Ladies and gentlemen, welcome to the Handelsbanken Interim Report January to March 2015. Today, I'm pleased to present Mr. Ulf Reets, CFO. For the first part of this call, all participants will be in listen only mode. And afterwards, there will be a question and answer session.
Speaker, please begin.
Good morning, everyone, and welcome to this conference call for the Q1 2015. Joining me today, I have Michael Hallacher, Head of IR Lars Hoglund, Head of Debt IR and Jorgen Olander, Group Head of Accounting. And the slides used for my presentation are as usual available at handersbanken.com. On Slide number 3, I will again start by showing you the value creation of the bank. Again, equity per share plus dividends continued on its steady path with an annual growth rate of 15%.
This was achieved in quarter where the Swedish STIBOR rate for the first time hit negative territory. And as can be seen, the chart starts in 2,007 when the financial crisis now all time low or negative interest rates. Quite different circumstances, one must say. In all these different environments and challenges, our business model has proven very robust quarter by quarter. And in our model, as you know, since 43 years now, all our now 831 branches constantly and swiftly take new local decisions in order to adapt to the prevailing local circumstances, circumstances that naturally differ a lot between our various locations and home markets.
And then when you sum up the combined effect of all these local decisions, you see this extremely consistent development over the quarters years. Then on slide number 5, you can see the profit and loss account for the Q1 compared to the Q4 2014. Operating profit increased by 15% quarter on quarter, and this was the best comparable first quarter profit ever for the bank. Net interest income was, however, flat quarter on quarter and here lower margins on deposits due to the falling interest rates was offset by higher lending volumes combined with structurally lower funding need as well as positive currency effects. Year on year, the increase was 4%.
Then net commission income, that improved by 4% in the quarter and 12 percent year on year, mainly due to asset management and payment fees. And this was the highest level recorded for commissions so far. Net gains and losses on financial items and here adjusted for the extraordinary capital gain in the Q1 of 2014 increased by 22% year on year and 62% in the quarter. The main explanation was higher activity from customers in the foreign exchange business. So all in all, revenues up 2% in the quarter.
On the cost side, personnel costs rose 3%. And here the currency effect expands 2% and increased pension costs due to lower interest rates another 0.5%. Total costs were down 2%. Loan losses decreased and the loan loss level fell to 7 basis points. The credit quality in the portfolio remained stable.
And in total, when you sum it up, net result for the quarter was up 17%. On slide number 20, you can see the development of net interest income in the Q1 compared to the Q4 2014. All in all, a small increase of €33,000,000 Margins on deposits in Sweden dropped by 143,000,000 due to lower Swedish interest rates. And in addition to that, the revenues from the financing effect of the equity dropped by €30,000,000 and deposit margins outside Sweden decreased by €27,000,000 These negative effects of falling interest rates were, however, offset by foremost three factors. Firstly, growing lending volumes, all in all, added €64,000,000 and that is primarily outside Sweden.
Secondly, the very good liquidity situation combined with continued deposit inflow meant that market funding activities were reduced during the quarter adding some €101,000,000 And thirdly, currency movements had a positive impact of €104,000,000 Here, I think it's interesting to note that the weaker Swedish krona following the lowered interest rates in Sweden has thus provided a formal economic hedge creating a positive impact from the non Swedish operations, which balances the pressure from Swedish deposit margins for us. Other things to note is that lending margins in Sweden were more or less unchanged. Mortgage margin increased by 1 basis point to 101 basis points. But on corporate lending, margins declined somewhat. Lending margins outside Sweden reduced net interest income by NOK 22,000,000.
Margins declined in Norway and also slightly in Denmark and Finland. In the U. K, on the other hand, lending margins continued to improve somewhat. So to summarize, the strong pressure from lower interest rates was more than offset by higher lending volumes, less need for market funding because of the deposit influx to the bank and a weaker krona. Then back to slide number 6, where we show the longer impact we have seen from the falling interest rates here analyzed as the impact of 3 months STIBR on our Swedish deposit volumes and the financing effect of the equity.
Compared with the Q4 of 2011, the STIBOR decline is around 250 basis points. The average STIBOR rate was just above 0 in the first quarter, but there have been a number of days where STIBOR has been below 0. Clearly been seen on deposit margins in Sweden. Clearly been seen on deposit margins in Sweden. We have continued to lower rates to 0 on part of the Swedish deposits in the Q1.
But still at the end of the quarter around 20% of the accounts carried some interest. And we have not moved into the negative territory when it comes to what we pay for deposit accounts, neither for households nor for corporates in Sweden. The interest also be seen in the slide. So all in all, if you compare Q4 2011 with Q1 20 15, the negative impact of falling interest rates in Sweden amounts to SEK 1 point 3,000,000,000 or SEK 5,200,000,000 on an annualized basis. On slide number 7, we show the development of our fee and commission income.
With the headwinds that lower interest have caused for net interest income, I think it's very encouraging to see the good trend for fees and commissions. The total increase year on year was 12%. Fund management fees were up 31%. Payment fees increased by 9% and insurance fees rose by 15%. In Sweden, Handelsbanken received 20 percent of the new savings into mutual funds in the Q1, which is about twice our back book share of that market.
Out of the Swedish banks, Handelsbanken continued to have the highest average fund rating from Morningstar. Then in terms of geography, Sweden, U. K. And Denmark all had very strong growth in commissions. In the U.
K, Hartford continues to be an important driver, but also the payment business had a strong development here. And looking at the group development for fees from mutual funds, other asset management and insurance, you can see that the growth has been 45% on a 12 month rolling basis going back 2 years, a growth which has even accelerated compared to the situation last quarter. Then on slide number 12, you see the cost development and here adjusted for currency effect. And from the slide, you can see that costs in our Nordico markets, where growth is muted, have declined by 4% over the last 1.5 years calculated as a 12 month rolling cost adjusted for currency effects. And in the same period, the bank has opened in total 47 new branch offices in our home markets, primarily in the U.
K. And Netherlands and with another 12 branch to start up branches. On top of that, of course, existing branches in these countries have also added more staff to continue to grow in our niche and being able to serve more high quality customers. So all in all, the bank has added more than 500 persons in the U. K.
And the Netherlands in this period. And as the chart clearly shows, I think, this expansion is more or less offset cost wise by the cost reduction that is naturally taking place in the slower growing Nordic markets. Then if I may back to slide number 11, you can see the development in the Swedish branch of operations, where operating profit was up 14% year on year. The strong improvement in fees and commissions have, as you can see, more than compensated for the decline in net interest income in Sweden. In total, revenues increased 4% year on year, thanks to the 23% improvement in fees and commissions, while costs have declined by 2%.
Costincome ratio amounted to 34.8% in 20 15, down from 36.7% in the Q1 2014. Loan losses in Sweden decreased substantially from 9 basis points in Q1 2014 to 3 basis points this year. For the 4th consecutive year, Handelsbanken again was awarded the Service Score Prize for being the Swedish bank providing the best service to its customers. And in fact, the bank has won this prize every year since this independent survey started in 2012. And as you probably know, having the most satisfied customer is one of the cornerstones in our financial goal.
Then turning to slide number 8, you can see the financial position of the bank, which has continued to strengthen. Core Equity Tier 1 ratio increased to 21.1 percent, up from 20.4% at the end of the 4th quarter and from 19.5 percent 1 year ago. This quarter, we have a technical effect in that the transitional rule regarding effect of 0.4%. Otherwise, the improvements is again related to retained earnings, improved credit quality of existing and new customers and also better use of collateral in the lending. If we look at total capital adequacy ratio that reached 28.2%, up from 25.6% at year end and 24.5% 1 year ago.
The additional Tier 1 that the bank issued in February here contributed 2.1 percentage points to the increase. As you may know, we issued USD 1,200,000,000 with extremely high demand from investors resulting in the tightest coupon and spread EBITDA at that point for an 81 instrument. The Swedish FSA has communicated that as of year end 2014, the bank is advised to keep a core equity Tier 1 ratio of at least 17.8%. This includes a Pillar 2 for risks like pension risk, interest risk, the banking book and concentration risk. With the proposed new models that will come into force for calculating these additional capital requirements in Pillar 2, we estimate that the core Equity Tier 1 capital requirement is somewhat above 18%, all other things being equal.
This means that to our best estimate, we are within our capital goal of having 1 to 3 percentage points above the FSA number. Last week, the Swedish FSA also announced that they will prepare for potential increase in the countercyclical buffer in Sweden from the 1% level that will formally be implemented in September this year. This new increase may in that case be decided June this year for implementation 1 year later at the latest. And you also may want to note that the Annual Shareholders Meeting decided on a split of our share 3 to 1, which will be made during the course of the Q2. Then if we look at liquidity, liquidity wise, the bank continues to have a strong deposit inflow.
LCR according to the EU definition went up slightly to 175% and Central Bank deposits increased EUR 26,000,000,000 in the quarter, which structurally means less market funding activities resulting in positive effects on NII as I mentioned. Diluted volume of senior and covered bonds in the Q1 amounted to SEK 25,000,000,000 compared to some €42,000,000,000 1 year ago. Then if we turn to slide number 13, here you can see the progress of the U. K. Operation.
The bank now has 192 branch offices in the U. K. Including recruited branch managers for coming new branches. Operating profit increased 24% year on year and 12% quarter on quarter. As we have said before, the UK operation now grows more and more also within the existing branch network.
And if all branches just add 1 employee that equals staff wise opening of some 45 to 50 new branches, but even more cost efficiently. Since the branches have only started to capture the initial of the local market, there is obviously much more to do for each branch in terms of customer penetration. At the same time, this is facilitated by the fact that we add more products to the offering in the U. K, making the bank, of course, more relevant for more and more of the top quality customers here. As the chart also shows, the revenue development for the branches is actually stronger now than in 2,008.
And at the same time, costs are still on the same level as back then. So the underlying profitability is doing better now than in 2,008. We are of course still very enthusiastic about our U. K. Development as you can summarize, equity per share including dividends continued to grow steadily by 15% per year also when adding the Q1 of 2015.
Operating profit was the best comparable first quarter profit ever for the bank with an increase of 15% quarter on quarter. This was achieved in spite of the continued pressure on interest rates. Fees and commissions increased by 4% in the quarter, 12% year over year and the positive trend in the mutual fund business in Sweden continued and with a strong fee growth also in other home markets. All in all, fees and commission for the group were at their highest level ever.
Costs
increased just over 1% in local currency and 0.5% adjusted. Brick Markets continue to finance the expansion in the U. K. And the Netherlands. And the bank continues to grow profitably in the U.
K. And Netherlands by opening branches and adding staff to the existing branch network. The Swedish branch office operations in spite of the continued decline in interest rates improved profit by 14% year on year. Core Equity Tier 1 ratio at the end of the quarter reached 21.1 percent and we estimate that we are within the target range of 1 to 3 percentage units above the level required by the Swedish FSA. And with that, I conclude my presentation and open up for any questions.
Thank you.
Ladies and gentlemen, we now begin the question and answer session. And we have a first question from Mr. Omar Kinan from Deutsche Bank. Please go ahead, sir.
Good morning. Thanks very much for taking the questions. I had a question on Swedish mortgage margins. I'm surprised to see only a one basis point increase in the back book despite the meaningful expansion spread that we've seen between mortgage rates and STIBOR in the past few private households? And could you perhaps give us kind of your outlook on the rate of that book margin improvement increase from here?
Will it be 1 to 2 bps per quarter? Or could we see something better? Thank you.
Thank you very much for that question. Well, as I think you know, our branches of capital price is towards the clients. And typically, we defend our clients and we follow very quickly the market price. And the market price is a bit different in different places. And when you add it up all, as you can see, in total, that is the back book, up one basis points in the quarter.
Talking about trends, C3, R and E, yes, you have seen for now some quarters actually that the margins have gone up. So my impression is, if anything, is that that has been the case. When you talk about margins in general, I think it's a fair comment as you touched upon that margins on the private side has gone up. While that is not the case on the corporate side, corporate loan demand in Sweden is sluggish. Ordinary companies are have a good solidity and a good cash flow position, which means that demand is very flat for ordinary companies.
When you look at the in the statistics, I think it's fascinating to see that you see in the aggregate some growth. And that is coming from high risk deals. The market now is have a high risk tolerance in that field like buying property properties and using high leverage that is against the we, of course, do not participate in that. And as you can see, we produced a very flat number since we know when it comes to corporate lending. The outlook as usual we don't do any budget.
I think it's hard to forecast what the competitors will do, and we will follow what they do.
Okay. That's very clear. No, I appreciate that you can't give a forecast. It's just kind of surprising that the kind of system level trends we've seen doesn't seem to be translating into a back book improvement. But okay, we'll see what happens.
Thanks.
We have a next question from Mr. Ronit Kost from Citi. Please go ahead, sir.
Hi. It's Ronit from Citi. Can I just follow-up, Mr? Riese, on your comments, first of all, on the corporate
lending or the lack
of corporate demand in Sweden? Of corporate demand in Sweden. If I look at your statistics taking out mortgages, looking at non mortgage corporate lending, it's down year on year. You just touched upon how the demand is really in riskier deals you want to get involved in. What do you think needs to take place?
And I'm not talking about your business. I'm not asking for a forecast for Handelsbank. I'm thinking more for the broader system. What do you think needs to take place for your clients to start increasing corporate lending demand, corporate borrowing demand? I mean, is it just that we got to get used to this kind of environment of no basically flat corporate loan growth and get used to DCM activity?
Or will there be certain catalysts in the future that you can look forward to see a pickup on balance sheet growth? And then I have two follow-up questions, very specifically numbers question. One is on IAS 19 and I may be missing something, but most banks quarter on quarter, so IAS 19 have a negative impact on their capital. And you've seen year on year a negative, but quarter on quarter a positive impact. And if you could just explain why that is?
Is it 20 basis point positive impact? And I think everyone else has seen a negative impact. And finally, on Norway, it's a small number, but there's quite a jump on loan losses. Is there any color you can give us around the jump in loan losses to 19 basis points, please?
Thank you very much for that. On the corporate loan demand, I think what is needed is really that companies start seeing the future more brightly and then start to take action on their investment plans. They have been postponed now for quite many years. And of course, there is a want and a need to do investments. But I think you will have to have more of general demand in the world economy and for Swedish export companies for that to happen.
There are as you know in the Swedish macro environment quite a lot of positive things happening now. I mean the low oil price is good for Sweden. Also, I mean, the efficiency development in Swedish companies have is showing good progress. You can actually compare that with the development in the U. S.
And then of course also the rather weak Swedish krona is helpful. I think that the decrease in interest rates in Sweden has made many companies a little bit more questioning what is happening and how is the future looking since that is such a strong signal to the business community getting into negative territory. We have never experienced that before. So more of demand I think is needed and then investment will come. When you look over the years, demand on the corporate side that is a rather volatile thing that really comes with the business cycle.
And when investment comes, you would really see big pickup normally in loan demand from corporates. IS and pensions. Yearly we do a calculation of service costs and that's a yearly calculation. And you look of course on the debt and you discount what kind of pension liabilities you have and you compare that with the assets backing those commitments. And that for us is a cost of SEK 50,000,000 per quarter, so SEK 200,000,000 year on year.
And that's an effect then that starts in the Q1 and then it's the same in the Q2 etcetera. Then when you look at the OCI, you have a comparison between assets and liabilities in the pension system. That's a quarterly calculation. And there you have the positive effect as you say. And why is that?
Because the asset side of course the stock exchange increases has a positive effect because it's a portion of that those assets are of course equities shares because that's a very, very long term commitment as you know. Cases, Nothing that is a general deterioration or nothing that you can draw any conclusions on. As we have said, over the quarters, you can have credit losses in Finland or Great Britain or Sweden or Norway. And it's really a random thing. It's not that you can see any theme or so on.
In general, the credit quality as you probably see in Eastern showing a slight positive migration both quarter on quarter and year over year. And of course credit losses in this quarter went down to 7 basis points.
Thank you for that. Just to pick up on the second point on the IAS 19. So I understand the equity value would have gone up in the assets. Can you give us any asset allocation split between equity and fixed income? And wouldn't you have had an increase in your liabilities as well given interest rates went down quite sharply quarter on quarter?
Yes. I would like to refer you to our annual report where you will see this described. And of course, this is the combination of all return in the whole portfolio, including bonds and equities. And if you look in the annual report, you will have details of this. If you have any more questions, just come back.
We'll follow-up. Thank you.
We have the next question from Mr. Anton Grechok from UBS. Please go ahead, sir.
Thank you very much for taking my questions. Just two questions, please. One is on net interest income in the U. K. Can you please help us to understand the quarter on quarter dynamic there given that net interest income has grown by 10% Q on Q while volumes in local currency have only grown by 2% Q on Q.
What was the main driving factor behind the NAI strengths? What are the effects? And do you expect some of this to unwind later in the year? And then the second question please, a follow-up on capital. You have flagged that 40 basis points or so of capital generation came from the change in treatment of IFS reserves.
I was wondering if you can give a little bit more color on that. Thank you very much.
Thank you very much. On NII in Great Britain, especially then of course on the private side up 4% in the quarter. So that's if you take it on a yearly basis 4 times that of course. It's also that lending margins actually there went up a bit still. As you probably heard before us saying, we have very good margins in the U.
K. We're talking ballpark to 2.5 times the Swedish ones. And of course currency effects, you have in the fact book, you have the currencies. You can calculate the effect yourself. And if you want to divide it into different pieces.
And you also have the local figures of course of our U. K. Operation there. On capital, yes, it was in CRD 4 changed the rules of holdings in equity holdings and that was not implemented immediately in Sweden. So the old rule was kept for quite some time.
And the old rule said that you should deduct your holdings directly to from Core Capital. And that rule, the temporary prolonging was abolished at year end. So therefore, you got a positive effect on the capital side. You, of course, have a correspondent negative effect when it comes to the rea and the risk weighted assets.
Okay. That's very clear. Thank you very much.
We have a question from Mr. Heinrich Lutz from Goldman Sachs. Please go ahead, sir.
I guess, 2 very quick questions, Malek. The first question is, if I sort of see it correctly on the dividend you're basically accruing, it basically seems like you're now more accruing towards sort of something like a 70% payout. I recall sort of that you basically paid out sort of 50 percent plus a special dividend which we then sort of if you accrued is that for an ordinary dividend or could you also accrue for special one or the would you still keep sort of the whole strategy of special dividends? And the second question is like with sort of the 12 additional branch managers you said you hired in the U. K.
Should we expect sort of a reacceleration sort of openings of branches there because we more recently I think saw something like more like 4 quarter and that would basically already sort of be the capacity for 3 more quarters or so would that be probably a reacceleration in growing the U. K. Footprint?
Right. Thank you very much. The first question regarding what kind of dividend is deducted when calculating the quarter one ratio. There it's very clear and very mechanical rules. And that means that if you don't have any decision taken on what to distribute, for instance, policy saying that you should distribute 50% payout ratio whatever.
You don't have that. You have to look at the latest 3 years and you will have to take the highest of all that. So it's correct that we are calculating effectively then a payout ratio of 70%. But it's not and I want to like to stress that it's not that we have taken any sort of decision or have any thoughts what it will be. And we have no payout ratio policy as you know.
This is just a mechanical thing in the rules how you should calculate your capital. So don't need any sort of order cost or anything in that amount. But that is in effect what has been deducted in terms of dividend in terms of calculation.
When it comes to
the U. K. Branch openings, I think you should not over exaggerate the exact numbers and exact numbers in quarters for two reasons. It varies between quarters. And it's not a matter of capacity in the sense that Oreste could open more branches so on.
But the bank and the one. But the management decision here is to shoot, should we put more resources into existing branches or open new branches. It's of course always a combination of those 2, but what is the best thing to do? And here, of course, it's not rocket science that it becomes more efficient to add more capacity in existing branches, because you have already paid for the branch and furniture and you have already started up client relationships and so on. So it's easier to expand from an existing branch when you look at the kind of how old our branches are in the U.
K. So the simple answer is that it will be a combination. But if you would like to have something useful in your Excel arc for looking at what could the profits be and so on, please look at both effects because otherwise you would be completely wrong in your projections for the future.
Okay. That's very helpful. Thanks very
much. We have next question from Mr. Riccardo Rovere from Mediobanca. Please go
ahead sir. Good morning to everybody. Just one question for me. We have seen that the Basel Committee has started talking about capital floors. What kind of discussions you're having with your regulators in Sweden given your risk rates?
Thank you.
Thank you very much. Well, when it comes to our risk weights, as you know, we have a very, very thorough validation system and so on. So there's no ongoing discussion in that the risk weights that is used is should be wrong in any way. But then you come to the another question, which is of course the policy questions, how should one use risk weights? Should one use standardized risk weights?
Or should one use leverage ratio? And the Basel debate where of course the Basel Committee has come out with one proposal as I understand that they also now discuss other proposals. So we will have to wait and see what will happen with that. You have probably maybe heard and seen that the Swedish authorities, the Finance Ministry and also the Swedish FSA. They are and I think rightly so very proud about the Swedish system using risk weighted system, but instead have ample buffers on the capital side.
So that I think is very clear from the ruling authorities side what they think. But as you say the debate in Basel will continue and we will see. In general, you can say that you have really a scale here from a totally risk weighted system in one corner to the other side of the scale where you've got a complete leverage ratio regime. And of course, the more you move to a leverage ratio regime, the larger the incentives are to take away assets from the balance sheet. And I think it's very comfortable to have a comforting to understand that the value creation in Handelsbanken that does not come from having it on the balance sheet necessarily.
The value creation comes from what's called origination, knowing your clients, choosing the right clients, looking after your credits, providing the best service in order to attract the top clients all of that. So if leverage rates regime would come into effect. I don't think that is very likely that that will be the ruling metrics. But if that comes in place, of course, it's not rocket science that banks will start using securitization on a massive scale. And I can assure you there are a lot of investors that just love to buy our mortgages and lots of investment banks that would love to help to do that.
Okay. Okay. Very clear. Thank you. And
we have a question from Mr. Jacob Kruse from Autonomous. Please go ahead, sir.
Hi. It's Jacob from Autonomous. Can I just get back to the risk rate question? When you say securitization of mortgages, I guess that's one thing, but I think the main impact from a floor would be on the corporate side where you're I think now 23.3 percent risk weighted looks very low both in the European and Swedish context. So do you have similar sort of alternatives there?
Would you try to securitize corporate loans? And I think previously the reaction of banks to this has been that the FSA would adjust the hurdle rates if the risk weights had a big impact. Do you have any clarity there or any comfort that that would indeed happen? Thank you very much.
On the first question, you're right. I mean, the proposal as it stands now in the early starting phase is, of course, affecting all sorts of assets. But you're absolutely right that on the corporate side, there is a big effect. I think it's fair to say ballpark. If you look at the Swedish banking system system and you would apply the kind of starting assumptions that are presented in the Basel paper you would end up in something that is not very far from the Basel I regime.
You're not talking very much risk weighting actually and those kind of numbers. Of course, the capital that we'll have would, of course, also not then be measured on buffers on a risk weighted system. So the numbers will shift, of course, and the goals capital goals will shift and a lot of things happening. In reality as you know nothing has happened. The credit losses will be the same.
The clients are the same. It's just that the postman came with a letter saying that now you should use another yardstick. But from a financial point of view, it makes sense to do securitization. When it comes to corporates, although that market is not developed in Sweden, there are a lot of institutions with long term pension obligations that are really looking for assets that can be very safe and yield a lot. And of course, we have a very, very long track record as you know when it comes to credit granting.
And of course, you can slice it, so you can take part of the risk, the first loss or whatever. We would be very happy to do that. So there are lots of construction stuff that could be done. Your second question, I did not fully understand. You're talking about hurdle rates from the Swedish FSA.
As in the I think you have
a 17.8% capital hurdle rate that consists of a number of buffers.
Okay. Thank you. Yes. Absolutely. It's as you know, it's not how should I put it hard number in that if we go under that we will have to close the bank.
It's what the FSA says that this is what they think that Handelsbanken should have. And if we are under, we the assumption is that we should prepare a plan for to get back. And 17.8 percent, the number they gave out in 17.8 percent, the number they gave out in February for Handelsbanken and that was a number calculated at year end. But the calculation they used had as part of it 1.5% standardized notional part. And that concerns pension risk, concentration risk and interest rates risk in the banking book.
And the reason they use standardized number for all of the big banks, the same number was that they were developing a method. They have since then came out come out with the method and that is underway to be implemented. And when you take the numbers in the Handelsbanken case, our best estimate is that the number is above just above 18%, a little bit more than 18%. And that is described also in the report. Then there will be an ongoing process with the Swedish FSA.
Once a year we do the ICAP and they come back with what's called SREP and then they give a number. That number is a yearly number. So the number that we're talking about now is the year end number last year end. Every quarter from what I've heard and learned they will continue to send out a new message concerning what they expect each of the 4 Swedish banks to have. So and the numbers of course may change because of 2 things.
If they change anything in how they look at things and they can do that specifically to one institution or for the whole system. And then of course, the way this is construction means also that it means a little bit how large proportion do you have for instance in mortgages then the number will shift a little bit. And that is the reason also why we have our target as a relative target to this number that is advised from the FSA. We are as you know saying that we should be 1 to 3 percentage points over and above the FSA expectation number.
Okay. Thank you very much.
We have a question from Mr. Matt Clark from Nomura. Please go ahead, sir.
Good morning. Just a follow-up question on your securitization comments. Just wondering how would you make that assessment? What turns it into a threat to a reality? What's kind of the critical metric and the tipping point that would lead you to start securitizing your balance sheet?
Because presumably at some point you have to make a decision and it won't necessarily be that there is a step change in external policy. You'll have to take a decision based on gradual changes in the external regulatory environment. So how do you think about that? Thanks.
Yes. I mean, it's of course some or it's some practical work to do it and so on. We are of course from a technical point prepared to do this. But on the other hand, I think that the processes of changing capital regulation will take some time both when it comes to the leverage ratio question which is more long term question, but also to the Basel proposal, although it has been said that maybe some clarity would come before year end now. But often these things take time.
So I think we will have a lot of time to meet in the coming telephone conferences to discuss this. It's not something that will come dramatically and immediately. But so there will be plenty of time to do this over time.
Maybe I could rephrase it in some more black and white ways. I guess, firstly, do you think that increasing securitizations were you to do it today would improve your ROE? And secondly, has the management board looked at this, taken a vote on whether this is a step you should take yet? Or is it still all something that gets discussed at the water cooler rather than at boardroom level? Thank you.
We have not taken any decision to go down any of this route. We follow what is happening in with the regulation. We are making sure that from a technical standpoint this is an option that we can do. If this would have as of now improved our ROE we would have done it already. We shareholder value for us is really key.
And I think it comes with the family to say because it's the employees of the banks or the larger shareholders of the bank as you know. So it's really our own money. But it's not a situation as of today that massive securitization is something that is profitability enhancing. But it's not something that can be outruled.
Great. Thank you. Very clear answer.
I have
a follow-up question
buffer. Let's assume this is going to go from 1% to, I don't know, just to double or to go 1.5%, whatever. Do you think it's going to be effective effective to try to cool the real estate market because so far the 25% is great on mortgages, all these let's say pillar pillar 2 buffers seem not to have, let's say, had any particular impact. So it's going to make any difference for you? And if it's not going to make any difference, what else should we expect to try to cool the debt to the population and the real estate prices?
This is the first question. The possibility of securitizing mortgages or maybe I understand correctly what you said, the possibility of securitizing mortgages or maybe I don't know also the corporate loans would be an option if the leverage ratio stops to be a backstop mechanism and becomes a much more important mechanism that it is today? Or would it be would you be put in place also if standardized risk weighted assets were to be implemented in Europe? I would say the first one because you already are subject to the 25% risk weighted and it's irrelevant whether Sweden consider it Pillar 2 or not. But technical is already 25%.
And the third question, this is and I apologize, I just missed it during your presentation. At certain point, you mentioned that your core capital could go to 18%. I just missed what would bring it to 18%. Sorry to have missed that during the presentation.
Yes. First of all, your first question on countercyclical buffer to cool down the housing market. And you're absolutely right. It's an extremely inefficient tool of course to do that. And it's very easy to prove that it's a very, very inefficient minimal if any.
So, what minimal if any. So what has been debated as you know is of course the fact that in Sweden we have a tax deduction when it comes to what to pay on mortgages and that has been heavily debated now. That is of course from a technical point of view taking the political party side a very, very efficient way to affect demand on housing prices in the longer run. And you've got other sort of taxes also doing that. On the second question, leverage ratio or standardized, is standardized method according to the Basel Committee enough to trigger securitization wave?
And the answer is yes. I don't want to be saying exactly when and how. But if you take the Basel proposal as it stands back to that back to that kind of environment. And of course that would be a massive driver for securitization, no doubt about that. So you don't have to go the whole way to leverage H2O for that to happen in my opinion.
The 18%, yes, that is our estimate when we use the FSA proposed models when it comes to calculating their amount that they advise is the need for capital in Handelsbanken a bit over 18%. And that should of course be compared to the 21.1% we have in core Tier 1 Equity. So what we say very clearly, we estimate that we are indeed within our band 1, 2, 3 percentage points over and above the FSA number.
Okay, okay. Very clear. Thank you very much.
There are no further questions at this time. Please go ahead Mr. Riese.
[SPEAKER KARL HENRIK
SUNDSTROM:] Okay.
Then I thank you very much for participating today. And as usual don't hesitate to call us if you have any more follow-up questions.