and it's migration in very good risk classes, sort of going from ultra safe to ultra safe. It's nothing dramatic with that migration.
Thanks. That's very clear.
Next question comes from Omar Keenan from Deutsche Bank. Please go ahead.
Good morning. Thanks very much for taking the questions. My first question is on capital, and my second question is on Sweden. My question on capital the point around the Swedish corporate risk weight is understood. If I apply the SEK 100 billion increase in RWA that has been previously mentioned, I think mostly it's related to the housing cooperative loans. On my numbers, I put the pro forma core tier one ratio at 19%, compared to the regulator's requirement of something in 18.8%, 18.9%. We have another 10 basis points from the staff convertible coming through. Other than the second half earnings, what other measures can we expect to be taken to rebuild the management buffer?
Currently it looks like on a pro forma basis, the management buffer is in the tens of basis points rather than the 1 to 300 basis points target that's given. That's my first question. Shall I ask the second?
Well, I can take the capital question first, and we can come back to your second question. First of all, I don't want to comment on your exact numbers. I think you should bear in mind that when talking about numbers, one has to make assumptions on whether things are coming Pillar 2 or Pillar 1. Of course, we have done all sorts of calculations ourselves, and therefore we come to the clear conclusion that we estimate that we are indeed compliant also after Q2. I think you should also bear in mind, looking forward, that this has been an awkward quarter, as you've seen from the figures. Since interest rates went down, we of course, being prudent, took down the discount rates when discounting pension liabilities. We are now using 2% for the quarter. It was down from 2.5% that we used in Q1.
Because of falling long-term interest rates, that had a negative effect of 0.6 in the quarter. If that had not happened, we would have been at 23.6. Just as an observation, I know that some banks do not change at all between Q1 and Q2, you have to ask them about that, this is a negative effect for us. We don't do any projections, I think it's not rocket science if you put all things being equal and doing a forward rolling of that you will experience that it will not only be a compliance situation but also a rather, hopefully, comfortable situation when the new rules comes into effect. Again, I'm not doing any projections, just thinking out loud.
Okay. There's no other lumpy items that you expect to come through in the second half, like the staff convertibles or upstreaming any more equity from the life business? I guess the point on the pensions as well. Is there any more downside to the 2% discount rate? I understand the point on the earnings, these are the big moving parts. I just want to try to get a sense of your expectations for H2.
Yeah. Well, talking about the discount rate, you have to tell me what you believe will happen with long-term interest rates going forward. That is dependent on that. I'm just saying.
Zero
that when you compare banks, of course, it means a lot where the starting point is. As you see at the end of the quarter, interest rates happen to be very low because of Brexit.
Yeah.
That's why we have this effect. Would we have calculated today, the interest rate would have gone up, as you know, if you follow the markets.
Yeah. Okay.
Again, I'm not doing any projections here.
Okay. Fair enough. Okay. My second question was on Sweden. I was really encouraged to see a positive lending margin improvement in Q2. It's the first time we'd seen it in many quarters. It's not explained by the one basis point of mortgage margin increase, so it feels like there's repricing on the corporates. Is this the repricing trends that we've heard about? Can you give us a bit more color on the lending margin improvement? Do you expect this trend to be sustained? Thank you.
Well, as you know, we are in our system not a price leader, but a price follower. It's our branches that sets the prices towards the clients. That means that the answer to your question really lies in also, of course, in the strategies of our peers. I think maybe there is what I hear is that there is, of course, some wish from some of our peers to compensate for the new capital rules that are rolling in here. That, I think, is an important effect behind this, because as you know, on the corporate side in Sweden, there is not much demand. There are demands for highly leveraged deals, and we do not participate in those. If you take ordinary companies, you don't see very high demand at all there.
I think one should look at this as a function of the new capital rules and the cost associated with that.
Okay, great. Thank you very much.
Next question comes from Anton Kryachok from UBS. Please go ahead.
Good morning, and thank you for the presentation. I had a couple of questions, please. Firstly, on the U.K., I'm looking at your annual report here where you show the breakdown of exposure to property management companies in your corporate book. In the U.K., total exposure stands at SEK 116 billion. Of that, SEK 59 billion is commercial real estate, while the rest is primarily made up of multi-family dwellings and residential property. I was wondering whether you can give us a little bit more color on what actually sits within that multi-family dwellings and residential property. Is it lending to developers or is it lending to smaller corporates that use residential property as a collateral, basically, for their corporate lending? If you can share a little bit more color on that would be helpful. The second question, please, on net interest income.
I was somewhat surprised by the negative development on NII in Finland, which has been under pressure for the last couple of quarters. Were there any one-off elements in the weakness that we've seen? Is it perhaps negative deposit margins that is impacting NII? Can we expect an improvement from here, please? Thank you.
Thank you very much. When talking about U.K. portfolio, the numbers you quote are right. To put it in a group context, we are talking about 6% of our portfolio that you're talking about. It is, of course, as you know, according to our policy, the decisions are made solely on the basis of cash flow and ability for the borrower to repay. We must feel absolutely sure on that note before we say yes. We take the collateral as well. We have a good LTV situation, and we have a very proper and prudent way of conducting our decisions. That means that you will find extremely low volumes of property development, simply because that do not fulfill the criteria of the cash flow. Very little housing associations as they are defined in U.K.
We see that we have a good position, and strong position, good rating and so on in our portfolio there. You talked about NII in Finland. In Finland, you have negative margins, margin effect. As you know, the Finnish economy is not in a terribly good state. One might claim maybe that there are signs of improvement, but in general, it's not a very good situation when talking about the country. This has been the case for quite some time. The growth in the country is not there, and that means that the competition, of course, is fierce, and that means that margins have gone down. Also its effect, of course, on that interest rates have gone lower, and that you get negative effects when interest rates goes lower.
Okay. Thank you so much.
Next question comes from Yafei Tian from Citi. Please go ahead.
Thank you for taking the question. I have two questions, one around capital and the second around U.K. business. On capital, I noticed that you accrue dividend at 50%. If we were to assume similar payout as last year, then the reported CET1 ratio would be around 20 to 30 basis points lower than the current level. Are you comfortable with delivering the same level of dividend payout as well as meeting the regulator's capital requirement? Along that line, you mentioned that the capital is going to be implemented in the later half of 2016. Is there any phase-in period for you to fully change your capital risk weight to 30% or you have to implement it by end of 2016? On U.K., there is a wide expectation that the Bank of England is going to cut the base rate.
In that case, how do you forecast the main development in U.K. going forward? Thank you.
Thank you. First of all, on dividends, we were very clear already in the Q1 report that the fact that one has to deduct a certain payout ratio when calculating the capital does not in any way signal what the dividend decision will be at the end of the year. There is no signaling value in us using 50%. I think that's very important to be very clear about that. Our capital strategy and dividend strategy is very clear. First of all, of course, we want to be compliant with the regulation. Secondly, we want to have enough capital, of course, to cater for the growth that we have because it's a very good growth and profitable growth as you know, and can see from the CAGR. Thirdly, all capital that is left over after those two first items will be distributed to shareholders.
We predominantly have used dividends as the way to distribute, although we also have a mandate of being able to buybacks from the annual general meeting. We will have to come back at year-end on the dividend decision for the year. You talked about phase-in. I think that's a very good question. I think it's important to keep in mind that the number that the Swedish FSA is producing is a recommended number. That means that there is no automatic effects if you're under the number. The only effect is that you will have to produce some sort of plan. How are you going to, in the future, take yourself to that number? It's a very different number to what you have in some countries, where it's a very fixed number and a very dramatic number if you go below it.
I think that answers really in the bigger context, your phase-in question, what will happen if you are not all compliant with the number. There is still some uncertainty as to the exact date when this recommendation will come into force, if you see what I mean. I think that is not maybe so important. We, of course, want to be compliant and as we said, our best estimate is that we are already compliant in Q1 and now in Q2. You talked about U.K. and falling interest rates. I think that, as you know, we are totally matched when it comes to interest rate risk in Handelsbanken. The only exception is that when interest rate goes down, we lose on margins on deposits when interest rates are getting closer and closer to 0 or even getting into the negative territory.
If I were you, just try to grasp the effect, look at the deposit volumes and look at the effects that we have had in Sweden when we have gone from very positive margin on the positive side of maybe 1.3% and now down to situation where we lose 50 basis points because the Swedish STIBOR is at about minus 0.5%. I don't think the mechanics will be any different. Of course, the starting point in the U.K. is in positive territory.
Okay, that's very clear. Thank you.
Ladies and gentlemen, I remind you that if you want to ask a question, you will have to press 01 on your telephone keypad. Next question comes from Chris Manners from Morgan Stanley. Please go ahead.
Good morning. It's Chris Manners from Morgan Stanley here. Just two questions, if I may. The first one was on the growth rate in the U.K. Obviously, you've been growing very nicely organically. When we look at the latest credit condition survey post-Brexit from the Bank of England, it does indicate that there's probably quite a big drop in loan demand. Maybe you could talk a little bit about those dynamics and also how we should think about the growth rate that's potential for Handelsbanken and whether that might have faded a little bit. The second one was on the cost base again. It was a good performance on the cost base. I think beat consensus there. Is there anything more that you can do? Obviously, you had the early retirement and the restructuring in Q1. Will we expect more benefit from that filtering in Q3, four and onwards?
Thank you.
Thank you very much. On the first item, the growth rate, I think it's important to keep in mind that our growth is, of course, organic, yet taking clients from other banks. We are not just following what's happening in terms of growth in the market. We have a market share of, let's say, 0.4 in the U.K. We have lots of growth to do regardless of whether the economy is growing or actually decreasing. The whole basis of our growth is that we do something very, very different to what we see our competitors are doing in the U.K. The bespoke local relationship extremely high service, individualized, personalized service, the whole Handelsbanken concept. That is the reason why we have so much more satisfied clients and such an enormous interest from really, really good clients. We are not a mass market bank.
We focus on really the top of the segments, both on the corporate side and on the private side. On that ground, we are not dependent on the loan demand in the country as a whole. We are such a small portion of the total market. You can see that we have good growth. We are very confident when it comes to the basic idea behind our organic growth in the U.K. Having said that, of course, there can be upturns and downturns in the economy and so on. Structurally speaking, we feel very confident. You talked about the cost base in Sweden.
Yes.
Yes, we have this program. It's not because of cost, but the whole effort now to make the branches even more competent and being able to focus more on the clients in light of the increased digitalization where more basic transactions are nowadays made via mobile telephone and so on. All of this process, and that includes that the number of personnel will go down, and we have this early retirement program that we talked about in Q1, which we expect to give between SEK 600 million and SEK 700 million in improved results. We have said that this effort where we're talking about that this should be done before year end of 2017. In this quarter, the Q2, you'll see no effect of this yet. The program or the efforts, and this is, as you know, in Handelsbanken done totally locally and decided locally.
We see very high activity on these issues now. You don't see any effect yet in the Q2 numbers. That is to come.
Got you. Okay. That makes a lot of sense. Thank you.
Next question comes from Andreas Håkansson from Exane BNP Paribas. Please go ahead.
Yes. Hi, it's Andreas here. Just to follow up from the meeting in Stockholm this morning. I was looking at the increase in risk ratings on the large corporate side, which went from 43.4 to 45.9. I guess that's the rating migration we've been talking about. Could you tell us any specific sectors or countries you see that, and would expect that there could be a continued increase in coming quarters? Thanks.
Thanks for that question. We have, in Q2, done some, and you can see that in the report in the notes, some changes in estimates when it comes to corporate risk weights. That is, of course, part of the ongoing discussions that we have with the Swedish FSA. That has increased risk-weighted assets. Risk-weighted assets are going up, as you see in the quarter, by about SEK 18 billion in ballpark. That is part of it. When it comes to, and really the core of your question, different corporates and how they migrate and so on. As I mentioned when we're talking about the negative migration that we got in the quarter, we are talking about an effect mainly of corporate going from ultra safe to ultra safe, so to say.
The mathematics works, of course, if we're talking about larger sums, it have an impact on the risk weights. Do I see any trend or can I make any conclusions out of this? No. There is no such elements. Those are, how should I put this, random elements or events or so on. I don't think you can draw any conclusion.
Could you at least tell us what country it's coming from? Is it driven by Norway, for example?
I can tell you so much that it's not any oil related or related in that kind of way when you're talking about Norway. I don't think we give any more detail. Knowing the circumstances, you should not draw any conclusions from it because it's not such an event that you can draw any such conclusion from that is meaningful.
Okay. Thank you.
Next question comes from Abir Gharuri from Allianz Global Investors. Please go ahead.
Yes. Hello. I have two questions. First, on the leverage ratio on the exclusion of the central banks holdings. Can you elaborate more on the effect on your banks, especially in terms of AT1 issuance? Can we also think about [reductions for all other regulator ?] My second questions would be on the Pillar 2 rules. We expect the paper from the European Commission by the end of the year. What could be the response of the Swedish regulator with regard to the state of Pillar 2 on the calculation of MDA buffer?
Right. On the first question, yes, I just mentioned that if you do as Bank of England proposes to take away cash balances that are held with central banks, our leverage ratio will go from 3.9 to 4.9. You can also see as an example at year-end, we deliberately took down the amount of cash balances held at Federal Reserve at year-end. You can see our leverage ratio went to 4.4. This was, of course, without having any deteriorating effect whatsoever on our excellent liquidity situation and liquidity risk situation, LCR, NSFR. The whole structure of our funding and so on. For us, this is an important point. If leverage ratio would come into effect, it's very easy for us to increase it.
You can ask why do we have this money at Federal Reserve if we don't need it and have no use of it? Well, the fact is that by accepting deposits from large international institutions, we are actually doing them a favor. Since it's short-term money, we put it at Federal Reserve. That means that these institutions' credit departments look carefully, of course, into Handelsbanken. Then when we issue our funding that we use, the long-term bond funding that we use for our business, these credit departments know us very well and are very eager to buy and participate in our issues. It's a sort of marketing effect. We also have a small positive effect, the result effect, but it's really very small. On that side, the cost of improving the leverage ratio for us would be minuscule.
You talked about the Pillar 2 in the euro context. I think one should see the Swedish FSA, that's what they do now, that's what they've said, as a front run on what might come in a European context. They have said that they will look, of course, into this in the total framework when the EU has decided on what they want to do. I hear from EU, I'm sure you have heard it as well from Brussels, that there's a lot of talk now about the effects of Brexit and so on. Maybe one should take it a little bit more easy now with the new regulation and so on. I think that has been really more predominant after the Brexit vote. That's what I hear.
Okay. Thank you.
Next question comes from Johan Ekblom from Bank of America. Please go ahead.
Hi, it's Johan Ekblom from Bank of America. Just quickly on the U.K. I know you don't give forecasts in terms of growth, et cetera. If we look at the pace of branch openings or hiring of branch managers, it's a bit lower this quarter than it's probably been on average if we look over the past year or two. Should we read anything into that when you think about your expansion plans? Do you feel that you expect to slow down? Is that in any way driven by what's going on in the U.K.? Is it just that you reach sort of the network size you need?
Thank you for that. I hope now that you really think that we have been very transparent about capital and saying about all effects of capital. Thank you also for the U.K. question. When it comes to the U.K., as you may know, it's just not a matter of the number of branches. The thing is that the more branches we have, more and more of the expansion is coming from existing branches, and that is, of course, structurally what happens. When it comes to the number of branches opened, that is something that is locally decided, and it goes a little bit up and down in the quarters. I don't have any views of what our British colleagues are thinking about the future.
The way we work is not on having long-term plans, and the number of branches is not a goal in itself for us. The important thing is profitability and of course, the growth, if it's the right kind of assets, low risk, profitable assets. I'm sorry, we don't work like that, forecasting the number of branches going forward. We don't think that's an important number.
Thank you.
There are no further questions at this time. Please go ahead, Mr. Frykholm.
Thank you very much for attending this conference call, please don't hesitate to call us if there are any further questions. I wish you all a nice summer. Thank you very much.
Ladies and gentlemen, this now concludes our conference call. Thank you all for attending. You may now disconnect your lines.