Ladies and gentlemen, welcome to the Handelsbanken Interim Report January to March 2015. Today, I'm pleased to present Mr. Ulf Riese from 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 first quarter 2015. Joining me today, I have Mikael Hallåker, Head of IR, Lars Höglund, Head of Dept IR, and Jörgen Olander, Group Head of Accounting. The slides used for my presentation are, as usual, available at handelsbanken.com. On slide number three, 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. As can be seen, the chart starts in 2007 when the financial crisis stopped 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.
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. When you sum up the combined effect of all these local decisions, you see this extremely consistent development over the quarters and years. On slide number five, you can see the profit and loss account for the first quarter compared to the fourth quarter 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%. Net commission income, that improved by 4% in the quarter and 12% 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, adjusted for the extraordinary capital gain in the first quarter 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. All in all, revenues up 2% in the quarter.
On the cost side, personnel costs rose 3%. Here the currency effect explains 2% and increased pension cost due to lower interest rates another half a percent. Total costs were down 2%. Loan losses decreased, the loan loss level fell to seven basis points. The credit quality in the portfolio remained stable, 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 first quarter compared to the fourth quarter 2014. All in all, a small increase of SEK 33 million. Margins on deposits in Sweden dropped by SEK 143 million due to lower Swedish interest rates. In addition to that, the revenues from the financing effect of the equity dropped by SEK 30 million, and deposit margins outside Sweden decreased by SEK 27 million.
These negative effects of falling interest rates were, however, offset by foremost three factors. Firstly, growing lending volumes all in all added SEK 64 million, 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 SEK 101 million. Thirdly, currency movements had a positive impact of SEK 104 million. 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 one basis point to 101 basis points, on corporate lending, margins declined somewhat.
Lending margins outside Sweden reduced net interest income by SEK 22 million. 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. 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 inflows to the bank, a weaker krona. Back to slide number six, where we show the longer-term impact we have seen from the falling interest rates, here analyzed as the impact of three months STIBOR on our Swedish deposit volumes and the financing effect of the equity. Compared with the fourth quarter of 2011, the STIBOR decline is around 250 basis points.
The average STIBOR rate was just above zero in the first quarter, there have been a number of days where STIBOR has been below zero. The largest negative impact has clearly been seen on deposit margins in Sweden. We have continued to lower rates to zero on parts of the Swedish deposits in the first quarter, still at the end of the quarter, around 20% of the accounts carried some interest. 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 income related to the equity, which is invested short, has fallen significantly since 2011, as can also be seen in the slide.
All in all, if you compare Q4 2011 with Q1 2015, the negative impact of falling interest rates in Sweden amounts to SEK 1.3 billion or SEK 5.2 billion on an annualized basis. On slide number seven, we show the development of our fee and commission income. With the headwinds that the 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% of the new savings into mutual funds in the first quarter, 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.
In terms of geography, Sweden, U.K., and Denmark all had very strong growth in commissions. In the U.K., Heartwood continues to be an important driver, but also the payment business had a strong development here. 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 two years, a growth which has even accelerated compared to the situation last quarter. On slide number 12, you see the cost development and here adjusted for currency effect. From the slide, you can see that the costs in our Nordic markets, where growth is muted, have declined by 4% over the last one and a half years, calculated as a 12-month rolling cost adjusted for currency effects.
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 managers in addition hired 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. All in all, the bank has added more than 500 persons in the U.K. and the Netherlands in this period. 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. If I may, back to slide number 11, you can see the development in the Swedish branch office 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%. cost income ratio amounted to 34.8% in 2015, down from 36.7% in the first quarter of 2014. Loan losses in Sweden decreased substantially from nine basis points in Q1 2014 to three basis points this year. For the fourth consecutive year, Handelsbanken again was awarded the ServiceScore Prize for being the Swedish bank providing the best service to its customers. In fact, the bank has won this prize every year since this independent survey started in 2012. As you probably know, having the most satisfied customer is one of the cornerstones in our financial goal.
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%, up from 20.4% at the end of the fourth quarter and from 19.5% one year ago. This quarter, we have a technical effect in that the transitional rule regarding surplus values in available for sale shares has expired. This is giving a positive 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% one 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 $1.2 billion U.S. with extremely high demand from investors, resulting in the tightest coupon and spread ever done at that point for an AT1 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 notional standardized 1.5 percentage point add-on in Pillar 2 for risks like pension risk, interest risk in 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 in June this year for implementation one year later at the latest. 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 second quarter. If we look at liquidity. Liquidity-wise, the bank continues to have a strong deposit inflow. LCR, according to the E.U. definition, went up slightly to 175%. Central bank deposits increased SEK 26 billion in the quarter, which structurally means less market funding activities resulting in positive effects on NII, as I mentioned.
Issuing volume of senior and covered bonds in the first quarter amounted to SEK 25 billion compared to some SEK 42 billion one year ago. 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 U.K. operation now grows more and more also within the existing branch network. If all branches just add one 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 niche 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 2008. At the same time, costs are still on the same level as back then. The underlying profitability is doing better now than in 2008. We are, of course, still very enthusiastic about our U.K. development, as you can understand when you look at the figures. To summarize, equity per share, including dividends, continued to grow steadily by 15% per year, also when adding the first quarter 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 half a percent adjusted. Markets continue to finance the expansion in the U.K. and the Netherlands. 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 continuing 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%, and we estimate that we are within the target range of 1 to 3 percentage units above the level required by the Swedish FSA. 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. If you have a question for the speaker, please press 01 on your telephone keypad and you'll enter a queue. That is zero and one. We have a first question from Mr. Omar Keenan 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 quarters. Can I ask why it wasn't stronger? Was there more negative development on corporate mortgage margins in the private households? Could you perhaps give us your outlook on the rate of back book margin improvement increase from here? Will it be one to two basis points 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 are cutting the prices towards the clients. Typically, we defend our clients and we follow very strictly the market price, and the market price is a bit different in different places. When you add it up all, as you can see in total, that is the back book up one basis point in the quarter. Talking about trends, if there are any, yes, you have seen for now some quarters actually that the margins have gone up. My impression, if anything, is 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 have a good solidity and a good cash flow position, which means that demand is very flat for ordinary companies. When you look at in the statistics, I think it's fascinating to see that you see in the aggregate some growth, that is coming from high-risk deals. The market now have a high-risk tolerance in that deals like buying properties and using high leverage, that is again seen. We, of course, do not participate in that. As you can see, we produce very flat numbers in Sweden 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. Okay, we'll see what happens. Thanks.
We have the next question from Mr. Ronit Ghose from Citi. Please go ahead, sir.
Hi, it's Ronit from Citi. Can I just follow up, Mr. Riese, your comments, first of all, on the corporate lendings or the lack of corporate demand in Sweden. If I look at your statistics, taking out mortgages, looking at non-mortgage corporate lending, it's down year-over-year, and you just touched upon how the demand is really in riskier deals you don't want to get involved in. What do you think needs to take place? I'm not talking about your business. I'm not asking for a forecast for Handelsbanken. 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?
Is it just that we got to get used to this kind of environment of 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? Then I have two follow-up questions, very specifically numbers questions. One is on IAS 19, and I may be missing something, but most banks quarter-over-quarter saw IAS 19 have a negative impact on their capital. You've seen year-over-year a negative but quarter-over-quarter a positive impact. If you could just explain why that is. There's a 20 basis point positive impact, and I think everyone else has seen a negative impact. 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. I think you will have to have more of a 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. The low oil price is good for Sweden. The efficiency development in Swedish companies is showing a good progress. You can actually compare that with the development in the U.S. 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. 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. When investment comes, you would really see big pickup normally in loan demand from corporates. IFRS 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.
That for us is a cost of SEK 50 million per quarter, so SEK 200 million year-on-year. That's an effect that starts in the first quarter, and then it's the same in the second quarter, et cetera. 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. Why is that? Because the asset side, of course, the stock exchange increases has a positive effect because it's a large portion of those assets are, of course, equities shares, because that's a very long-term commitment, as you know. Loan losses in Norway, a couple of 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 is showing a slight positive migration, both quarter-on-quarter and year-over-year. Of course, credit losses in this quarter went down to seven basis points.
Thank you for that. Just to pick up on the second point on the IAS 19. 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? Wouldn't you have had an increase in your liability 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 these-
Okay
these described. Of course, this is the combination of all return in the whole portfolio, including bonds and equities. If you look in the annual report, you will have details of this. If you have any more questions, just come back.
I will follow up. Thank you.
We have the next question from Mr. Anton Kryachok 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 NII strengths? What are the effects, and do you expect some of this to unwind later in the year? 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 IFRS 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, it's a combination of more business and the volumes you can see on the lending side in the quarter going up, especially then, of course, on the private side, up 4% in the quarter. That's if you take it on a yearly basis, four times that, of course. It's also that the lending margins actually there went up a bit still. As you probably heard before, are saying we have very good margins in the U.K. We're talking ballpark two and a half times the Swedish ones. Of course, currency effects. You have in the fact book, you have the currencies. You can calculate the effect yourself if you want to divide it into different pieces. You also have the local figures, of course, of our U.K. operation there.
On capital, yes, it was in CRD IV changed the rules of holdings in equity holdings, that was not implemented immediately in Sweden, the old rule was kept for quite some time. The old rule said that you should deduct your holdings directly from core capital. That rule the temporary prolonging was abolished at year-end. Therefore, you got a positive effect on the capital side. You, of course, have a correspondent negative effect when it comes to the RWA under risk-weighted assets.
Okay. That's very clear. Thank you very much.
We have a question from Mr. Heiner Luz from Goldman Sachs. Please go ahead, sir.
Hello. I got two very quick questions, more like, 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 something like a 70% payout. I recall that you basically paid out 50% plus a special dividend, which we then sort of If you accrue it, is that from ordinary dividend, or could you also accrue for a special one, or would you still keep the whole strategy of special dividends? The second question is, Malik, with the 12 additional branch managers you said you hired in the U.K., should we expect a re-acceleration openings of branches there, because we more recently, I think, saw something more like four quarter.
That would basically already sort of be the capacity for three more quarters or so would there be probably a re-acceleration sort of in growing the U.K. footprint?
Right. Thank you very much. The first question regarding what kind of dividend is deducted when calculating the Q1 ratio. That means that if you don't have any decision taken on what to distribute, for instance, a policy saying that you should distribute 50% payout ratio, whatever. If you don't have that, you have to look at the latest 3 years, and you will have to take the highest of that. It's correct that we are calculating effectively then a payout ratio of 70%. 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.
Don't read any sort of forecast or anything in that amount. That is in effect what has been deducted in terms of dividend in that 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 we could open more branches than you see here. We have increased the capacity, as you know, also with the fifth regional bank and so on. The management decision here is to choose, should we put more resources into existing branches or open new branches? It's of course always a combination of those two, but what is the best thing to do?
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. 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. The simple answer is that it will be a combination, but if you would like to have something useful in your [Excel art ] for looking at what could the profits be and so on, please look at both effects, because otherwise you will 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 from me. We have seen that the Basel Committee has started talking about capital floors. What kind of discussions you have been with your regulators in Sweden, given your risk weight? Thank you.
Thank you very much. When it comes to our risk weights, as you know, we have a very thorough validation system and so on. There's no ongoing discussion in that the risk weight that is used should be wrong in any way. 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? The Basel debate, where, of course, the Basel Committee has come out with one proposal. As I understand it, they also now discuss other proposals. We will have to wait and see what will happen with that.
You have probably maybe heard and seen that the Swedish authorities, the Ministry of Finance and also the Swedish FSA, they are, and I think rightly so, very proud about the Swedish system using a risk-weighted system, but instead have ample buffers on the capital side. That I think is very clear from the ruling authorities side what they think. 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. Of course, the more you move to a leverage ratio regime, the larger the incentives are to take away assets from the balance sheet.
I think it's very 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. If a leverage ratio regime would come into effect, I don't think that is very likely that that will be the ruling metrics. If that comes in place, of course, it's not rocket science that banks will start using securitization on a massive scale. I can assure you, there are a lot of investors that would just love to buy our mortgages, and lots of investment banks that would love to help to do that.
Okay. Very clear. Thank you.
Before our next question, just a short reminder that if you have a question, you will have to press zero one on your telephone keypad. 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 weight question? When you say securitization of mortgages, I guess that's one thing, I think the main impact from a floor would be on the corporate side, where your, I think now 23.3% risk weight looks very low, both in the European and Swedish context. Do you have similar sort of alternatives there? Would you try to securitize corporate loans? 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. The proposal as it stands now in the early starting phases is, of course, affecting all sorts of assets. 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, 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 also not then be measured on buffers on a risk-weighted system. The numbers will shift, of course, and the 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. 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. Of course, we have a very long track record, as you know, when it comes to credit granting. Of course you can slice it, you can take part of the risk, the first loss or whatever. We would be very happy to do that. There are lots of constructions 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. 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. If we are under, the assumption is that we should prepare a plan to get back to that number. The number, as you say, is 17.8. The number they gave out in February for Handelsbanken, and that was a number calculated at year-end. The calculation they used had as part of it 1.5% standardized notional part, and that concerns pension risk, concentration risk, and interest rate risk in the banking book. The reason they use a standardized number for all of the big banks, the same number, was that they were developing a method.
They have since then come out with the method, and that is on the way to be implemented. When you take the numbers in the Handelsbanken case, our best estimate is that the number is just above 18%, a little bit more than 18%. That is described also in the report. There will be an ongoing process with the Swedish FSA. Once a year, we do the ICAAP, and they come back with what's called SREP, and then they give a number. That number is a yearly number. 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 four Swedish banks to have. The numbers, of course, may change because of two 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. Of course, the way this is constructed 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. 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. Matthew 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 the critical metric and the tipping point that would lead you to start securitizing your balance sheet? Presumably at some point you have to make a decision, and it won't necessarily be that there's a step change in external policy. You'll have to take a decision based on gradual changes in the external regulatory environment. How do you think about that? Thanks.
Yes. It's, of course, always some practical work to do it and so on. We are, of course, from a technical point, prepared to do this. 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 some clarity would come before year-end now. Often these things take time. 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. 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? 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 with the regulation. We are making sure that from 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. 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 are the largest shareholders of the bank, as you know. It's really our own money. It's not a situation as of today that massive securitization is something that is profitability enhancing. It's not something that can be outruled.
Great. Thank you. Very clear answer.
We have a follow-up question from Mr. Riccardo Rovere from Mediobanca. Please go ahead, sir.
Thanks again for taking my questions. First of all, something on the countercyclical buffer. Let's assume this is going to go from 1% to, I don't know, just to double or to go one and a half, whatever. Do you think it's going to be effective to try to cool the real estate market? Because so far the 25% risk weight on mortgages, all these, let's say, Pillar 2 buffers seem not to have, let's say, had any particular impact. Is it going to make any difference for you? 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 second question is again a follow-up on the securitizations.
If 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 duration stops to be a backstop mechanism and becomes a much more important mechanism than it is today. 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 25% risk weight, then it's irrelevant whether Sweden consider it Pillar 2 or not. The technical is already 25%. The third question, this is, I apologize, I just missed it during your presentation. At a 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. You're absolutely right. It's an extremely inefficient tool, of course, to do that. It's very easy to prove that it's a very inefficient way if you want to cool down. Of course, you could argue it could have a very indirect cooling effect, but effect would be minimal, if any. 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 you pay on mortgages, and that has been heavily debated now. That is, of course, from a technical point of view, taking the political part aside, a very efficient way to affect the demand on the housing prices in the longer run. You got other sorts of taxes also doing that.
On the second question, leverage ratio or standardized. Is standardized method according to the Basel Committee enough to trigger a securitization wave? 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 now, and you have to take the standards, their starting numbers, it's like saying to implement Basel I again. We're back to that kind of environment, and of course, that would be a massive driver for securitization. No doubt about that. You don't have to go the whole way to leverage H2 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%.
That should of course, be compared to the 21.1% we have in core Tier 1 equity. What we say very clearly, we estimate that we are indeed within our band, one to three percentage points over and above the FSA number.
Okay. Very clear. Thank you very much.
There are no further questions at this time. Please go ahead, Mr. Riese.
Okay, I thank you very much for participating today. As usual, don't hesitate to call us if you have any more follow-up questions.