Ladies and gentlemen, welcome to the Handelsbanken Interim Report January to June 2015. Today I'm pleased to present Mr. Ulf Riese, CFO. For the first part of this call, all participants will listen only mode and afterwards there will be a question and answer session. Speakers, please begin.
Good morning, everyone, welcome to this conference call for the second quarter 2015. Joining me today I have Mikael Hallåker, Head of Investor Relations, 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. On slide number three, as so many times before, we show the value creation of the bank. This was yet another stable growth quarter, adding to the long suite of quarters since the start of the financial crisis back in 2007, where equity per share, including dividends, has shown an annual growth rate of 15%. This is in spite of the fact that also the second quarter offered its challenges.
Even more negative interest rates in Sweden and elsewhere, continued weak loan demand in Sweden, towards the end of the quarter, the situation in Greece again became very turbulent, which affected financial markets and also the general business climate in Europe. In this environment, the Handelsbanken business model has continued to perform along this very steady path. We now have 837 branches in the bank, they have continued to face and handle their individual challenges in all different local markets. When you sum up all of these millions of local decisions, the result is this continued steady growth in value creation for our shareholders. On slide number five, you can see the profit and loss account for the second quarter compared to the first quarter of 2015. Operating profit increased by 6% quarter-on-quarter and was the highest quarterly result ever.
Net interest income improved somewhat by 1% in the quarter, in spite of the negative impact of even more negative interest rates in Sweden. In U.K. and the Netherlands, the improvement was 8%, in the other home markets except Finland, we saw a marginal increase while Finland was flat. Year-over-year, the increase was 4% for the group. Net commission income, that increased by 2% in the quarter and 11% year-over-year. Again, higher asset management fees and also higher fees from the card business were the main drivers this quarter. Net gains and losses on financial transactions, an item that typically is quite stable in Handelsbanken, just as we want it to be, improved by 5% quarter-on-quarter. Other income this quarter increased due to annual dividends from shareholdings. All in all, revenues rose by 5% in the quarter.
Personnel costs rose 1% due to an increased number of employees in our growth markets. Total costs were up 3%, mainly due to seasonally higher activity in the second quarter compared to the first. Loan losses were 8 basis points, a slight increase compared to the first quarter. The credit quality in the portfolio remained stable, where impaired loans fell to 24 basis points of total lending and credit risk migration was neutral. In total, net result for the quarter up 7% and return on equity for the group increased to 14.5%. On slide number 20, we show how net interest income developed in the second quarter, an improvement by SEK 103 million compared to the first quarter.
All in all, deposit margins dropped by another SEK 188 million in the quarter, and the net interest income related to the financing effect of the equity declined by SEK 38 million. In Sweden, deposit margins fell by another SEK 200 million, whereas operations outside Sweden saw a small pickup of SEK 12 million. Increased deposit volumes in Sweden gave a negative impact of SEK 8 million, while total lending margins declined by SEK 11 million. Here we have an improvement of SEK 77 million in Sweden that was offset by lower lending margins, mainly in Norway. In the U.K., lending margins improved slightly also in Q2. In Sweden, the improvement was mainly driven by mortgage margins being up 3 basis points to 104 basis points. Increased lending volumes added SEK 90 million to net interest income, with SEK 62 million coming from outside Sweden.
We had some positive currency effects, day count effect, and also a contribution from the benchmark. More importantly, however, the lower need for market funding contributed strongly to the sequential improvement in net interest income. I will come back to that. First, if we go back to slide number six, you can see that quite a dramatic impact in a longer term perspective of the lower and now even more negative interest rates in Sweden. Not least the second quarter has shown this very clearly, I think. The average STIBOR rate in Sweden dropped another 26 basis points during the quarter, bringing it down to an average level of -19 basis points. Just over 15% of our deposit volumes in Sweden carried some interest in the end of the quarter. At the same time, we still have not charged any Swedish customer for deposits.
Also, the interest income related to the equity has, of course, decreased further in the quarter. All in all, if you compare to Q4 2011, the negative impact of falling interest rates in Sweden was SEK 1.6 billion in the second quarter or SEK 6.4 billion on an annualized basis. Moving to slide number seven, we show the development of net interest income for the group, and here also in a longer perspective since 1999. In this slide, you can see that net interest income in the second quarter was, in fact, the best ever for the bank, in spite of the dramatic interest rate development you saw on the earlier slide. In fact, if we again just compare with Q4 2011, net interest income on a group level was SEK 662 million, or 10% higher in the second quarter of 2015.
Still, the negative impact from lower rates in Sweden in the same period has been SEK 1.6 billion, as I just mentioned. The explanation, I think, is clear when you look at the slide. First of all, the improving lending volumes and margins in Sweden have added SEK 1.3 billion, limiting the negative impact on Swedish net interest income all in all to be around SEK 300 million lower this quarter than compared to Q4 2011. Our home markets outside Sweden, of course, make a big difference. Net interest income from these operations grew by more than SEK 1.1 billion on a quarterly basis in the same period. I think this illustrates very well the value creation that our model is able to produce even in headwinds like the current extreme interest rate situation.
On slide number eight, we show how the decreased funding needs has impacted net interest income this year. The bank has continued to attract huge deposit volumes. Household customers in all our home markets have added SEK 34 billion compared to one year ago, in spite of the fact that we do not pay interest on most of these deposits. These deposits from our core household customers are to some extent useful for funding. As you can see, the volume of issued bonds has indeed decreased by SEK 37 billion in 2015 compared to 2014. Corporate deposits have also increased. They have increased by SEK 118 billion in the same time. Here we take a very cautious view on how to use these deposits.
As you can see, our position with central banks and our liquid bond portfolio has indeed increased by SEK 97 billion as a result of this very large corporate deposit inflow. In terms of issued bonds, we have focused so far this year on the cheaper covered bonds rather than senior bonds. The reason for this is found in the bottom table. Here you can see that still our NIA ratio, Non-encumbered assets to unsecured funding, has increased from 229%-242% in one year. So overall, the protection for senior bondholders have been even further strengthened. When you add up all of these measures, even stronger liquidity and better encumbering situation, you can see that these funding effects have actually added approximately SEK 700 million to net interest income in the first half of 2015 compared to the same period last year.
On slide number nine, we show the development of our fee and commission income, which is encouraging, especially of course, in this low-rate environment. As you may recall, this is an item where we have been actively and structurally worked on for quite some time, I mean the savings area and cards. During the first half of 2015, the bank had a market share in Sweden of 26.5% of new savings in mutual funds. That is more than twice our back book share of the market. Fund management fees for the group increased by 30% in the first half of the year and by 7% quarter-on-quarter. Adding up all fees in the group, the improvement was 11% compared to 2014.
Taking a longer perspective on our fees from mutual funds, asset management, and insurance, the right chart shows that in the last two and a half years, the growth has been 55%. The trend here, as you can see, looks very good indeed. Turning to slide number 13, you can see the return on equity for our various home markets. Here we can see U.K. in top in the second quarter with 18%, Sweden is at 16%, and that's in a quarter with even more negative interest rates. Norway and Denmark are between 14% and 15%, and that is in spite, of course, of the negative interest rates prevailing in Denmark. The Finnish economy continues to struggle, but our branch office operation there is still running at 12% in the second quarter.
Finally, Netherlands, our newest and smallest home market, where the underlying profitability is actually similar to that in the U.K., but where we take investments in infrastructure and more branches, resulting in total of a return on equity of 6%. Let's turn to slide number 10, talking about the financial position of the bank, which has again continued to strengthen. Here you can see that the Core Equity Tier 1 ratio increased to 21.3%, up from 21.1% at the end of the first quarter and 20.1% one year ago. Retained earnings and a positive volume migration contributed 0.3 percentage points. Credit risk migration was neutral this quarter, and we have lowered the discount rate this quarter for pension liability, and all in all, IAS 19 for pensions reduced Core Equity Tier 1 ratio by half a percent. Other effects contributed half a percent.
Total capital adequacy ratio improved to 28.4% compared to 28.2% at the end of the first quarter and 25% one year ago. As you may recall, our target for core capital is that we aim at being one to three percentage points above the level advised by the Swedish FSA. In May, the Swedish FSA communicated that as of the end of the first quarter, the bank is advised to keep a Core Equity Tier 1 ratio of at least 17.7%. The FSA has also published the models used for calculating the individual Pillar 2 add-ons instead of the standardized 1.5% that is currently used. In September, 1% countercyclical buffer will be introduced in Sweden, and the FSA has also decided to increase that to 1.5% in June 2016.
All this taken together, according to our best assessment, implies that the FSA advised Core Equity Tier 1 ratio for the bank will increase, and thus that the bank is currently within our targeted range for core equity. Looking at slide number 11, let me comment briefly on the changes Moody's announced in June for our long-term rating. Following Moody's extensive review, Handelsbanken's long-term rating was indeed upgraded to Aa2, and the counterparty risk assessment was upgraded to Aa1. This means that the bank has a higher credit rating than all other Nordic banks, and looking throughout Europe, no comparable bank has a higher rating than Handelsbanken. If you're interested, you can study this in more detail in the credit opinion published by Moody's on June 25th.
I think one interesting feature here is that Handelsbanken, as one of extremely few banks actually in the whole world, gets one notch uplift for corporate behavior, rewarding our extreme long-term stability and our business model, and the fact that we, for a very long time, have proven to be a very different bank regardless of external circumstances. On slide number 14, you can see the development in the U.K., which continues to be very good. The bank has now 197 branch offices, including recruited branch managers for new branch openings. Operating profit increased by 29% quarter-on-quarter and 44% year-on-year. During the second quarter alone, seven new branch offices were opened in the U.K., but at the same time, average number of employees increased by 66 persons.
This means that we are also adding people in the existing branch network in order to expand business also here. Interestingly, the lending margins in the U.K. continue to be much higher than in Sweden. Even though competition is certainly back in the U.K., margins for us even continued to increase slightly in the second quarter. As you have seen, return on equity in the second quarter was just above 18% in the U.K. It goes without saying that we continue to be very enthusiastic about the opportunities in the U.K. To summarize, equity per share, including dividends, continued to grow steadily by 15% per year also when adding the second quarter of 2015. Operating profit was the best quarterly profit ever for the bank, with an increase of 6% quarter-on-quarter.
This was achieved in an environment of even more negative interest rates in Sweden. Net interest income reached its highest level ever with an increase of SEK 103 million in the quarter. A lower need for market funding was an important driver, together with higher business volumes in our different home markets, as well as improved volumes and lending margins in Sweden. Fees and commissions increased by 2% in the quarter and 11% year-over-year, the positive trend in the mutual fund business in Sweden continued. Return on equity for the group increased to 14.5% in the second quarter. U.K. reached a level of 18% and Sweden 16%. Core Equity Tier 1 ratio at the end of the quarter increased to 21.3%, we estimate that the bank is within the target range of 1 to 3 percentage units above the level advised by the Swedish FSA.
With that, I conclude my presentation and open up for questions. Thank you.
Ladies and gentlemen, if you have a question for the speakers, it's 01 on your telephone keypad, 01. The first question comes from Mr. Omar Keenan at Deutsche Bank. Please go ahead.
Good afternoon. Thank you very much for taking the questions. Good morning, rather. Could I have first question just on funding and net interest income, and the second question just on capital and corporate risk weights. You've given some really interesting color around the wholesale funding cost tailwinds. We can see that Handelsbanken's loan to deposit declined from about 270% to 170% over two years, driven by deposit growth. Could you tell us how much of the deposit base is sticky? You differentiated in the slide between wholesale and corporate deposits. Just want to know if it's as simple as that. Could you help us work out how much excess funding you're carrying and if this tailwind will continue? My second question on corporate risk weights.
I think we're aware of the Basel IV risks, one of your peers seems to have taken an upfront increase in corporate risk weights for various reasons. The SREP process is ongoing, also seems like the Swedish regulator is looking harder at the model processes. I guess given that Handelsbanken has the lowest corporate risk weights amongst peers, do you see any risks from an extra add-on on the horizon? Thank you.
Thank you very much for that. On the first question, stickiness, we are, as you know, very careful to use corporate deposits for funding anything else than extremely short assets. As you can see from the slide, out of the increase of 118 in corporate deposits year on year, 97 of that has gone into overnight placement with central banks. Household deposits, of course, are much more sticky, and we can use them to a large extent. Having said that, I know that this is prudent because you got also very small corporates where the stickiness, of course, could be higher, and you got large corporates where it's very sort of overnight. In the measures NSFR, LCR, and that kind of regulation, there is a difference. It has some sort of impact on the ratios.
From an operational point of view, the most important measure for us is, of course, how long can we cater for a situation where we do no external funding whatsoever, neither short-term nor long-term, and in a situation where 10% or 20% of the deposits, for some reason, leaves the balance sheet? The answer is that we can cater for such a situation over three years without taking up any external funding. That is the kind of prudence we have, and that is without any management actions. I can guarantee you if that would be the situation, of course, we would take a lot of management actions in those three years. When you're talking about how much excess do we have, obviously, the huge liquidity reserve that we got, we don't need that kind of amount, of course, from a risk perspective.
Of course, we have a large extra buffer that could be taken down. I think the right answer maybe for you is that at the moment, you can see from the figures that we have increased the result with SEK 700 million on a yearly basis out of the structure we have today. That is a shift. On a going concern basis, that is the level that we're currently seeing. That is not to say that we don't see more deposits coming in. Our branch offices are, as you know, in, for instance, our new markets, getting older and older, and they tend to start with the lending side and then comes deposits. You will see, for instance, when you look at Great Britain, that deposits, of course, growing much faster than the lending side. Corporate risk weights.
That is, of course, a debate that is ongoing. We don't have any SREP from the authorities. We expect that during the autumn. Risk weights in Handelsbanken, as you rightly say, has gone down, and that has to do with that the quality has increased. With each and every credit over, you can say SEK 1 million, the branches looks at every quarter and takes immediate action if you see deterioration. That means that the volume that are leaving the balance sheets is of less quality than the volume that is coming in. You get an ongoing improvement in the book. That's why you see risk weights going down. Of course, you got a mixed effect in that in Sweden, corporate lending is not growing, but mortgages with much lower risk weights in Pillar 1 terms is growing.
On the corporate risk weights, I don't have any more information that you got. I think maybe one should look a little bit into what was said from the Swedish FSA as an input to the Stability Council, where they were very clear saying that they really like the risk-weighted system, but they also acknowledge that sort of the debate and so on makes it very important that Sweden, in every sort of regard, is looked upon as an extremely prudent supervisory regime and so on. Of course, it's an ongoing debate that nobody knows where it will end up.
I take comfort though, in that if there's extreme things happening, it has been said that the extra buffers that the Swedish authorities has imposed could be somewhat reduced if you're moving on the scale from purely risk weights to more standardized risk weights or even a leverage ratio regime. The debate is ongoing.
Okay. Thank you very much. I guess the summary to that is that you don't see any risk from the Swedish regulator preempting a Basel IV process, at least for Handelsbanken?
I can only give you the information I've got. Of course, it goes without saying that the whole subject has some uncertainty. You mentioned the Basel Committee, you can see the debate in EU, et cetera, you've got the national side. Of course, the rules are not finalized, I think.
Okay. Thank you very much.
The next question comes from Mr. Anton Kryvyy at UBS. Please go ahead.
Good morning. Thank you very much for taking my questions. Just two questions, please. One on capital. In the management statement, you've commented that the capital ratio suffered by up to 50 basis points from the negative impact on IAS 19 accounting, which was a little bit surprising to me given that the long end of the Swedish yield curve has steepened during the quarter, some of your peers have actually seen tailwinds on capital creation coming from IAS 19, not the headwinds. Can you please remind us why you're seeing different trends? The second question, please, on NII. You have commented that you've seen some margin expansion in the U.K., and indeed, the pace of NII growth continues to exceed the pace of volume growth.
I was wondering whether this margin expansion is actually driven by the fact that customers are seeing higher prices from you, or is it driven by the fact that the U.K. operations are receiving lower funding costs and therefore seeing margin expansion? Thank you.
Thank you. On the NII question to start with, I think it's hard to say, actually. As I said just some minutes ago, we indeed see a strong competition in the U.K. marketplace. Since we are very different, it seems like the clients, it's not a matter of price. It's not that we at all are taking clients because of price. We're taking clients because of our extremely high service concept and relationship concept. I can just say that the prices we see are actually giving a higher margin. It's hard to say, but I think it might be true to say that some of our competitors which have not got such a good Moody's rating and so on, of course, might have another funding structure and higher input prices. I wouldn't outrule that.
On capital and pension, the pension calculation is made yearly when it comes to calculating what's called the service cost in the profit and loss statement. You can see in the annual report that we used 3% at year-end. The calculation according to regulation is such that you should seek to have the long term, the same duration as your pension obligation, the long term corporate bond rate. There is no such long term bond in Sweden, you have to use a model for that. Different banks use different models. During the year, as you can see in this quarter, you have a calculation which goes totally through the OCI, it's not affecting the profit and loss statement. If you've seen our Q1 report, we lowered the discount rate, we have now again lowered the discount rate.
Different bank, as I said, have different models. If you look at the sort of numbers, I see that some of our peers have higher figure, higher interest rates. I don't see anyone that has lower interest rates than we have, I see one that has the same. The really important figure is of course at year-end, you will be able to follow this closely in the annual report.
Okay. That's very helpful. Thank you.
The next question comes from Johan Ekblom at Bank of America. Please go ahead.
Thank you very much. I just wanted to touch a bit on the cost side. We've had a number of quarters now where costs have come in somewhat above market expectations, and I guess part of it is FX driven. Maybe you can comment a bit on where you see cost income going midterm. You talked previously about the potential for further improvement in the Swedish business, and I guess the U.K. should gradually come down as the pace of investment slows. Is there any way that you can slow down cost growth and maintaining the network expansion over the near to medium term?
Yes, you are right. I've also learned that the expectation was that we should have somewhat lower costs if you look at the market. The good news is that we have also got, and even to a larger extent, higher income. I think that is a really interesting thing, of course, to look at the result, which I understand was somewhat better than we anticipated, and you can see that the cost-income ratio also moved in the right direction. The second part of your question, are we happy with this? The answer is no. Of course, we can do a lot, and of course, there's a lot of initiatives in all parts of the group, and different initiatives between branches and so on.
As a general trend, you've seen that Sweden is putting more and more energy, of course, into the efficiency question, since the impact is so great from lower interest rates, and also the fact that demand for corporate lending is very flat-ish in Sweden. For instance, if you look at personnel, we have gone up on average by 78 persons in personnel in the quarter, and 96 out of those 78 is outside Sweden. That's another way to say that Sweden is actually going down, and the markets where we grow, the U.K. and Netherlands, we are expanding. We don't have any budget or any top-down steering on this. It's an automatic process, and the way we look at it is, of course, to see the relationship between cost and income.
We have, for instance, if you look at digitalization and so on, there are efficiency gains that are rather powerful now in the Swedish branch office system, which means that time is freed up for more of advisory and relationship services, while more transaction-oriented tasks are handled more digitally. That is something that we don't force our clients into, but the clients choose themselves. Mobile telephone banking is, if you measure it by transaction, increasing, of course.
Thank you.
The next person, of course, Mr. Kian Abouhossein at JP Morgan. Please go ahead.
Hi. Good morning. Thanks for taking the questions. I just have two. The first one was on the NII bridge, the second one on your comment on capital requirements. On NII, I guess specifically on lending margins, these have widened in Sweden, I guess benefiting from the mortgage repricing that you mentioned earlier. Just wondering how sustainable this is going forward. Should we expect the tailwind from repricing to continue in coming quarters? On the international side, lending margins overall actually came down despite, I guess, better margins in the U.K. Can you just comment on the trends that you're seeing here, market by market? On capital requirements, you mentioned in the report that you expect these to increase from the 17.7 on the back of a higher countercyclical buffer and Pillar 2 requirements.
Can you just give us a sense as to how much you think these could increase from the current 0.5 and 1.5? I guess your comments earlier in the call that you're currently within your target range kind of suggests that this could be quite a meaningful increase. Just wondering whether my thinking here is correct. Thank you.
Thank you. On NII, Swedish mortgages we are a price follower since our branches follow the market price and defend their clients. That is what's typically happening. As you can see in the Swedish markets, there have been some increase. It's not dramatic. We see two and a half basis points in this quarter. I don't want to make any projections on this, but it has been a development, a trend now for quite some time. I think maybe it's a reflection also of the new capital rules and the risk weight floor in Pillar 2 and so on. That's what I hear from peers and so on. We in Handelsbanken it's very simple. It's the branches that sets the prices, and this is the outcome that we have been seeing.
In other markets, you can see that in Norway, where the market has two very large players, one ultra large and one just below that, and they are shifting strategies. It was margins up some time ago, and then it has become margins down. Now it's margins going down. I think you should talk to them. Again, we are a price follower, but that is what has happening. We see a small decrease also in Finland in terms of margins, not as large as in Norway. We see small pressures in Denmark, but in the U.K., on the opposite, we see an increase in margins. That's that. Capital, yes, the 17.7%, that is what the FSA has said was the number at the end of Q1, and they have made this public.
In that they have included a standardized 1.5% for pension risk, concentration risk, and interest rate risk in the banking book. Since then, they have developed models and also actually decided on models. If you put in our numbers in that models and also combine it with the capital buffer that is coming into force, you will end up north of 18%, and that was what we said in Q1. As you rightly say, we communicate that to our best of our knowledge, we are within the range with our 21.3%. I think then if you calculate it backwards, I think then the 18.3% that you pointed out is some sort of number. Yet again, we don't have the SREP, and we just touched upon the general debate. There is some sort of uncertainty in knowing the exact long-term number.
Okay. That's helpful. Thank you very much.
The next question comes from Mr. Matthew Clark at Nomura. Please go ahead.
Good morning. Just a couple of follow-up questions on the funding slide. Could you just clarify the net stable funding ratio impact of the move that we've seen in the funding mix year-on-year? I'm assuming that it was negative for the NSFR. If you could confirm whether it was negative, neutral, or positive, and whether that's a consideration for whether you would repeat this kind of shift. Also, should we think of the ratio of increased deposits to decreased bond funding as being 4 to 1? That seems to be on slide eight. Is that what we should think as being the order of magnitude going forward as well? Whenever you increase your deposits, then around a quarter of that can be used to fund longer term business. Thanks.
Thank you. Yes. On NSFR, we have communicated that we are not far from 100. It is only a small exercise to get us to 100. I can actually say that the NSFR measure is, as you know, very artificial if you compare it with the true, for instance, stickiness of different deposits, et cetera. It is a very mechanical tool. As a matter of fact, due to the changes in our balance sheet, for instance, what has happened on the derivative side and so on, I can say that actually the number has moved up, not down, in the last half-year. It's not that we have deteriorated our situation. On the contrary, we have a higher liquidity buffer with central bank.
We have an even better NIA encumbrance situation, which I think is a really important thing that has been forgotten in the market because there are so much other things going on. I can assure you that will return as a very important thing. I'm very happy to see the NIA improving. We have, as I said, actually improved NSFR. Looking forward, I don't want to do any projections, but I can say that what you see in the slide, the improvement in result, that is a yearly effect. We are on a going concern on that. All things being equal, that effect will continue. What will happen with deposits and so on, I don't want to speculate. I can only say that we have the most satisfied clients, and we see good inflow and so on.
It looks promising, but I don't want to go into any projections here.
Could you just clarify a bit more on what the changes to the derivative structure that benefited your NSFR year to date was, and whether this was an active kind of process for you, or whether this is just passive, that markets moved and coincidentally had a beneficial effect on your NSFR?
Yeah. We don't like derivatives in the balance sheet. You have to have some extent, for instance, because of the fact that we hedge all of our funding abroad. When you take that, for instance, the Swedish krona, we lock it all in with swaps. It's the same with if you have got difference in interest rate in the denomination, fixed versus variable and so on. We lock in all sorts of risk in the funding and the assets that is funding, and then you need derivatives. Apart from that, of course, derivatives per se may not pose any risk if you got them on both sides of the balance sheet, but it makes the balance sheet larger, and also since derivatives is hedging other objects in the balance sheet, you also get a funding need for that. We have worked very actively on that.
That has a good funding effect also in the balance sheet. Apart from that, when you look at the nominal numbers, it also so happens that market value changes has made the volumes go down. That is on both sides of the balance sheet.
In terms of what you did actively to mitigate the NSFR pressure, is it just improved netting of derivatives? Just want to try and understand a bit more what it is you've done there.
Netting is one thing, if you also get out of derivatives on both sides, you will get the same effect. There are a lot of different techniques used to take down the balance sheet when you got derivatives on both sides of it. It's a combination, but netting is one of the techniques.
Okay. Thanks very much.
Next question comes from Mr. Riccardo Rovere at Mediobanca. Please go ahead.
Good morning to everybody, and thanks for taking the questions. I have three questions from my side. First of all, on NII, if I look at your disclosure in the quarterly report, I noticed that if I do the sum of contribution from derivatives, recognized hedges as interest income and interest expenses, I see SEK 1.2 billion contribution in the first quarter, then we come in SEK 1.4 billion in this quarter. I just wonder what is happening there, given that rates have moved completely different in the two quarters. I just wanted to understand how does it work, what is your positioning there? The second question I have is on the corporate risk weights. It is down to 21%, is down three percentage points in six months. You say that this is due to a mixed effect. What comes in is safer than what comes out.
What is the churn rate of the corporate portfolio? What portion of the corporate portfolio is substituted every seven, three months? This is the second question. The third question I have is on the leverage ratio. The quarter one keeps improving, but the leverage ratio is actually absolutely stable. It has gone up since December just because you issued the AT1 basically. The exposure in this quarter is up mostly because of SEK 20 billion of lower adjustments, I think lower netting in the derivatives. Before you said you don't like that derivatives in your balance sheet. Why there is such a big difference between one quarter and the other in the amount of netting that you can do for the calculation of the leverage ratio exposures. What's happening there? Thanks. Just related on leverage ratio again.
Do you see 4% as an adequate level, which is 30, maybe 40 basis points below your main Swedish peers, and it is almost 180 basis points below the one of your Norwegian peer. Thanks.
Thank you. First of all, on page number 31 in the report that you're referring to, you have quite a lot of things happening in derivatives, which has to do first and foremost about currency effect. When you look at the table on page 31, you have to look at the items in connection because the derivatives that you see a large portion of them is actually then hedging the funding. The funding and the assets are not marked to market. They are marked to the nominal amount they came in, while the derivatives are marked, as you know, to market, and that you see in the OCI. Looking at the profit and loss statement that you see on page number 31, you will actually have to then put different items together in order to see the effect.
The really interesting thing also, of course, to see the net interest income, the combined effect of what you are doing in the balance sheet. The corporate risk weights that they are going down, as you know, it has a very large effect if you take away something that is not a good asset, because a not good asset, if it asset deteriorates, it goes very quickly that the risk weight goes up. It goes up dramatically when you approach the full situation. That is to say you don't need a very big turnover in order to increase the average risk weight, because if you take away things that are in high risk classes, you get a very high effect.
The answer from your question is really that we have an extremely low turnover if you look at our stable client base, but we take in new clients. Yes, clients that we don't like or assets we don't like leave the balance sheet. That effect is rather dramatic because the difference between the risk weights of what's coming in and what's going out, that's a huge difference. It's not that we are turning around the whole bank frequently, but on the margin, you get a high effect. Leverage ratio. Yes, you can see the numbers north of 4%. What we hear from the Swedish authorities, the ruling ones, is the FSA and the National Debt Office, and also the Ministry of Finance, they are sort of talking about 3%. We are not unhappy with what we have.
Should there come anyone that thinks this would be important to have a good leverage ratio, it would be a law or something. As you know, it's not rocket science to bring it up easily. One very easy thing to do is to take down the liquidity reserve. We have much more buffers than we need, and then you take down the balance sheet on both sides. Secondly, if you get a more adverse leverage ratio regime, let's say 6% or whatever you want to think about, of course, one would use securitization. You couldn't imagine the number of investment banks that are calling and knocking on our door and urging to help us with that. That is also very easily done. It's not something that we necessarily want to do, but if leverage ratio would be important in any sort of respect, of course it's easy to fix.
Yes, I'm happy for the moment, let's see what the regulation says in a far distant future.
Okay, thank you very much. With regard to your last statement on securitizing assets, I would suppose you're mostly referring to mortgages. What portion of your mortgage book could be securitized in, let's say, in a reasonable period of time, let's say 6, maybe 12 months, 10%, 20%, 30%, if you had to throw a ballpark?
I can assure you much more than is needed because it will take some time before a leverage ratio will be a binding restriction in Sweden. I can assure you we can do much more than in the timeframe before the leverage ratio comes into effect. You're right, the current regime is such that mortgages has a Pillar 2 effect, as you know, of minimum risk weights of 25%, and the real risk weight is maybe sort of 5%, including security add-ons. You have already, in fact, that, but the leverage ratio of 4 or whatever, of course it's a great effect and it's very easily done. Having said that, let's presume theoretically that the Basel Committee on Banking Supervision proposal of standardized risk weights or corporate risk weights goes up. Of course, you get the same effect there.
It is little bit of more of technical work in order to describe it statistically. It's very doable to do it on the corporate side. Maybe you do it little bit more bilateral then. I wouldn't worry about leverage ratio.
Okay. Thank you very much.
The last question comes from Mr. Jacob Kruse at Autonomous. Please go ahead.
Hi. Thank you. Just a couple of questions on capital. Firstly, when it comes to the risk weights of the corporates, what kind of risk weights are you getting on the new loans that you're putting onto the balance sheet where you say this rolling effect? Secondly, on the SREP process and the FSA in Sweden. Nordea basically said that with the College of Regulators now including the ECB, the Swedish FSA has to rethink at least how they've treated Nordea in a number of instances when it comes to optimizations. Do you see them doing this for you as well, regardless of the ECB not being on your college? Do you think this is going to sort of have a very limited effect on the Swedish way of doing things?
Could you give any kind of guidance or idea of where you think these SREP add-ons may end up? Thank you.
Thank you. We have not got any decision on the SREP from the authorities. I think that, as I said, the general information that we got is of course what the FSA said in the Financial Stability Council paper, where they hinted that they would look into the risk weights in a general manner and also by institution to institution, that they felt it's very important that they are regarded as very prudent. That is the only information I sort of got on the subject. I can't give you more light there than we already discussed. You asked about the risk weights on new volumes. Mikael, I think you got the number out?
Like I said, Ulf, we don't have the risk weights on new loans per se. I think Ulf really described it in his previous answer when he said that there's an average that you see and the risk that leave the portfolio have much higher risk weights and ones that come in have low risk weights. I think that is the impact that we see.
Look at the average numbers. You can think of it as, of course, something being lower, and I would say 10%-15% lower or something. The really important thing is, of course, the volumes that comes in and goes out in order to get this effect. The important thing for us is that the quality work that our branches are doing, the daily work by knowing our clients so much better than our competitors do. Especially this is an increasing phenomenon because when the others stop doing branch offices or take down branch offices, it's hard to get the relation. We keep this. This is a very good uptick and very positive effect of the relationship that our branches have.
I think, Jacob, that the easiest thing is really if you look at the Pillar 3 report, you can see all the different risk classes, you can see the different risk weights and PDs in between those risk classes, and that kind of would give you an indication of where the new ones are coming in.
Okay. Thank you.
I thank you very much for attending today, and as usual, have you got more questions, please do not hesitate to call us and we can discuss further. Thank you very much. Bye bye.