Ladies and gentlemen, thank you for standing by. Good morning, and welcome to the Handelsbanken third quarter interim report. Today, we are very pleased to present Mr. Ulf Riese, CFO. For the first part of this call, all participants will be in a listen-only mode. Afterwards, there will be a question and answer session. Speaker, please begin.
Good morning, everyone, and welcome to this conference call for the third quarter 2015. Joining me today I have Mikael Hallåker, Head of IR, Lars Höglund, Head of Dept IR, and Jörgen Olander, Group Head of Accounting. The slides used for my presentation are, as usual, available at handelsbanken.com. First of all, on slide number three, you can see the value creation of the bank. This quarter was again stable from a value creation point of view, and equity per share, including dividends, has continued its steady growth path of 15% per year. This was achieved in a very challenging quarter. Interest rates even more negative, stock markets down, which affected assets under management, and a widening of credit spreads. On top of that, corporate loan demand in Sweden continued to be weak also this quarter.
Over time, as the slide shows, one can take comfort in saying that our business model handles challenges like this in a very robust way. On slide number four, you can see the profit and loss for the first nine months. Operating profit was more or less flat with only a marginal increase. The third quarter was challenging, and operating profit fell by 10%, mainly due to falling interest rates and seasonal effects. Net interest income improved by 2% year-on-year, driven by growth in the U.K., the Netherlands, and Denmark, by 33%, 14%, and 6% respectively. In Sweden, Norway, and Finland, net interest income declined somewhat. Over this period, a reduced need for market funding compensated to some extent for the sharp decline in deposit margins. Compared to the second quarter, net interest income dropped by 3%. Net commission income rose by 10% year-on-year.
Here, higher asset management fees as well as higher advisory and payment fees were the main drivers. Quarter-on-quarter, net commission income declined by 2% due to lower fund management fees and lower equity commission income as a result of the stock market downturn. Net gains and losses on financial transactions dropped 4% year-on-year, excluding extraordinary gains during the same period in 2014. All in all, revenues increased by 2% in the first nine months. On the cost side, personnel costs increased by 6% compared to the same period, 2014. Half of the increase was due to the currency effects, and 2 percentage points were attributable to the IAS pension impact. The underlying growth in personnel costs was 2% and is mainly explained by annual salary increases and the growth in the U.K. and Netherlands.
Total cost increased by 5% year-on-year, excluding currency effects, the increase was just under 2%. Loan losses were up 4% year-on-year, and the loan loss level was 8 basis points for the nine-month period and 10 basis points for the quarter. Collective provisions increased somewhat on the back of the annual update of the estimates. Excluding that, loan losses actually declined 3% year-on-year. The credit quality remains stable. Rating migration in the quarter was neutral, and the impaired loans level was actually down to 22 basis points compared to 24 basis points at the end of the second quarter. All in all, net result for the period was unchanged compared to the same period, 2014. Return on equity for the group was 13.1% for the first nine months and 12.7% for the third quarter. Moving on to slide number 19.
You can see here the development of net interest income in the third quarter. All in all, a decline of SEK 185 million compared to the second quarter. Deposit margins and net interest income related to the equity this quarter dropped another SEK 66 million. Deposit volumes have continued to increase for the bank, but with the current interest rate level that actually gave a negative impact in Sweden of SEK 9 million. Total lending margins declined by SEK 70 million in spite of the fact that the mortgage margin in Sweden increased one basis point. Because in Sweden this was more than offset by a reduction in corporate margins. Also in Denmark and Norway, margins declined. Increased lending volumes improved net interest income by SEK 89 million, with SEK 48 million of that coming from outside Sweden.
Some of the other effects in the quarter were a negative benchmark effect and a positive day effect. More than two-thirds of the other negative effects that you can see were attributable to the higher cost for placing cash in central banks, not least in Sweden, due to interest rates turning even more negative in the quarter. Going back to slide number five, this shows the impact that negative interest rates in Sweden has had on deposit margins and on the yield earned on assets financed by the bank's equity. The average STIBOR rate in Sweden dropped another eight basis points to minus 27 basis points in the quarter. Only a small share of the Swedish deposits now carry some interest.
As you can see from the slide, the current impact from the negative rates in Sweden amounts to SEK 6.6 billion on an annualized basis compared to the interest rate peak back in 2011. On the back of the further decline of the STIBOR rate, the impact, as you can see, was even stronger in the third quarter than in the second. Going to slide number six. This shows the group's fee and commission income. The accumulated growth here for the first nine months was 10%, and in the third quarter you could see a decline of 2%. The bank's efforts within the mutual fund business is certainly paying off. The market share for new net savings in mutual funds in Sweden for the first nine months was 42%.
The fee income from the mutual fund business in the group increased 24% year-on-year, in spite of the fact that lower market values put some pressure on assets under management in the third quarter. Adding all fees in the bank from mutual funds, other asset management, and insurance, the improvement this quarter compared to the third quarter in 2012 is 61%, as you can see from the chart to the right. On slide 11, we show the result of this fall's customer surveys made by the independent institutes of SKI and EPSI. To have the most satisfied and loyal customers is of highest importance for Handelsbanken. As you can see, we are significantly above the industry average in all our home markets. This is true for private customers as well as corporate customers.
In many countries, we are also above average with a very broad margin, especially in the U.K. and Netherlands, but it's also true in Sweden and for Danish and Finnish private customers. The customer's trust is crucial for the long-term profitability and is of course a starting point for our branches every day when they serve their customers. I'm convinced that this is one important reason among others behind the very strong development in the inflows to our mutual funds in Sweden we see as I described earlier. It is much more natural for satisfied customers to decide to do more business with Handelsbanken, and also to entrust us with a larger share of their business. Going to slide 10, we here show the return on equity for the first nine months in our different home markets.
U.K. is the most profitable market for us with 17% return on equity in spite of the big investments that we have made during the last quarters. Sweden was at 15%, and that is in a period when interest rates have fallen sharply, loan demand from ordinary corporates is weak, and the equity market has fallen, affecting the value of assets under management. Finland and Norway, which are two countries where the economies in general are struggling, were both at 14%, and Denmark was at 14% before loan losses, but here reported 11% due to increased loan loss provisioning on a single exposure in the quarter. In the Netherlands, we have opened up three branches this year, taking the total number to 23.
The product offering in the Netherlands is being developed in order for us to become even more interesting for our customers, and the underlying profitability of the Dutch business is strong. Of course with the investments that we have done, this effect and the reported return on equity for the period amounted to 6%. Slide eight shows the financial position of the bank, which again has continued to strengthen. Core Tier 1 ratio increased to 21.4%, up from 21.3% at the end of the second quarter and 20.7% one year ago. This was in spite of the fact that IAS 19 for pensions had a negative impact of 0.5% in the quarter. Retained earnings and positive volume migration added 0.4 percentage points, and the net increased business volumes and some other effects was 0.2 percentage points if you take that net.
Total capital adequacy ratio was 27.4%, up from 25.6% one year ago, down from 28.4% at the end of the second quarter. The decline here is explained by Tier 1 instruments maturing during the quarter. The Swedish FSA concluded in their annual capital assessment of the bank recently, the so-called SREP, that the bank should, at the end of 2015, have a Core Equity Tier 1 ratio of 18.1%. The current 21.4% that we reported is according to the current rules, which means that it's calculated based on the same payout ratio as for the full year 2014. During 2016, the countercyclical buffer in Sweden will be raised again, also there is still some uncertainty regarding the final capital requirement for banks in general in Sweden. Our current assessment is therefore that the bank is within its long-term target range.
Slide number 12 is by now very familiar to you, showing the strong development we have in the U.K. With the big investments that we have done during the last quarters, we believe that we have a strong platform for continued growth in the U.K. Including appointed branch managers for new branches, the bank has now announced its branch number 200 in the U.K. Eight new branches were opened in the third quarter, another five branch managers have been appointed for future branch openings. The operating profit in the U.K. rose by 37% in the first nine months of the year. On slide number 13, you can see the development for net fees and commissions in the U.K. The current profitability in the U.K., 17%, is still very much produced from a lending business, which is quite capital intensive.
However, as you can see, the fee and commission generating business is quickly becoming a larger contributor. It's up from a 3.3% share of total revenues in 2012 to 8.5% in the third quarter. As the right chart shows, growth has been 276% in three years for fees and commissions in the U.K. You can here also clearly see the important impact Heartwood has made to that development, really starting off from the third quarter 2013, which was the first full quarter with Heartwood as part of the Handelsbanken group. Here, I would also like to point to the fact that the integration of Heartwood into the bank's business is indeed still at a quite early stage. This development is, of course, in total very promising when we think about the profitability prospects for the U.K. going forward.
To summarize, equity per share, including dividends, continuing to grow by 15% per year, also when we had the quite challenging third quarter. Operating profit for the first nine months increased marginally. Net Interest Income increased by 2% for the period, dropped 3% quarter-on-quarter. Even lower interest rates, combined with some lending margin pressures, were the main reasons here. Fees and commissions increased by 10% year-over-year, declined 2% quarter-on-quarter due to the stock market downturn that affected assets under management and equity commissions. The development for the bank in the mutual fund business is nevertheless structurally very interesting, we captured 42% of all new net savings in mutual funds in Sweden.
Return on equity on a group level was 13.1%, with U.K. in the top at 17%, followed by Sweden with 15%, that is in a negative interest rate environment for most of the nine-month period. In the third quarter, operating profits fell by 10% compared to the second quarter, mainly due to falling interest rates and seasonal effects. Core Equity Tier 1 ratio at the end of the quarter increased to 21.4%. With the upcoming increase in the countercyclical buffer and further uncertainty regarding final capital requirements in Sweden, our current assessment is that the bank is within its long-term capital target range. With that, I conclude my presentation and open up for questions. Thank you.
Thank you very much, sir. Ladies and gentlemen, should you wish to ask a question, please press 01 on your telephone keypad and wait for your name to be announced. If you wish to cancel that request, you may press 02. There will be a brief pause while questions are being registered. Once again, it's 01 if you wish to ask a question. Our first question comes from the line of Omar Keenan from Deutsche Bank. Please go ahead.
Good morning. Omar Keenan at Deutsche Bank. I had two questions, one on net interest income and a second one on capital please. Firstly, on net interest income, I wonder if you can elaborate a little bit more on the competitive dynamics that led to the decline in corporate lending margins. Was it any particular product area, do you see this trend continuing into the fourth quarter? Secondly, on mortgage margins, I can see it's up only one basis point, which seems to be a very divergent trend from your peers that have reported so far. I wonder if you can also elaborate on why the mortgage margin was only up one basis point. My question on capital.
We've had a lot of noise from the regulator on plans to increase the internal model corporate risk weights in 2016, it seems like a key plank of that will be to change the way that the M factor, the maturity, is calculated from a contractual basis to a behavioral basis. I was wondering, do you know what your corporate risk weights would look like if they were all calculated based on behavioral maturities rather than contractual maturities? Thank you.
Thank you very much. First on NII. When it comes to margins and when we look at corporate margins in Sweden, indeed, as you can see from the material, they have deteriorated in the quarter. I would say it's first of all the general competitive pressure. As you know, from ordinary companies, there is very flat at best loan demand, actually a little bit diminishing loan demand. There is the segment that we are not participating in, the high-risk leverage commercial real estate deals. There I've heard it's not so much of a pressure. Again, we are not in that segment. You can see from the statistics that there is certainly one player that are very large in that.
Corporate lending in Sweden is affected of those kind of deals where they are linked to STIBOR. Of course, the negative STIBOR effect that you can see here. Regarding mortgages, as you know, we are a price follower. Our market share in mortgages in Sweden is extremely stable. We follow the market price, and as you can see, it was one basis point up, but we have no ambition to steer that from a central point of view. We just add up all the deals that the branches are doing here. On capital, yes, I think you gave a very good presentation of the current situation. We don't know anything more than you have already said. We know that authorities are looking into the M factor. You probably seen the EBA paper stating that in Pillar I, it should indeed be the contractual length.
In Pillar II, as you know, the authorities can do whatever they like in changing that. For instance, you can think of rules saying that regardless of the actual maturity, you should use a minimum of two years or three years or four years or five years or whatever. As you do that, of course, since the M factor in the formula, the Basel formula, has some sort of impact, you will of course then increase the need for capital and the risk weight by the risk weights for corporates going up. It's very hard and we have no information on what kind of calibration they are looking at. You asked any sort of anticipation and so on.
I think the main theme here, as I hear it from the authorities in the general public debate, is that they say that it's not a matter really of expected M factor or contractual. It's more that if you're a big bank, then it's not regardless of what you have in the contract, you cannot get rid of all of your stock. Since the big banks are such a large portion of the whole society, so to say. It's more of that kind of reasoning that's behind this.
Okay. No, understood. Just to ask the question, have you run that sensitivity and do you know what the corporate risk weight would look like under those conditions? Is it easy for you to know now or would you rather not say?
We have done a lot of calculations ourselves. I think it's meaningless to give you any sort of numbers here. I haven't got a clear view of in the relative game if we would be a net benefit or not in relationship to other banks. It has to do a little bit about the technical, how you do it technically. If you do it more granularly on different portfolios or if you do it one-size-fits-all of all sorts of corporates. In effect, you can say it's in the hands of the authorities, the toolbox to do what they want. Having said that, I must stress that we see the Swedish authorities as being very serious about these kind of things and do it in a way that could be perceived by everyone as being fair and so on.
I think you have to see this as part of the toolbox where the Swedish FSA 5%, also the minimum risk weight of mortgages and so on in that kind of framework that they put in some more things, and this time it has to do with risk weights on corporates. I wouldn't anticipate anything extremely dramatic.
Okay. Fair enough. Understood. Perhaps could I just ask a quick follow-up on mortgage margins? You said that Handelsbanken is a price follower as far as pricing of mortgages is concerned. On 50% of the mortgage stock out there, we've had two peers that have increased back book margins six basis points in one quarter. It's not a matter of being a price leader, but it's just such a wide divergence. I think it's just a bit difficult to understand why mortgage margins can't go up more than that in the near term.
I think if you want to analyze it more in depth, you have to realize that the Swedish mortgage market consists of many different parts. Some of our competitors has a sort of on and off strategy. If they are on, having taken the strategic decision they want to be larger, they're doing campaign prices. As soon as those campaign prices matures, they lose market share again, and they go up and down. If you look at the market share development of different institutions, you will find this pattern. From a consumer point of view, there are people that have this as a life interest of chasing the last basis points in mortgages, and they move along, and you can see the volume moving along. There you have one sort of price sensitivity.
If you go to long-term client relationship, it's not so volatile as in the sort of the highly moving segment. The total figures you see from banks is a combination also this mix effect. While in Handelsbanken, we have a very stable client base. We are very fair to our clients, we charge them the market price and follow the market price all along.
Okay, great. Thank you very much.
Thank you. Our next question comes from the line of Heini Lass from Goldman Sachs. Please go ahead.
Hello. I got two questions, more like the first one would be sort of on the pension impact on capital. We're seeing sort of a broader range of the sort of assumptions underneath. If you can just remind us of the discount rate you're using and the inflation expectation, particularly given you seem to have a negative impact while it was more positive, some of the other peers. Why would you have not adjusted it differently this quarter? The second thing would be going through your divisional disclosure, you again have a sort of a bigger loss in Denmark, and I think we've seen that already last year. Is there something that seems to be recurring or can give you some detail there? It might be coincidental, it seems to be Denmark again and again.
Is there any factor that you sort of misjudged from your sort of lower risk perspective or if you can give us some idea there?
The pension how it affects capitalization. That is a quarterly question where you calculate what is the pension liabilities and what is the pension assets that we have. There is a large portion of equities in our pension assets. What has happened in the quarter is that asset prices, as you know, stock market prices has come down. Therefore you have a negative capital effect. This capital effect comes in on a quarterly basis where you do this calculation and it goes through the OCI if you see Other comprehensive income. If you look at Other comprehensive income, you will see the exact figures for this and also the tax effect of that change. There's no change of discount rate in the quarter, so it's totally effective on the asset side in this quarter.
Coming to Denmark, the loss in Denmark, yes, we have said that it's on an old and existing exposure that we have, and where we have taken more credit losses. That is the explanation in Denmark. When you look at other part of the portfolio disregarding this item, there is no sign of deterioration or migration or anything like that. It's not a matter of that we see any sort of systematic development in Denmark.
Just on the pension, could you give us some idea where your discount rate sits, particularly given when some of your peers are giving it and they basically seem to both have increasing the discount rates, therefore sort of reducing the liabilities. What would be your reason to keep it stable compared to them?
Yes. The system here is that you should use the long-term corporate bond rates that are in the markets. The problem is that there is no such long-term bond rate in the Swedish money market or Swedish bond market. You have to have a model for deciding how do you fix this interest rate. Then this is done in different ways in different banks. Each year in our annual report, we go through how we do it and how the interest rate is. As I say, in this quarter it's very undramatic, I can reveal that there is no change in the discount rate from Q2.
Okay, thank you.
Thank you. Now our next question comes from the line of Anton Krashok from UBS. Please go ahead.
Good morning. Thank you. I have two questions, please. The first one on the net interest income. If you look at the divisional performance, Sweden and Norway, quarter-on-quarter saw a decline in NII, but at the same time, your other operations saw an increase in net interest income quarter-on-quarter. I was wondering whether there've been some change in how you allocate interest expense or interest income internally that drove this increase in other operations NII. The first question, please. The second question is on asset quality again, if I may. You've seen a very low level of loan losses in Finland, I was wondering if it's a reflection on structurally improving situation in the Finnish market, or is it just a one-off write-back that has led to such a low level of loan losses in the quarter?
Thank you very much.
Thank you very much. On the first question, no, it's exactly the same principle as we have had. We have a central treasury which are doing all of the internal bank work. Whenever a branch takes a deposit, they leave it with central treasury and get an internal rate back, vice versa if they lend money, it's exactly the same principles. As you see over time, there is very little variation in what we call others, the part of the group that is not a segment. It could be smaller variations quarter-to-quarter. For instance, when we take up funding in the markets, it has not been used by the business yet. When it's used, of course the internal rate for that particular amount of money comes into the profit and loss statement of the business segment. There's no change whatsoever.
What you see in terms of changes in Sweden and Norway on a net interest income is a reflection of the business. In Norway, as you see, it's down 7% quarter-on-quarter, but bear in mind then that the Norwegian currency went down. In local currency, we're talking of 1%. As you said, there is a margin squeeze in Norway. Finland on loan losses. Again, the country, the macro environment in Finland is not particularly good as you know. My impression is that maybe we have come to the bottom. Actually, there was a small GDP increase, I understand, but it is very small. It's not that Finland macro environment is improving, maybe it has reached the bottom. Concerning loan losses, again, also here we do not see any trends in terms of migration and so on.
If you go look at Finland over time, you have seen there have been quarters with a bit of more credit losses, and that has not been the case in this quarter. Then you see more of the underlying ROE. You can say exactly the same example with Denmark. The underlying ROE in Denmark is well over 14%, but it's reporting 11% this quarter because of the credit loss we just discussed.
Thank you. That's very clear.
Thank you. Our next question comes from the line of Johan Ekblom from Bank of America. Please go ahead.
Thank you very much. Just two things to follow up on. First, in terms of the weaker net interest income in the quarter, I understand that a lot of this is driven by a lower return on your excess liquidity. To what extent is that now reflected in numbers? Or do you foresee a further headwind as you have to substitute fixed income instruments with direct central bank deposits in Q4 and maybe into next year? Then secondly, if you could just comment a bit on the competitive outlook in the U.K. We're seeing, I guess, some slowdown in particular on the corporate side. Is that driven by increased competition? What does that do to your thinking around margin pressure for that unit?
Yeah, thank you. On the first question, we have, as you know, as part of our liquidity planning and liquidity prudence we have cash overnight with central banks. What has happened in the quarter is that Danmarks Nationalbank has lowered the amount of where we can put in money at 0% interest rates. The other amount is negative interest rates when it comes to central bank placement in Denmark. You have also in Sweden got, of course, the change of the interest rates from Sveriges Riksbank, which is also a negative. Generally, also in other currencies, the spread has gone down in a negative way. We talk about this in the report. Going forward, do I see any big changes? Well, you have to tell me where the interest rates are going.
All things being equal, I don't see any changes. It's a matter, of course, of where the interest rates are going. There are some possibilities from time to time to exchange what you have at central banks, for instance, to interest-bearing bonds, state bonds, and so on. We are not ever prepared to take any sort of credit risk with our liquidity portfolio. U.K. competitive landscape. I think it's very fair to say that the British banks have indeed improved quite a lot in terms of financial stability and also in activity and so on. They're more active and so on. Having said that, we are getting more and more, especially in the way we conduct our business, being a non-mass market and very bespoke service and so on. Actually, when we look at the margins in this quarter, they are not going down in the U.K.
We have still the double of the margins we have in Sweden we receive in the U.K. There's no deteriorations. There's actually a small increase in some segments. Of course, the price competitiveness varies in different products. When I ask our branch manager in the U.K., they say that they never compete on price. The price is never really a question. It's more about getting the trust of the client and really getting the relationship going. That is what the constant energy on. We are not there on price competition basis. It's not because of that we're expanding. You say that Q3 growth is not so great, you should remember that in spite of the British and Swedish weather, also Britons take a vacation, and it so happens it comes in Q3.
Maybe just to follow up on the U.K. The pace of branch openings that we've seen, should we expect that to continue at broadly the same pace? I think in the past you mentioned that with 200 branches you have a full national coverage. Does that mean we should expect it to slow, or is there more to do?
This is totally a local decision. Let me say that. As a general observation, as I said in my presentation, what we have taken, as you've seen from the figures, extensive investments, both in terms of new branches, but also in setting up the new regional head office in Leeds from year-end, computer systems, et cetera. On that ground, of course, there is a big scope of expanding the business also within the current branch office network framework. That's not saying that we will not continue to start branches, and I don't want to go into any numbers. As you can see, we have taken quite a lot of investments. We have a very good ground for expanding regardless of the number of branches. I think it's very likely that you will see the number of branches vary quite a lot from quarter to quarter.
This quarter it was a rather high number, I must say, eight new branches and so on.
Perfect. Thank you very much.
Thank you. Our next question comes from the line of Daniel Deto from JPMorgan. Please go ahead.
Hi, good morning. Three questions from me. The first one on deposits and the two last ones on capital. Just on deposits, you reported quite a large decline in deposits quarter-on-quarter, both in absolute terms but also relative to your peers. Just wondering if there was anything behind this. Second, on capital, just on slide 21 where you showed the quarter-on-quarter progression in capital, could you just give us a bit more detail around the 40 basis points of other effects? Lastly, again, on capital, you mentioned that you now feel that you're within your long-term range when it comes to capital levels. Does that mean that for the time being you see it as appropriate to be somewhat above the 100-300 basis points range rather than being somewhere within it, given the amount of regulatory uncertainty? That's it.
Thank you very much.
Thank you very much. Maybe I should start on capital. What we say on capital is that we have received the SREP and there the Swedish FSA says 18.1 as the advised number for year end. They make a forecast. In that number, 18.1, is not included what they have already decided in terms of the countercyclical buffer increase which will take effect on the 23rd of June in Sweden, going from 1%-1.5%. For us, this is only applying to the Swedish volumes, so for us that would be an effect of about 0.3. If you take 18.1, add 0.3, you are at 18.4. We are at 21.4. Add to that the fact that the Swedish authorities has been very clear and transparent that they are currently working on the IRB models and also the question on corporate risk weights.
We discussed the M factor as one part of their Pillar II toolbox to do that. They have said that something will come out in this respect probably during the spring or something like that. Therefore we say that our best judgment is that with our 21.4, we are indeed within the 1%-3%, which is our goal. It's not that we think that we are above. We think that we are within that band. On deposits, you talked about the peer volumes and what's happening on deposits. As you can see, we have structurally a good inflow of deposits. I'm talking about household deposits, SME, ordinary companies. On top of that, there is a volatile part of the deposit market which has to do with, of course, financial institutions.
We are not a lot of that, but also large corporates and that kind of, how should I put it, large corporate treasury department deposits. That's quite fluctuating, and you can see that quarter by quarter that that's going up and down. You can see, for instance, in our branch office operation outside our home market, you can see a rather dramatic turn. You can also see it in Finland, for instance, on the corporate side. You have to look at different parts. Structurally when it comes to do we take on new interesting clients with deposits, the answer is certainly yes, and we have a nice development there. On top of that, we have this fluctuation.
It goes without saying that it can indeed even be a problem if you get a lot of these volatile deposits from large corporations because not only are they volatile, that's one thing, but the other part is that you cannot use them for anything because the LCR and the NSFR measurement is such that they take into account that they are volatile. If you have too much of them, it's only posing a problem because you have to put it into central banks and then you have this negative return on that.
Thanks. Then just on the other movements within capital quarter on quarter, the 40 basis points.
It's Mikael here. It's a number of really on the second decimal things, you have, for example, reduced the capital requirement for market risk. You have also a slightly smaller IRB deduction in the capital base. You have a small on the second decimal impact on the LGD factors. There are a number of ones, when you just sum it up with one decimal, it's actually 0.4, slightly less actually if you look at the second one. There's probably six, seven, eight different small items with the biggest one being lower market risk and also partly a positive effect of the IRB deduction in the capital base.
Okay, thanks. Just on the management buffer. In other words, you see your current 100 to 300 basis points as appropriate going into next year, given the potential increase or the likely increase in Pillar II requirements. Is that correct?
Yes. We think that 100 to 300 is indeed a good span when it comes to working within a capital framework. We have to, of course, see what authorities come up with here and adopt to that level. I think it's good to see, however, that in spite of our 15% growth and of the payout ratio that has already been deducted in the Core Tier 1 ratio we are building capital. Not only have we got this 15% growth in value we have a 73% payout ratio in the calculation, and in spite of that, we are building capital. Hopefully at some stage we come to the end of the earned capital discussion and know exactly what the authorities want us to have. Let me also be very clear. When I say 73% payout ratio, this is how the rules are working.
That is what you should deduct when you calculate the Core Tier 1 ratio. It's exactly the same payout ratio that we had last year. There is no forecast whatsoever in using that amount. It's just a reflection of a mechanical calculation out of the regulation.
Okay, understood. Thanks very much.
Thank you. Our next question comes from the line of Jeff Doors from Société Générale. Please go ahead.
Hi, good morning. Jeff Doors here from SocGen. I think we've covered a lot of ground, only two questions that are additional to what we've heard already. First of all, just on the Swedish business and more generally, you've obviously got a trend of net interest income falling back, and probably the outlook is fairly bleak for that as well. Loan losses are coming up. Are you able to offset that domestically with any of the other revenue items or costs, or are you looking towards the other divisions and international to offset that pressure in Sweden? The second question is a bit more of a clarification. On the provision coverage and the absolute level of provisions, you've got quite a high jump quarter-on-quarter with about a five percentage point increase in the coverage ratio on pretty flat non-performing loans.
Can you just outline what is driving that? Is that specific credits going bad? Is it more generic provisions? Can you just give us a bit more color there? Those are the two questions. Thank you.
Thank you very much. Yes, maybe there is a misunderstanding about credit losses and credit losses in Sweden. There is one credit that has been with the bank for many years where we have decided to take more provisions than we have earlier done. If you take that provision away there is small amounts only of loan losses, and there is certainly not, contrary to what you described, any sort of trend of increasing credit losses in Sweden. I don't want to do any sort of forecast, but I don't see any kind of information that should at this point to an increase.
When you look about the credit losses that we have in the quarter, you're right that they have gone up if you look Q2 to Q3. You have to remember that there is this element of the Group reserve which is a totally mechanical calculation, the general provision called Group reserve that is calculated on the basis of PD values for credits that have a credit rating that is worse than normal. What has happened in this quarter is that yearly there is a validation of PD values, and the PD values in risk classes with rating that are rather bad has gone up slightly. Therefore, we have done an allocation of SEK 70 million purely as a modeling thing in the group provision.
If you take that amount and look at the individual provisions, actually the number as you can see Q2 to Q3 is going down. We have already talked about the Danish case, and I also now mentioned about the Swedish case. If you leave those two instances alone, actually, as you understand, there is a general improvement if you look at the rest. Swedish business. You asked about the environment here. Yes, the loan demand on the corporate side is very sluggish for normal companies. They do not invest yet because they want to see more of world demand. They are cash rich, and they have good solvency. I just can't see any quick shift in terms of loan demands. In terms of commitments, yes, there are some demands, and that used to be an early indicator of coming loan demand, I'm not so sure.
I think we have to see more of uptick in world demand before we see more of investments. You have these segments where we do not participate, the highly leveraged commercial real estate and private equity deals. Where will the money come from, if I understand your question right? This is something that our branches think about daily because our steering system puts out all these effects immediately on interest rates and so on to our branch offices. There are various ways. Some branches work on the mortgage margins if you are in a market where that could be happening. Most, if not all branches, work more and more on the mutual fund side. You've seen from the material that we're taking 42% of the new net savings in Sweden in mutual funds. Insurance is another very interesting field for us. We are very small.
We're now starting to get up a good product range. Talk about unit link. More usage our credit and debit cards for our new clients. On top of that, the whole very interesting, of course, thing that is happening with increased efficiency since the use of our mobile telephone apps and digitalization and so on is increasing constantly, which free up time in the Swedish branch offices. There is also work, as you may have seen on when it comes to cash handling in the Swedish branch office operations. Cash handling is a very time-consuming and also very costly thing. There are various ways of increasing efficiency here. There is lots of things that could be done to counteract what you see. It's indeed a daily task of everyone working in the bank to do that.
We have our international expansion as well, the U.K., the Netherlands and so on. Commissions, that's a general theme, not only in Sweden. We're talking here in the material about the U.K., where we've gone from 3.3% of total income when it comes to fees to 8.5%. 8.5% is still, if you compare it with our competitors, of course, very small numbers. We have lots and lots of things to do. Also, of course, on fees and commission in the other Nordic countries, same thing. Lots of things to do.
That's great. That's good to hear. Thank you.
I will hand the conference back to you, sir.
Any last question before we close the call? No, it doesn't seem so. Thank you very much for participating, and as usual, if you have any further questions, please don't hesitate to call us. Thank you very much. Bye.
Ladies and gentlemen, that has conclude our conference for today. Thank you very much for your participation. You may now disconnect your lines.