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 be in listen only mode and afterwards there will be a question speakers, please begin.
Good morning, everyone, and welcome to this conference call for the Q2 2015. Joining me today, I have Michael Hallacher, Head of Investor Relations Lars Hoglund, Head of Debt IR and Jurgen Olander, Group Head of Accounting. And the slides used for my presentation so many times before, we show the value 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%. And this is in spite of the fact that also the 2nd quarter offered its challenges, even more negative interest rates in Sweden and elsewhere, continued weak loan demand in Sweden.
And towards the end of the quarter, business model has continued to perform along this very steady path. We now have 8 37 branches in the bank and they have continued to face and handle their individual challenges in all different local markets. And when you sum up all of these millions of local decisions, the result is this continued steady growth in value creation for our shareholders. Then on Slide number 5, you can see the profit and loss account for the 2nd quarter compared to the Q1 of 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%. And 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. Then 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.
And 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 Q1. 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.
And in total, net result for the quarter up 7% and return on equity for the group increased to 14.5%. Then on Slide number 20, we show how net interest income developed in the 2nd quarter, an improvement by NOK 103,000,000 compared to the Q1. All in all, deposits margins dropped by another SEK 188,000,000 in the quarter and the net interest income related to
the
fell by another €200,000,000 whereas operations outside Sweden saw a small pickup of €12,000,000 Increased deposit volumes in Sweden gave a negative impact of €8,000,000 while total lending margins declined by €11,000,000 Here we have an improvement of €77,000,000 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 €90,000,000 to net interest income with €62,000,000 coming from outside Sweden.
We had some positive currency effects, day count effect and also contribution from the benchmark. But 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. But first, if we then go back to slide number 6, 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 2nd 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 minus 19 basis points.
Just over 15 percent of our deposit volumes in Sweden carried some interest in the end of the quarter. And 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. And all in all, if you compare to Q4 2011, the negative impact of falling interest rates in Sweden was SEK 1,600,000,000 in the 2nd quarter or SEK 6,400,000,000 on an annualized basis. Then moving to Slide number 7, 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 €662,000,000 or 10% higher in the Q2 of 2015. And still, the negative impact from lower rates in Sweden in the same period has been €1,600,000,000 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 1,300,000,000 limiting the negative impact on Swedish net interest income all in all to be around SEK 300,000,000 lower this quarter than compared to Q4 2011. But then our home markets outside Sweden, of course, make a big difference. Net interest income from these operations drew by more than €1,100,000,000 value creation that our model is able to produce even in headwinds like the current extreme interest rate situation. The huge deposit volumes. Household customers in all our home markets have added 34,000,000,000 compared to 1 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. And as you can see, the volume of issued bonds has indeed decreased by €37,000,000,000 in 20 15 compared to 2014. Corporate deposits have also increased. They have increased by EUR 118,000,000,000 in the same time. But here, we take a very cautious view on how to use these deposits.
And as you can see, our position with central banks and our liquid bond portfolio has indeed increased by €97,000,000,000 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 on the in the bottom table. Here you can see that still our NEAR ratio, non encumbered asset to unsecured funding, has increased from 2 29% to 142% in 1 year. So overall, the protection for senior bondholders have been even further strengthened.
And when you add up all of these measures, even stronger liquidity and better encumber situation, you can see that these funding effects have actually added approximately SEK 700,000,000 to net interest income in the first half of twenty fifteen compared to the same period last year. Then on Slide 9, 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 percent of new savings in mutual funds and 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 2.5 years, the growth has been 55%. So the trend here, as you can see, looks very good indeed. Then 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 2nd quarter with 18%. Sweden is at 16%. And that's in the quarter with even more negative interest rates.
And Norway and Denmark are between 14% 15% and that is in spite, of course, of the branch office operation there is still running at 12% in the second quarter. And 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 6%. Then 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 core equity Tier 1 ratio increased to 21.3%, up from 21.1% at the end of the Q1 and 20.1% 1 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 0.5%. Other effects contributed 0.5%.
Total capital adequacy ratio improved to 28.4% compared to 28.2% at the end of the first quarter and 25% 1 year ago. As you may recall, our target for core capital is that we aim at being 1 to 3 percentage points above the level advised by the Swedish FSA. And in May, the Swedish FSA communicated that as of the end of the Q1, the bank is advised to keep core equity Tier 1 ratio of at least 17.7%. The FSA has also published 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 FSA has also decided to increase that to 1.5% in June 2016. All this taken together according to our best assessment bank is currently bank is currently within our targeted range for core equity. Then looking at Slide 11. Let me comment briefly on the changes Moody's announced in June for our long term rating. Following Moody's extensive review, Anders Banken'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. And if you're interested, you can study this in more detail in the credit opinion published by Moody's on June 25. I think one interesting feature here is that Handelsbanken as one of extremely few banks actually in the whole world gets 1 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 the 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 Q2 alone, 7 new branch offices were opened in the U. K.
But at the same time, average number of employees increased by 66 persons. And 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.
And even though competition is certainly back in the U. K, margins for us even continued to increase slightly in the second quarter. And as you have seen, return on equity in the second quarter was just above 18% in the U. K. But it goes without saying that we continue to be very enthusiastic about the opportunities in the U.
K. So to summarize, equity per share, including dividends continued to grow steadily by 15% per year also when adding the Q2 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 NOK 103,000,000 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 volumes in Sweden. Business and commissions increased by 2% in the quarter and 11% year over year And the positive trend in the mutual fund business in Sweden continued. Return on equity for the group increased to 14.5% in the 2nd quarter. U. K.
Reached a level of 18% and Sweden 16%. Core Tier 1 ratio at the end of the quarter increased to 21.3% and we estimate that the bank is within the target range of 1% to 3 percentage above the level advised by the Swedish FSA. And with that, I conclude my presentation and open up for questions. Thank you.
The first question comes from Mr. Umer Kienen at Deutsche Bank. Please go ahead.
Good afternoon. Thank you very much for taking the questions. Good morning rather. Could I have the first question just on funding and net interest income? And then the second question just 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 deposits declined from about 2 70% to 170% over 2 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. I just want to know if it's as simple as that.
And could you help us work out how much excess funding you're carrying and if this tailwind will continue? Then my second question rates. I think we're aware of the Basel IV risks, but one of your peers seems to have taken an upfront increase in corporate risk rates for various reasons. The SREP process is ongoing, but also seems like the Swedish regulator is looking harder at the model processes. So I guess given that Handelsbanken has the lowest corporate risk rates amongst peers, do you see any kind of risks from an add on, 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, very careful to use corporate deposits for funding anything else than extremely short assets. And as you can see from the slide, out of the increase of SEK 118,000,000 in corporate deposits year on year and SEK 97,000,000 7,000,000 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, of course, prudent because you've got also very small corporates where the stickiness, of course, could be higher and you've got large corporates where it's very, very sort of overnight.
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. And the answer is that we can cater for such a situation over 3 years without taking up any external funding. So that is the kind of prudence we have. And that is without any management actions. And I can guarantee you if that would be a situation, of course, we would take a lot of management actions in those 3 years.
When you're talking about how much excess do we have, obviously, I mean, the huge liquidity reserve that we got, we don't need that kind of amount, of course, from a risk perspective. So 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 results with SEK 700,000,000 on a yearly basis out of the structure we have today. And that is a shift. So on a going concern basis, that is the level that we're currently seeing.
But 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 S rep 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. Each and every credit over, you can say, NOK 1,000,000 the branches looks at every quarter and takes immediate action if you see deterioration.
And that means that the volume that are leaving the balance sheet is of less quality than the volume that coming in. So you get an ongoing improvement in the book. And that's why you see risk rates going down. Also, of course, you've got a mixed effect in that in Sweden, corporate loans are not corporate lending is not growing, but mortgages with much lower risk weights in Tier 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 in the as an input to the Stability Council, where they were very clear saying that they really liked the risk weighted system, but they also acknowledge that sort of the debate and so on makes it very, very important that Sweden in every sort of regard is looked upon as an extremely prudent supervisory regime and so on. So 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 then 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 leverage ratio regime. But the debate is ongoing.
Okay. Thank you very much. So I guess kind of the summary to that is that you don't see any risk from the Swedish regulator pre empting the Basel IV process at least for Handelsbanken?
I can only give you the information You can see the debate in EU, etcetera. And then you've got the national side. So of course, the rules are not finalized, I think.
Okay. Thank you very much.
The next question comes from Mr. Anton Kuchuk 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 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 and 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? And the second question please on NAI. You have commented that you've seen some margin expansion in the U. K. And indeed the pace of NAI 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 UK 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. I mean, as I said just some minutes ago, I mean, we indeed see a strong competition in the U. K. Marketplace.
But since we are very, 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. And then I can just say that the prices we see are actually giving a higher margin. So 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. We you can see in the annual report that we used 3% at year end. The calculation according to the regulation is such that you should seek to have the long term the same duration as your pension obligation, the long term year, Different banks use different models.
During the year and as you can see in this quarter, you have a calculation which goes totally through the OCI. So it's not affecting the profit and loss statement. If you see in our Q1 report, we lowered the discount rates and we have now again lowered the discount rates. Different bank SSS 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. And I see one that has the same. But the really important figure is, of course, at year end, so you will be able to follow this closely at in the annual report.
Okay. That's very helpful. Thank you.
The next question comes from Mr. Johan Erik Blom at Bank of America. Please go ahead.
Thank you very much. I just want
to touch a bit on the cost side. I mean, 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. But maybe you can comment a bit on where you see cost income going mid term? I mean, 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, but is there any way that you can slow down cost growth and maintaining the network expansion over sort of the near to medium term?
Yes. You're right. I've also learned that the expectation were 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. And I think that is a really interesting thing, of course, to look at the result, which I understand was somewhat better than anticipated.
And 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 different 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 efficiency the efficiency question since the impact is so great from lower interest rates and also the fact that core demand for corporate lending is very, very flattish in Sweden. So 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. So that's another way to say that Sweden is actually going down and the markets where we grow, the U. K. And the 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, on 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. But that is something that we don't force our clients into, but the clients choose themselves.
But mobile telephone banking is as if you measure it by transaction increasing of course.
Thank you.
The next question comes from Mr. Daniel Dussoye at JPMorgan. Please go ahead.
Hi, good morning. Thanks for taking the questions. I just have 2. 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 price that you mentioned earlier. Just wondering how sustainable is this going forward? Should we expect the tailwind from repricing to continue in coming quarters? And then 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? And then on capital requirements, you mentioned in the report that you expect these to increase from the 17.7% on the back of a higher kind of cyclical buffer and Pillar 2 requirements. Can you just give us a sense as to how much you think this could increase from the current $500,000,000 $1,500,000 I guess your comments earlier in the call that you're currently within your target range kind of suggest that this could be quite a meaningful increase. So 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. So that's what's typically happening. And as you can see in the Swedish markets, there have been some increase. It's not dramatic.
We see 2.5 basis points in this quarter. And I don't want to make any projections on this, but it has been a development, a trend now for quite some time. And 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. But we are in HandSpank 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 we have the market has 2 very large players, 1 ultra large and one just below that. And they are shifting strategies. So it was margins up some time ago and then it has become margins down. And now it's margins going down.
So I think you should talk to them. Again, we are a price follower, but that is what has happening. This is a small decrease also in Finland in terms of our margins, not as large as in Norway. And we see small pressures in Denmark. But in the U.
Opposite, we see an increase in margins. And so that's that. Capital, yes, the SEK 17,700,000 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.
And 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 percent and that was what we said in Q1. And as you rightly say, we communicate that to our best of our knowledge, we are within the range with our 21.3%. So I think then if you calculate it backwards, I think then the 18.3 percent that you pointed out is some sort of number. But yet again, we don't have the SREP and we just touched upon the general debate. So 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, 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. But 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?
And then also should we think of the kind of the ratio of increased deposits to decreased bond funding as being 4 to 1 that seems to be on Slide 8. Is that kind of what we should think as being the order of magnitude going forward as well? So one of you increase your deposits and 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's only a small exercise to get us to 100. And I can actually say that the NSFR measure is as you know very artificially if you compare it with the true for instance stickiness of different deposits etcetera. It's a very mechanical tool.
But 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 sort of the last half year. So it's not that we have deteriorated our situation. On the contrary, we have a higher liquidity buffer with Central Bank. We have a better even better NIA encumbering situation, which I think is a really important thing that has been forgotten in the market because there's so much other things going on. But I can assure you that will return as a very important thing.
So I'm very happy to see the EMEA improving. And 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. So we are ongoing concern on that. So all things being equal that will 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 influence and so on. So 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 assets so far?
Yes. 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. And when you take that for instance to Swedish kronor, we lock it all in with swaps. And it's the same with if you have got difference in interest rates in the the denomination, fixed versus variable and so on.
So we lock in all sorts of risk in the funding and assets that is funding and then you need the 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 funding need for that. We have worked very actively on that. So 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. But that is on both sides of the balance sheet.
So in terms of what you did actively to kind of mitigate the NSFR pressure, is it just improved netting of derivatives to or just want to try and understand a bit more what it is you've done there?
Netting is one thing. And if you also get out of derivatives on both sides, you will get the same effect. So there are a lot of different techniques to use to take down the balance sheet when you got derivatives on both sides of it. So it's a combination, but netting is one of the techniques.
Okay. Thanks very much.
Next question comes from Mr. Riccardo Rivera at Mediobanca. Please go ahead.
Yes. 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 in if I do the sum of contribution from derivatives recognized the hedges as interest income and sorry, and interest expenses, I see $1,200,000,000 contribution in the Q1, then becoming $1,400,000,000 in this quarter. Just wonder what's happening there given that rates have moved completely different in the 2 quarters.
So I just wanted to understand how does it work? What is your Puneet positioning there? The second question I have is on the corporate risk weights. It is down to 21%, is down 3 percentage points in 6 months. You say that this is due to the kind of mix effect.
What comes out 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 3 months? This is the second question. And the third question I have is on the leverage ratio.
The quality one keeps improving, but the leverage ratio is actually absolutely stable. It has gone up since December just because you issued the DAT1, basically. EUR 20,000,000,000 mostly because of EUR 20,000,000,000 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 1 quarter and the other in the amount of netting that you can do on your for the calculation of the leverage ratio exposures?
What's happening there? Thanks. And just a little bit on leverage ratio again. Do you see kind of 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 4 and foremost about currency effect. And 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. And the funding and the assets are not they are not mark 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.
But 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. So the really interesting thing is, 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 not a good asset. If an asset deteriorates, it goes very quickly that the risk weight goes up.
It goes up dramatically when you approach the fault situation. So 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, very high effect. So the answer from your question is really that we have an extremely low turnover if we look at our stable client base, but we take in new clients. And yes, clients that we don't like or assets we don't like leave the balance sheet. And 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.
So it's not that we're 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, and the ruling ones is the FSA and the National Debt Office and 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 low 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. And you wouldn't you couldn't imagine the number of investment banks that are calling, 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. So yes, I'm happy for the moment. And let's see what the regulation says in a far distant future.
Thank you very much. And with regard to the YOLA statement on securitizing assets, I would suppose you're mostly referring to mortgages. What portion of your mortgage book could be securitized, 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 into before a leverage ratio will be a binding restriction in Sweden. So I can assure you, we can do much more than in the time frame before the leverage ratio comes into effect. And 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 weights is maybe sort of 5% including security add ons. So 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 proposal of standardized risk weights or corporate risk weights goes up.
Then of course you get the same effect there. And it is a little bit more of technical work in order to describe it statistically, But it's very doable to do it on the corporate side. Maybe you do it a little bit more bilateral then. So I wouldn't worry about leverage ratio.
Okay. 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 on to the balance sheet where you say this rolling effect? And secondly, on the SREP process and the FSA in Sweden. So 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?
Or do you think this is going to sort of have a very limited effect on the Swedish way of doing things? And could you give any kind of guidance or idea of where you think this SREP add ons may end up? Thank you.
Thank you. We have not got any decision on the SREP from the authorities. And I think that, as I said, the general information that we got is, of course, what the FSA said in the Stability Council paper, why they sort of they hinted that they would look into this the risk weights in a general manner and also by institution to institution and that they felt it's very important that they are regarded as very prudent. So that is the only information I sort of got on the subject. And so I can't give you more light there than we already discussed.
Then you asked about the risk weights on new volumes. And Mikael, I think you got the number out.
But like I said, Ulf, we don't have the risk weights on new loans per se. But 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, much higher risk weights and ones that come in have low risk weight. I think it's really a that is the impact that we see.
Yes. If you look at the average numbers and you can think of it as, of course, something being lower. And I would say 10%, 15% lower or something. But then 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.
And 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. And we keep this. And so this is a very good uptick and very positive effect of the relationship that our branches have.
And I think Jacob that the easiest thing is really if you look at the Pillar 3 report, we can see all the different risk classes. You can see the different risk rates 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. Then 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.