Good morning, everyone, welcome to this conference call for the fourth quarter 2015. Joining me today I have Mikael Hallåker, Head of IR, Lars Höglund, Head of Dep IR, and Jörgen Olander, Group Head of Accounting. The slides used for my presentation are, as usual, available at handelsbanken.com. First of all, as in my previous presentations, slide number three, updated but still looking the same. 2015 was the 44th year in a row where we fulfilled our company goal, having a higher ROE than the average of our peers. The distance to the peers was also big enough to imply a full Oktogonen allocation for the year. As you can see from the slide, once again, the value creation of the bank, equity per share, including dividends, continued in the fourth quarter with an annual increase of 15%. Handelsbanken achieved the highest operating profit ever during 2015.
Return on equity increased to 13.5% for the full year and reached 14.8% in the fourth quarter. The board has proposed an ordinary dividend of SEK 4.50, an increase by 8%, and in addition, an extra dividend of SEK 1.50. After deducting this, core equity tier one ratio still increased to 21.2%. As before, we have the most satisfied customers in our home markets and the stable growth in our growth markets continued both in the fourth quarter, where we also started to see more demand and activity for us in the Swedish corporate sector. Net commissions continued to have a good development also in 2015 with a 9% increase. We work hard here to develop this business further, we see a large potential in all our home markets.
The personnel cost increase in the fourth quarter is totally explained by the allocation to Oktogonen. This also explains why personnel costs in the quarter were higher than market expectations. The total cost increase in the year is related to our expansion in the growth markets. In Sweden, although costs were down 1% in the year, we see further opportunities in terms of reducing costs. Credit quality remains stable and loan losses decreased in 2015. After Moody's upgrade during the year to Aa2, we also have the highest credit rating of all comparable banks. Moving to slide number five, you can see the profit and loss for the full year 2015. Operating profit increased by 7% year-on-year, the highest full-year profit ever also when adjusting for extraordinary gains. Net interest income was up 2% year-on-year, as well as compared to the third quarter.
The highest growth here was seen in the U.K. with 31%, but there was growth also in the Netherlands and Denmark, while in Sweden, Norway and Finland, net interest income decreased. Net commission income improved by 9% year-on-year and 2% quarter-on-quarter. This upturn was driven by a range of areas where asset management, payments, and advisory fees all showed strong improvements during the year. Net gains and losses on financial transactions rose by 47% in 2015. If you adjust for the gain made on the divestment of SCA shares in the fourth quarter and for extraordinary gains made in 2014, this line was more or less unchanged. Revenues all in all increased by 5% in the year. Personnel costs rose by 7% and here three percentage points of the increase were attributable to currency effects and two percentage points to the IAS 19 pension impact.
That item will be negative also for 2016 but will turn positive in 2017 if interest rates are unchanged or higher. Excluding these items, the underlying increase in personnel cost was 2% and in the quarter, personnel costs were down 1% if you adjust for the Oktogonen allocation. Other administrative costs were down 1% in the year adjusted for currency effects. Total costs increased by 5% in 2015, but adjusted for currency, the increase was just under 3% and was due to our expansion in the U.K. and the Netherlands. Loan losses decreased by 10% and the full year loan loss level was 9 basis points, down from 10 basis points in 2014. Impaired loans level was 21 basis points, down from 25 basis points one year ago, and the credit quality remained stable. All in all, net result for 2015 improved by 8% compared to 2014.
Moving on to slide number 26. We show the sequential development of net interest income, an improvement of 2% or SEK 137 million in the fourth quarter. Again, interest rates in Sweden continued to fall in the quarter and reduced net interest income by SEK 93 million. Increased lending volumes added SEK 119 million, quite evenly spread between Sweden and the other home markets. In the fourth quarter, corporate lending in Sweden started to increase together with the continued growth in the mortgage business. Lower state fees this quarter added SEK 149 million to the net interest income, and here the smaller balance sheet at the end of the quarter means that the fee we will pay to the stabilization.
The balance sheet at year-end will also be the base for the coming new 9 basis point resolution fee that we will pay in 2017, and that will impact net interest income that year. Currency and benchmark effects reduced net interest income by SEK 79 million, but we had other positive effects of SEK 75 million, where the main explanation is the favorable funding costs our treasury team obtained in the quarter. Back to slide number seven. During 2015, average lending volumes in the group increased by 6% or just over SEK 100 billion. This was primarily driven by our growth strategy in the U.K. and Netherlands, but we also saw some good growth in the Nordic countries. The blue bars in the chart show the quarterly net interest income contribution from new lending volumes since 2013. As you can see, the growth rate is stable and rising.
The way we build a bank generates new business volumes, which improve the underlying net interest income. This is done with stability and low volatility. The red bars show the impact of falling interest rates on deposit margins in Sweden. As you can see, that impact takes away more than the positive contribution from our new business volumes in the group in this period. In the last two quarters, however, there has been a small net positive contribution from the volume growth. A larger positive and much more visible impact from our growth strategy should come at the stage when interest rates stop falling further and the downwards-pointing bars in the chart will disappear. Of course, the positive impact will gradually increase further when we have a situation with rising rates.
On slide number eight, you can see that 2015 was another year with a positive development for our fee-generating business, where we constantly increase our efforts. In Sweden, the bank had the largest net inflows into mutual funds of all fund providers with a market share of 21% in 2015. Looking at the sum of fees from mutual funds, other asset management, and insurance, the level in the fourth quarter represents an increase of 57% in the last three years. Net commission income from the card business rose by 10% in the last year. During the fourth quarter, we saw an impact of lower interchange and service fees. New prices on annual card fees, however, will become effective from 2016. Looking at the market shares for our Swedish card business, we can see that it has continued to increase in 2015.
All in all, net commission income improved by 9% year-on-year and 2% quarter-on-quarter. We will work hard to continue to develop the fee-generating business, and we see a big potential for the bank here on all our home markets. On slide number 10, you can see our cost development in the bank since 2013. As you can see here, the increase of expenses the bank has had since 2013 has taken place in our growth markets, the U.K., and to some extent, the Netherlands, where we have opened up a significant number of new branches and invested further in our product offering. On the other markets, costs in fixed currencies were down 2% in 2015 compared to 2013.
One example is the branch office operation in Sweden, where cost-income ratio in 2015 fell to 35.2% compared to 35.8% in 2013, in spite of the sharp decline in interest rates. Scrutinizing costs is natural in Handelsbanken, and even more so in branches and markets where there is a headwind on the revenue line. I think this slide illustrates that quite well. Needless to say, we are never satisfied, but know that there is more we can do also when it comes to costs, and we will focus even more on reducing costs in Sweden going forward. Our balance sheet is shown on slide number 11, and as you can see, it has continued to strengthen. The board has proposed an ordinary dividend increase of 8%, amounting to SEK 4.50 per share, and in addition, an extra dividend of SEK 1.50 per share.
This proposal corresponds to a payout ratio of 70%, although this is not a goal in itself. Taking the proposed dividend into account, the core equity tier one ratio increased to 21.2% from 20.4% one year ago. In the latest assessment, the Swedish FSA recommended the bank to hold 18.6% core tier one at the end of Q3 2015. The bank is therefore within the targeted range for core equity tier one. The model we use for the discount rate to calculate the Swedish pension liability means that we, in contrast to some other Swedish banks, have not increased, but rather decreased the rate in Sweden. It has been decreased to 2.25% from 3% during 2015. If the market interest rates remain on current levels, our discount rate will gradually rise in 2016, which all else equal, will have a positive impact on our core equity tier one ratio.
The core equity tier one requirement, I think is likely to increase further for the bank due to measures already decided or considered. I'm here thinking of increased counter-cyclical buffers in Sweden and Norway, also maybe potential changes in risk weights for corporate lending. As we have described for many years now, the bank, as a flight to quality receives huge volumes of short-term institutional deposits that we deposit in central banks. We have also highlighted that this is a position we can very easily shrink without any impact on our liquidity ratios. To show this in practice, we decided to reject some volumes of these deposits before year-end while still keeping a liquidity reserve of over SEK 800 billion.
As you can see in the table, our LCR was unaffected and well above the 100% minimum level, our NSFR at the end of the year stood at 100%. In case you're interested in leverage ratio, you will also notice that as a result of the smaller cash position with central banks, leverage ratio increased to 4.4%, up from 3.8% at the end of the third quarter. To me, this really shows the leverage ratio is a very blunt measure that really doesn't tell you anything about the true capitalization of a bank in relation to its risk position. Turning on to slide number 12, we compare the capitalization and the return on equity in 2015 with the 2011 level. In this period, our core equity tier one ratio increased from 15.6% to the current 21.2%.
Equity in relation to total assets has in the same time increased from 3.9% to 5.1% at the end of 2015. Still, with this massive increase in risk-adjusted as well as non-risk-adjusted capitalization, return on equity has remained stable around 13.5%. Needless to say, back in 2011, the interest rate levels were, of course, much higher than today's negative rates. I think this is another way of showing the efficiency of our business model and also the fact that it has become even more efficient over the years. On slide number 13, we show another perspective of our return on equity over time. We here compare our return on equity with the 10-year Swedish government bond rate to find out what premium over the risk-free rate the bank has generated over the business cycle.
As you can see, the difference between the return on equity of the bank and the risk-free rate has been stable throughout this very turbulent period. The premium generated by the bank was as high in 2015 as in 2007, 13%. The nominal return on equity has only moved in line with the 10-year risk-free rate. This very stable premium over the years, I believe, is a good reflection of the stability of our business model. The model has handled a very volatile environment and higher and higher capital requirements. The bank has, in spite of this, been able to keep the profitability premium intact. Slide number 14 is another slide showing the very low risk profile of Handelsbanken. In this case, the slide is based on the results of the 2015 EBA transparency exercise.
The numbers shown in the slides are non-performing loans and loans with forbearance measures as reported by the banks to EBA. As you can see, Handelsbanken is far out, with the lowest share of such loans of all presented banks. This, of course, should be no surprise to anyone, I think it's interesting to notice the quite dramatic differences also between the banks that are in the lower end compared with ourselves. Currently, this difference in credit quality is not really visible when looking at loan losses. Most banks in this part of the business cycle have low loan losses. We all know that there will be times when loan losses are back in the system again. This slide serves, I think, as a reminder pointing to the very high quality of Handelsbanken's credit portfolio.
This typically becomes more visible in crisis times when our low loan losses are contrasted to the significantly higher levels many banks then experience. Also in the ongoing debate regarding risk weights in the IRB models and why risk weights differ between banks, I think this slide should be quite clarifying also in explaining why some banks, such as Handelsbanken, rightly have lower risk weights on their exposures than certain other banks. On slide number 17, you can see our development in the U.K., which continues to be strong. Operating profit in 2015 increased by 36%. Net commission income continued its growth, in the fourth quarter, that represented 9.5% of total revenues, up from 8.5% in the third quarter and 3.3% three years ago. Still with this relatively low share of fees and commissions and continued investments, return on equity for the full year reached 17%.
Including appointed branch managers, we now have 206 branches in the U.K. At the same time, more and more of our branches are entering into the vintage of being older than four years. That means that the profitability improves, and that you can see from the slide. It also means that going forward, existing branches will provide an even more meaningful share of the growth in the U.K. It goes without saying that we continue to be optimistic about our vast opportunities in the U.K. market. To summarize, the very stable development of the bank continued also in the fourth quarter. Equity per share, including dividends, continued to grow by 15% per year. The full-year operating profit increased by 7% and was the highest ever for the bank. Also, if you adjust for extraordinary gains.
Net interest income increased by 2% for the year as well as the quarter, the year ended with a high business activity and with a good trend also in Sweden. Fees and commissions rose by 9% year-over-year and 2% compared to the third quarter. The bank had the largest net inflows into mutual funds of any mutual fund provider in Sweden, with a market share of 31% in 2015, and with mutual fund fees rising by 21% in the group. Here there is still much more we can do to further improve our fee-generating business. Looking at the cost development, expenses outside our growth markets have declined by 2% since 2013. We will focus on further reducing costs in Sweden going ahead. Credit losses and impaired loans fell in 2015, and the credit quality remained stable.
Full-year return on equity on a group level was 13.5%. U.K. had the highest return, 17%, followed by Sweden with 15%, in spite of negative interest rates and weak corporate loan demand for most of the year. 13.5% ROE represents the same premium over the long risk-free interest rates as back in 2007. The board is proposing an ordinary dividend of SEK 4.50 per share and an extra dividend of SEK 1.50 per share, corresponding to a payout ratio of 70%. The Tier 1 ratio at the end of the quarter was 21.2%, up from 20.4% one year ago. With that, I conclude my presentation and open up for questions. Thank you.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press the zero one on your telephone keypad. If you wish to withdraw that question, you may do so by pressing the zero two to cancel. There will be a brief pause while questions are being registered. Our first question comes from the line of Jan Wolter from Credit Suisse. Please go ahead. Your line is now open.
Morning, Jan Wolter here, Credit Suisse. Thanks for taking the questions. First, what is the bank's view regarding the marked increase in the share of new Swedish mortgages? I think if we look at the statistics, we can see that Handelsbanken took 27%, 28% of the new mortgage production in the fourth quarter vis-à-vis the more normal level, which we've seen historically of 20%, 22%. That's my first question, please.
Yes, thank you for that. I think that you shouldn't put too much into the figures actually. As you probably know, there are some technical things, I think, with the statistics. There are other volumes coming in from nothing in December, there's also happening strange things that I don't understand in November and so on. For all practical purposes, as you know, in our system, it's the branches that choose how to go about the combination of pricing and taking in clients and so on. We don't have any sort of central view on how to go about that. From a sort of overview or strategic long-term view, we have no ambition to increase our market share in lending, neither in mortgages nor corporate lending behind it.
Okay, thanks for that. Around capital and the special dividend. I think Handelsbanken previously stated that capital repatriation over and above ordinary dividends normally require the bank to be above its capital target range. Although we understand it's not a strict rule, what made the bank deviate from that principle this year?
No, I think that's a misunderstanding. What I think we've said is that we have our capital goal, if we are outside the range of the capital goal, we will communicate what we will do because of being outside the range. This is the ordinary and the yearly decision on the dividend level and where we, of course, look at our total situation and the board proposes a dividend. That is the result you see here. This decision is not made by any sort of automatic rule. Of course, the fact that we are within our target and you can say at the upper end, towards the upper end of the target, of course, has impacted the board's decision.
Thank you. The final question, also on the capital side. If we look at the capital consumption this quarter from lending growth, lending growth is still fairly low. That was around 40 basis points in the presentation. Earnings is building capital by around 10 basis points after dividends. How does the management and the board look at these numbers? Is the board and the management happy with capital being consumed because the bank is growing profitably in Sweden and outside Sweden? That would mean the capital ratio is coming down, everything else equal. Thank you.
Thank you. The way we work is that the branches and the regional banks do the business. We sum it up, we follow it, of course, extremely closely what's happening, our capital planning is done according to that. We are not steering the other way around saying, "This is the capital we have. You can only do this kind of lending." From an efficiency point of view, I think it's interesting to see in our first slide the CAGR that we have been for a considerable amount of time growing 15% and then still building capital. As you know, we have had the payout ratio the last couple of years in the range of 73% and this year it happens to be 70%. As you also know that the payout ratio is a residual. Our capital strategy is very easy to understand.
First of all, of course, we should be compliant with regulation. Secondly, of course, we want to make sure that we've got all the capital needed for our expansion because we know that it's such a profitable thing for our shareholders. Thirdly, if there are extra capital above that, we are of course happy to distribute that because our company goal is to have higher ROE than the average of our peers.
Okay. Very clear. Many thanks for your help.
Thank you. Our next question comes from the line of Anton Kryachok from UBS. Please go ahead. Your line is now open.
Good morning, thank you very much for the presentation. Just two questions please. The first one on net interest margin on Swedish mortgages. I think you have reported the one basis point drop in that margin this quarter. But if we look at your listed advertised prices as well as average achieved prices over Q4, it looks like they have been stable to at least increasing. Can you please elaborate a little bit what is driving the one basis point margin compression on the Swedish mortgage margin given that interest rates are falling? Thank you. The second question, please, on capital. You've commented in the report that there were negative 40 basis points impacting capital build this quarter from other. I was wondering if you can just elaborate a little bit more on this. Thank you.
Yes. Thank you. Well, on the mortgage margins, the one basis point, you shouldn't overexaggerate that effect. It's also a rounding effect. It's sort of a flat-ish. The system as you may know in our system is that the branches set the prices. Of course, there is also the list price system of Sweden. All banks put out list prices, and that is of course the maximum price that a client can ever pay. Then there's often a rebate from that price and deducting the rebate to come to the actual margin. If anything, I think if you look at the list prices, we were maybe a little bit later than some others of hiking those list prices.
What really matters when it comes to this margin you see, the 103 basis points, is really how our branches deal with the price towards the clients, and then we sum it up. I haven't got any more intelligent answer than that because it's really not scientific. It's handicraft out in all the branches, and it varies quite a lot actually from branch to branch in different parts of the country.
Thank you. Have you changed-
Capital charges. There is an item of 40 basis points. There are some technical calibrations from validations and those kind of things in there. That's the sum of the effects that is not explained by the other parts that we have broken up. Mikael, maybe you want to
Anton, I can just add, if you look at that number, I think the deviation of that between quarters have been roughly 0.4. In Q3, it was a positive 0.4, now it was a negative 0.4, and we talk about maybe 12, 15 different smaller items that add up. I think it corresponds to roughly 2% of the quarter 1 ratio, and I think that's what you could expect in normal deviation between quarters.
I think also it might be interesting to know that the 0.4 is to the larger extent, more of a conservative estimate based in margin adding effect if you look at it from a top-down approach when you look at these 15 items.
Thank you. That's very clear. Just to confirm on the mortgage margin side, you haven't changed the way how you charge your branches, the funding cost that you charge to your branches?
The funding cost to the branches is exactly the same. The prices vary, of course, from day to day when the market rates change.
Okay. That's clear. Thank you.
Thank you. Our next question comes from the line of Yafei Hu from Citi. Please go ahead. Your line is now open.
Morning. I have two questions. The first is on net interest income, and the second is on the U.K. If I were to look at the page six of the fact book. This quarter, the contribution to stabilization fund to net interest income is less negative than other quarters. Going forward, is this the level that we should expect for the net interest income, or is it more of a one-off? Just follow up on net interest income as well. Is the sensitivity on the interest rate movement about every 20 basis points change, about SEK 100 million change to net interest income? Does that sensitivity still hold? I'll come back on the U.K. question. Thank you.
Right. Thank you for that. As you've probably seen from the figures at year-end, the balance sheet is smaller, and that has to do with the fact that, as you may know, we are a flight to quality, which means that we attract a lot of U.S. dollar institutional deposits, and that's our short-term deposits. We don't use it for funding purposes. We put it directly in the central bank. Of course, at year-end, it's not of a big meaning to have those volumes on the balance sheet. We have talked a long time about our ability to take those amounts down quickly if it would be needed, for instance, in a leverage ratio context. We done that at the year-end. You can see the leverage ratio, it stands now at 4.4%, for instance. There is also an effect on the stabilization fund fee.
The Swedish stabilization fund fee is the last time you will see now. That was calculated afterwards. The volumes at year-end 2015 was the calculation for the 2015 stabilization fee, 3.6 basis points. Since the volume of the balance sheet went down, the number here, as you see, went down. From 2016, the stabilization fund will instead be what's called a resolution fund fee. There, the metric is that is calculated on the balance sheet two years back in time. The 2016 charge will be based on the end of 2014. For 2016, there will be half a fee. The full fee is nine basis points. Also, it is said that the resolution fund fee will be risk-adjusted, but the legislature has not revealed how that risk-adjustment will be.
It's a little bit uncertain what the resolution fund fee will be in 2016. It will be half. That is corresponding about the same as the stabilization fund, since the full resolution fund fee is double the stabilization fund fee. It will be risk-adjusted, they say. We don't know about that. The legislation is also a bit late, so maybe it's only an 11-month effect instead of a 12-month effect. We don't know about that. It's certain that it will be calculated on the balances two years ago. That means that the balances you see at the end of 2015 is good news for the resolution fund fee for 2017, and that is for certain.
Okay, that's clear. On the sensitivity?
Yes. You will have a very thorough report on our interest rate risk in the whole group in the Pillar 3 Report that will come out.
I don't reveal any secrets when I say that the interest rate risk in the bank is very small, except for one item, and that is what's happening with margins on deposits. You can see the effects, and we have published a lot of charts. We also have one in this kit, what has happened when interest rates go down and that margin, which is now in Sweden, negative, what will happen there. You can see from the slide, that is slide number 26. You can see the effects you have in Sweden from margins in the fourth quarter. You have SEK 90 million negative effect, and then you should maybe compare that with average STIBOR going down nine basis points in the quarter.
Okay, that's very clear. If I can follow up with one more question on the U.K. I noticed that in 2014, the loan growth rate was about 30%, and then it slowed down somewhat to about 14%. Are you reaching a stage where we should see more stable growth in the U.K. business? What about your investment in the business? Is it going to also coming down in 2016 and 2017?
Well, we have one chart showing the development in the U.K., and it's slide number 17. When you look at the development quarter by quarter, it can go down or could go up a little bit. If you look at the result, it went up by 36% year-over-year or 19% if you look in local currencies. We'll also find that the volume growth figures are about the same if you take away rounding effects and so on throughout the years. You can get some sort of deviations, of course, during the year and the fourth quarter again, when it comes to balance sheet at year-end could have some effect. All in all, what you ask for, how do we look at the U.K.?
We are still as optimistic as we've been in the past, and it looks very good, and what we see is a good business. We will continue to open branch offices. We have also communicated that it's natural that over time, since we have started so many branch offices, more and more of them will become older. Of course, all of them will become older, and that means that more and more of the profit will come from existing branches. It's not only the new branches, of course, that you should calculate on, but also the existing. The mathematics works that as you grow, of course, more and more of the total combined growth is coming from the existing branches.
Okay, that's very clear. Thank you.
Thank you. Our next question comes from the line of Daniel Do-Thoi from JP Morgan. Please go ahead. Your line is now open.
Hi, good morning. Two questions from me. The first one was on the leverage ratio, and the second one on the FSA review of corporate risk weights. On the leverage ratio and the increase to 4.4% at the end of the year, wondering whether that is just sort of the year-end seasonality relating to the stabilization fund fee calculation, which should then sort of reverse in the first quarter? Or should we instead expect it to operate at these kind of levels, so well above 4%, also in the interim quarters going forward? The second question was on the FSA review. You highlighted in one of your slides the lower historic loan losses, which goes some way to explain the lower risk weights that you have versus peers.
I suppose the same could also be said about your mortgage exposures, and yet the 25% floor has been applied fairly crudely across the banks by the FSA. I'm just wondering, how concerned are you that whatever comes out of the FSA review won't then adequately differentiate between the underlying differences in credit quality? Thank you.
Yes. Thank you for those questions. Well, the 4.4 in leverage ratio is something that we can, as you have seen, very easily make come true. We've shown that, and we can go, of course, a lot further to that. The thing is that there is no rule about leverage ratio, and ourselves, before it comes any rules, we are totally uninterested in the leverage ratio because it's such a blunt and really crazy measure and not looking at the risk. Operationally speaking, it's a totally meaningless measure. Of course, if there comes a regulation that says that this is important, or if we start feeling that a lot of people would not take the interest in how risky our balance sheet is, but only looking at the total size of the balance sheet They really wanted to show that this is not something that concerns us.
We will follow the number, but we have certainly no goal or so for it. Having said that, if the authorities make a decision that, yes, this is an important number, of course, as you can see from what we've done at year-end, it's very easy for us to adopt.
Can I just-
The FSA risk weight is an interesting question. The situation, as you may know, is that FSA has stated that they look into all the bank's models, and they are concerned from a general point of view that Swedish banks' risk weights have gone down over the years. They are not saying that it's wrong because of the development, because there has been less and less credit losses in the system. What they claim is this a reflection of a prudent looking forward thing? From a technical matters, they will use, I think, whatever they can to try to get risk weights to be larger on an institute-by-institute basis. Then they have also said that they will come out with thoughts on the matter in a more general way during the spring.
There have been rumors about the M factor, which is, of course, an important part in the Basel formula. If you set a floor on the M factor, the M factor is the duration of the credit. For instance, saying that regardless of the duration of the credit, you should always minimum calculate M factor as a three-year or four-year or whatever. It will get an impact on the risk weights. This is all we know. We anticipate something to come out during the spring. We don't know what. It's very much, of course, a political question, how far they want to go. As you say, they've already done it when it comes to mortgages. From a bank, you ask, how concerned are we? Well, if something comes, the numbers will change, but the bank will be the same, the risk will be the same.
We will, of course, adopt and apply the rules there are. It's not a threat to our business model or the way the bank works. As you know, we have a very good capitalization, if you compare it with the real risks in the bank, and we are also generating capital as we go along. I think one very important factor that some analysts, probably not you, but some may miss is how important the funding markets are for banks today and become even more important because of the regulation going forward. I can tell you that the funding markets, they are not impressed by the leverage ratio. They want to know what kind of risk the bank has in the balance sheet when they set the price on the bonds.
Because of MREL, TLAC, all this regulation, it means that banks generally will have to have much more of senior funding as opposed to deposits in their balance sheet, which means that funding cost differences between banks, in my view, will be an extremely important differentiator going along. The good news is that if you then have more capital, you should always look at it in relationship to the risk, and you get it back on the funding cost. All in all, we are very relaxed. That is not saying that we don't think something will come. In my guess, something will come. We don't know anything about what it will be. The good news is that it's always good not to have credit losses, because if you have it, clients are not happy, and you lose money forever.
Regardless what the capital charge says, we will always have an advantage with our lowest credit losses over our peers during the cycle. We are relaxed, but as with the numbers, they might change.
Okay. Thank you. Can I just follow up on the leverage ratio? You mentioned that there is a little bit more that you could do should you need to. Could you give us any kind of numbers around that? How much further could you stretch the leverage ratio without impacting revenues?
Yes. In our PFD report last year, you will have a corresponding in this year's PFD report, you will see leverage ratio calculated without, for instance, mortgages and so on. Of course-
Sure, yeah
First of all, we can do things that are extremely easy to do, taking away short-term deposits and central bank, where we put in our central bank deposits as we done during the year-end. We can do that quite a bit more than we did at year-end. We can also, of course, make sure that we take away part of our balance sheet. We could also securitize parts of our balance sheet and so on. In that table, if I remember correctly, you will end up with a leverage ratio of 8% or something like that. The important thing here is that the value creation in Handelsbanken, that comes from being nice to the clients and being local and knowing the clients and making sure the credit quality is top-notch. Having those assets on the balance sheet, that is not necessary. That's not where the value comes from.
This can be fixed, and of course, this is a political decision. Would you like to end up with something like the American system where mortgages and low-risk assets are not in the banking system, but then actively traded as securitized bonds? I think that the Swedish authorities, the ruling authorities there and the Swedish FSA and the Finance Ministry and the National Debt Office, those are of course the three that decide in Sweden on these matters. They've been very clear that they like the risk-weighted system. I don't see such a development very likely in Sweden to have a very high leverage ratio demand, actually.
Great. Okay, that's very clear. Thanks very much.
Thank you. Our next question comes from the line of Adrian Cighi from Handelsbanken. Please go ahead. Your line is now open.
Hi there. This is Adrian Cighi from RBC. Thank you for taking my questions, two questions, one follow-up on capital and one on loan losses. On slide 28, you show a negative 20 basis points move in core equity tier 1 from credit risk migration, yet there isn't any obvious deterioration in impaired loans. Can you help us reconcile the move? The second question, a very helpful slide on the comparison of historical loan losses between Handelsbanken and peers. Any thoughts on a forward-looking outlook on loan losses, especially in Norway? Do you see any red flags coming up? Thank you.
Thank you. When it comes to credit risk migration in the fourth quarter, you're right, we had a small negative credit risk migration, although the effect from the volume migration, that is that volumes coming in is of better quality than the volumes going out. That was, of course, a much larger effect counteracting that. You're right, there was a small negative migration effect in the existing loan book. It was a migration in better risk classes from extremely good risk classes to nearly as extremely good risk classes, as I say. It's not changes in risky assets, if I may say so. If we look at other measures like impaired loans, that is going down, as you've probably seen.
Right.
If you look at late payments, that are also going down. There's no evidence in the quarter that we have a deterioration in the credit book when we add all these numbers. Loan losses in Norway, when we look at the portfolio, we don't see any concerns or movements. We have communicated that we have a very low direct exposure to the oil industry. We're talking about an on-balance exposure of about $5 billion, and that is in good risk classes. That is not something that concerns us. You can always come into the whole picture of Norway, how far will the deterioration go, and also outside the oil industry and so on. That is another matter, of course.
Thank you.
Thank you. Our next question comes from the line of Katrine Jensen from Danske Bank. Please go ahead. Your line is now open.
Thank you. When do you expect to get clarity on MREL? Which liabilities do you expect to be able to fulfill it with?
Very good question. Thank you. We expect this to be in the first quarter and latest second quarter, I would say. It's the National Debt Office that are in charge of working on the rules. When we look at what we expect and see and compare it with our situation, we don't foresee any problems with meeting the MREL things that will come out. Full clarity on the rules have not come yet, but is expected this spring, probably Q1.
Okay. Do you expect to be able to use senior bonds to fulfill it with?
If you ask me to guess, yes.
Okay. Thank you.
Thank you. As there appear to be no further questions, I return the conference to you.
Okay. Thank you very much for participating, and as usually, if you have more questions, please don't hesitate to call us, me, or my colleagues in the IR department. Thank you very much for attending.