Ladies and gentlemen, welcome to Handelsbanken's Interim Report January till March 2014. Today, I'm pleased to present Mr. Ulf Riese, CFO.
Q2 2014. Joining me today, I have Michael Hallacher, Head of Investor Relations Lars Hoglund, Head of Debt IR and Olander, Group Head of Accounting. The slides used for my presentation are as usual available at hanersbanken.com. First of all, I will again show you the familiar slide number 2 of the bank's value creation. Equity per share including dividends has continued to grow by 15% annually also when the Q2 2014 is added.
The bank has continued to build capital and the core capital reached 20.1% at the end of the second quarter. Meanwhile, return on equity in the Q2 increased to 15.1%, up from 14.1% in the first quarter. Then on slide number 4, we have the profit and loss account. Operating profit rose by 10% in the 1st 6 months, driven by home markets outside Sweden, where profit was up 17%. Quarter on quarter operating profit rose 3%.
Net interest income increased 1% for the first half of the year as well as for the quarter. And compared to the first half of twenty thirteen, the increase was 12% in the home markets outside Sweden, where U. K, Finland and the Netherlands saw the strongest growth. Net commission income grew by 10% for the first half year and 4 percent quarter on quarter. Here higher asset management and card fees continue to be the main drivers of this growth.
Net gains and losses on financial transactions adjusted for the extraordinary capital gain in the Q1 increased by 17% in the 1st 6 months and 32% quarter on quarter. Higher business volumes in the client driven fixed income business was the main contributor here. In total, revenues increased by 6% year on year and 2% quarter on quarter, while total expenses were flat adjusted for currency effects. Loan loss ratio dropped to 6 basis points in the 2nd quarter from 7 basis points in the 1st quarter and the credit quality remains solid. Then on slide number 15, you can see how the net interest income developed during the quarter.
In Sweden, deposit margins continued to decrease due to lower nominal interest rates in Swedish kroner, which gave a negative impact of SEK 43,000,000 Lending margins in Sweden, however, improved somewhat as did lending volumes. In total, the Swedish lending business added SEK 58,000,000 in the quarter and the Swedish mortgage margin increased by 1 basis point to 92 basis points. In the home markets outside Sweden, deposit margins improved somewhat and we also had continued good growth in deposit volumes, not least in the U. K. And all in all, deposits outside Sweden improved net interest income by SEK 29,000,000.
Lending volumes continued to increase and added SEK 31,000,000. Corporate lending margins in the U. K. Improved somewhat further, while in the Nordic countries, lending margins dropped slightly. All in all, lending margins decreased by SEK 1,000,000 in the quarter.
Other effects such as higher state fees, the benchmark effect and that lower nominal interest rates in Swedish kronor decreased income related to the bank's equity together reduced net interest income by SEK 96,000,000, while currency effects and the fact that the second quarter had more days added SEK 110,000,000. Going back to slide number 8, we here take a closer look at our 12 month rolling cost development since 2011. And as you know, our expansion mainly takes place in the U. K. And the Netherlands, where we upfront and directly expense investment costs related to opening branches, adding skilled people and finding the very best customers in the local area.
For this reason, expenses obviously have increased in our new markets over the last years. As a counterbalancing effect, looking closer at the combined cost in the rest of the group, you can see that these now have declined for 4 quarters in a row. This is not the result of any central cost cutting program. It is just the sum of all local initiatives and the way our business model works. In places where revenues don't grow as fast as costs or if revenues even shrink, the obvious measure for that branch is to adjust the cost base to cope with the situation.
Our steering system makes it obvious for each unit to always make sure that the cost will not increase more than revenues for any group level, you see that this automatic and gradual cost adjustment in markets with slow or no growth makes up for the expansion costs we take for our expansion in the U. K. And the Netherlands. All in all, group expenses therefore are virtually unchanged 4 quarters in a row on a rolling 12 month basis with group efficiency even improving with the costincomeratio decreasing now to 44.6% in the 2nd quarter. Then on slide number 7, we illustrate the profitability in our different home markets for the first half of the year.
And as you can see Sweden, U. K. And Norway are all above 15%. This is in spite of the fact that in Sweden, we have had large pressure on deposit margins due to the falling interest rates for the last couple of years. In our U.
K. Result, of course, the continued expansion costs are included. Denmark is also very close to 15% and Finland where the economy still is quite weak is above 12%. And finally, the Netherlands, a very small and new operation is already above 10% including all their expansion costs. I think this illustrates good balance in the group and the fact that our business model works equally well in all our home markets despite rather different characteristics of each individual market.
Although it goes without saying there is room for local improvement everywhere of course. On slide number 9, we show the cash flow contribution from the home markets outside Sweden on a rolling 12 month basis. As of the 2nd quarter, 34% of home market market branch office earnings before loan losses are now generated in the home markets outside Sweden compared to 22% 2.5 years ago. For the first half of this year, net interest income outside Sweden increased by 12% and commission income was up 28%. Hartford is one important contributor, but also outside the U.
K. Commissions had a good development in general. Loan losses decreased by 14% compared to last year, which all in all means that operating profit was up by 17% in the home markets outside Sweden. During the 2nd quarter, it's in U. K, Finland and Norway And we have 8 new branch managers appointed for new branches in U.
Then on slide number 5, we show the financial position of the bank, which has again continued to strengthen even further. Core equity ratio increased to 20.1%, up from 19.5% at the end of the Q1. And here earnings in the 2nd quarter contributed 0 point 4 percentage points. Total capital adequacy ratio improved to 25%, up from 24.5% at the end of the Q1. On the 8th May, the Swedish FSA published a report about the new Swedish capital requirements, which I'm sure you have all seen.
The FSA estimated Handelsbanken's core equity requirement to be 17.4%. Since then, the Swedish FSA has proposed that the Swedish countercyclical buffer should be 1% rather than 1.5%, which lowers our core equity requirement to approximately 17.2%. During the fall, the Swedish FSA will present their models for how the individual Pillar 2 add on should be calculated. So the 17.2% ratio is still based based SEK 3,200,000,000 staff convertible bond. Although the bond was priced totally on market terms, the issue was oversubscribed more than 3 times with more than 70% of all staff in the group participating, which I personally think says something about how we who work at the bank, ourselves look at the future prospects of the group.
Then over to slide number 24, where we talk about our funding market activities. As you have seen, the bank's liquidity position is very strong and cash reserves in central banks increased further in the Q2 to more than SEK 475,000,000,000. We have also shown that we are already compliant or very close to being compliant even with all the future liquidity and funding measures. On the back of this, we have also in the Q2 been slightly less active in the funding market than last year. We have, however, continued to diversify our investor base.
In early April, we were the 1st Nordic bank to access the senior bond market in Australia. And in June, we did senior bond issues in the U. S. Market. And the price per share here was the tightest of any non U.
S. Bank since the financial crisis started. The reason for us diversifying the funding sources and investor base even further is that we want to be a fairly regular, but not frequent issuer in our different funding markets and thereby creating scarcity value in our bonds. Then back to slide number 10, where we talk about our U. K.
Operation. Handelsbanken in the U. K. Continues to develop very favorably as you can see from the numbers with operating profit in local currency up 38% year on year. Although we have a good growth in lending, deposits have grown even in the last couple of years.
And this means that the loan to deposit ratio, which I've heard some people like to look at, is now 168% in the U. K. Compared to 3 52% 2 years ago. The slide showing the trend for revenues and expenses in our U. K.
Branches per vintage as you can see in the slide. I believe it's very familiar to you. And this time we compare the current pattern with the pattern we saw 5 years ago and that you can see in the dotted line. And what you can see from this chart is that the U. K.
Branches have in fact developed even better than the profile indicated 5 years ago. Revenues nowadays increase even a bit faster and the breakeven point for the average U. K. Branch happens a bit earlier nowadays. 60% of our U.
K. Branches are younger than 4 years old and have not yet reached the age where the cost income gap really widens. Against this very encouraging track record, we have now decided to open up our 5th U. K. Regional bank to be headquartered in Leeds during the Q1 of 2015.
Thereby, we will add even more resources to support further growth in the U. K. Market. So to summarize, shareholder value measured as equity per share including dividends continued steady growth of 15% per year since the start of the financial crisis in 2,007. Operating profit increased by 10% year over year and for home markets outside Sweden, the increase was 17%.
Non Swedish home markets in the quarter now contribute 30 4% of the cash flow in the total branch office operations. Group expenses adjusted for currency movements are unchanged with cost efficiency improvements outside the U. K. And the Netherlands cost wise balancing the expansion costs. In the U.
K, the development continues to be strong. And when we look at the income profile or branches, revenues nowadays grew faster than the situation 5 years ago. The expansion will be facilitated by our decision to open our 5th U. K. Regional bank.
Return on equity for the group increased to 14.3% for the first half and to 15.1% for the Q2, in spite of the fact that the group continues to build capital. Core equity ratio improved to 20.1%. And with that, I conclude my presentation and open up for questions. Thank
you. Our first question comes from Mr. Omen Kinan from Deutsche Bank. Please go ahead, sir.
Good morning. Thanks very much for taking the questions. I just wanted to ask about the net interest income outlook for the next few quarters as you see it. We've had some pretty big moves in rates over the past few weeks following the 50 bps rate cut from the Riksbank. On the negative side, Stavor on average looks to be about 40 bps lower in Q3, which clearly is going to impact deposit margins in Sweden.
So we're just less wondering how much positive offset there is on the mortgage margin side in Sweden now. One of your competitors earlier this week said that the front book margin on mortgages had not changed at all. On my calculations, if I focus on the variable mortgage book here, if you have STIBOR 40 bps lower and the lift prices cut about 25 bps, then that should imply that front book margins have expanded by about 15 basis points before we account for the fact that discounts may have increased. Could you comment on those observations please? Thank you.
Thank you very much for those questions. If we start with mortgages, as you see, we have a small uptick in mortgage margins, 1 and a bit of one basis points up to 92 basis points. And we had some sort of similar development in the last quarter. But it's very hard to predict what will happen with the mortgage prices. As you probably know, we are a price taker and that has to do with our structure that is the branch offices that sets the prices and they, of course, defend their clients.
So if you look at our market share in the Swedish market, I think we are the bank with the lowest volatility in market shares. We are very, very stable over time, but prices goes up and down. Logically, of course, there is a lot of arguments that prices should go up with the new incoming Pillar 2 add ons, the 25% risk weight flooring in Pillar 2 terms, etcetera. But whether it will happen or not is very hard to say. And I'm very happy to also stress that we don't do any forecasting here.
When it comes to deposits, we have not in this quarter included this. But if you go back in time, you will see a diagram that we have from time to time, which shows net interest income divided into income on the lending and deposit side and STIBOR. And you see the very direct effect that lowering interest rates has on deposit margins. And as you probably seen in Sweden in the quarter Q1 to Q2, we lost SEK 43,000,000 on that movement. Again, it's a bit hard to say exactly what will happen because although the change was very recent as you say from the RixBank and also the downturn in Starboard although some effect had come before.
There are of course there were things being done in the mix between different accounts already in between. But in that chart, you get some sort of feel for the dynamics with lower interest rates.
Okay. So if I interpret what you're saying correctly then, if Handelsbanken is a price taker then kind of trends shouldn't be too different from what other banks are saying?
No. I think the difference is could be seen in maybe the structure of some of the other banks. We have a steering system as you know that we filter through the true funding cost to our every instance. And there are others that do not do it directly. And then of course, when you say see differences in the description of margins in different banks, you can get different patterns.
Of course, we for instance, when a lot of or all the other banks took cheap Central Bank money and then were forced to go out on market terms, the funding costs went up and our did not because we are always being funding on market terms. We never have taken any Central Bank money. Then you will get a different description of what the margin is. But apart from that, when it comes to the price to the client, it's the same with all the banks. You cannot be different in pricing towards the client, because then you immediately will not have the business.
Okay. And maybe just a quick follow-up question on the deposit margin side. I know you don't publish a rate sensitivity, but you have pointed us in the past to look at kind of the historical sensitivity that we've seen in the numbers. If I do that exercise, then the 40 bps change in Stavros should imply something like EUR 160,000,000 lower NII in the quarter, about EUR 600,000,000 annualized. Is there any positive offset on deposit rate repricing so that it should be lower than that impact in the Q3?
There are some possibilities in mix changes. But I think the historical pattern that we have described is virtually there. Of course, as the interest rate goes down to 0, the effect the number of accounts that have 0 on it is, of course, increasing. And I think when you look in our figures, you will find that, let's say, a little bit more than a quarter of our deposit volume in Sweden would have 0 on zero interest rate bearing interest rates.
Okay. Thanks. That's very helpful. Thank you very much.
Our next question comes from Mr. Hakan Fira from DNB. Please go ahead, sir.
Hakan Fira, DNB Markets. Firstly, on your deposit base growth. You highlight a few places in your presentation the significant growth we've seen both year on year and quarter on quarter in terms of deposits. And could you provide some more details on what kind of deposits that's been driving this growth? And secondly, is this something you've actively been trying to achieve?
Then if you move on to lending margins, you note that lending margins in Norway, Finland and Denmark are under pressure. Is this a broad based margin pressure you saw in the quarter? Or does any particular client segments, for example, commercial property stand out? Thanks.
Thank you. On the deposit volumes, it's mostly totally ordinary client driven business. And you see a very large impact, for instance, in the U. K, which has to do with the fact that when we start a branch office, the branch typically start on the lending side. And then as the branch matures, you get more and more of the deposits.
Explanation between the U. K. Figures. No, we are not looking particularly into deposits. We like, of course, and we hunt good relationship with clients, and we are happy to take the deposits as such.
But when I say that we don't hunt deposits, it also has to do with the fact that liquidity wise as you know you cannot use them totally for lending. And especially if you've got corporate deposits everybody knows that they are very could be very unsticky in a stressed situation. And so liquidity wise, it's very important And so liquidity wise, it's very important to have a prudent view on the stickiness of deposits. But from a client perspective, from a business perspective, we are of course very, very happy about the development. When it comes to lending margins, you're right.
There's a lot of money out there and you can see increased competition in various ways. The growth in these markets are not very large as you know and there is a lot of money out there. And you can see it also that the risk willingness now is very large. Have the same credit policy throughout the business cycle. And that means that we are there are deals that we are not don't want to do, but we now are getting back to some banks taking away demands for collateral, etcetera, etcetera.
And you can also see that in terms of margins pressure on the margin side. So I agree to what you say about both Norway, Denmark and Finland in this respect. I can't say that it's very different in different segments. Of course, always when you talk about price pressure, the very largest companies are of course very immediate to take advantage of this kind of situation.
Yes. That's excellent. And a quick follow-up just on your structure. In terms of the mortgage margins, have you passed on the 25% mortgage risk weight to the branches yet?
No. Our internal system is very easy to interpret. We always transfer the true cost for the group to the branches. And since this 25% add on in Pillar 2 terms has not yet come into force, I believe that that will be October according to the Swedish FSA. So that has not yet happened.
Excellent. Thank you.
Next question comes from Mr. Johan Ekblom from Bank of America. Please go ahead, sir.
Thank you. Just two questions. I guess, first of all, on the capital side, I mean, you saw very strong capital generation this quarter, which was dollars 3,000,000,000 dollars 3,000,000,000 capital swing in the quarter, that's tens of basis points. How much buffer do you need to hold on top of whatever level the SSA comes up with? Should we be thinking that because risk weights are low, ratios can move more and you might need to hold bigger buffers?
So do you think about that in terms of Swedish krona terms or in terms of percentage terms? I guess that's the first question. And then related to that, if you have any update on plans of issuing additional Tier 1 capital? And then just on the U. K, you've established a new regional bank.
Should we read anything into the pace of expansion here? Or is it more business as usual and the expansion will happen at the rate at which you can find new locations and branch managers?
Thank you for that. Yes, if we look at the OCI, you see that there are effects in the OCI quarter to quarter. Over time, one should expect these cash flow hedges to be 0 over time. But if you go to the fact book, you can see the historical series. It's sometimes minus and sometimes plus.
Now it's plus. I got a question after the press it's rather balanced. But over time, let me maybe explain. The effect comes mainly currency and that to the interest period and convert it by swaps. And since you value the swaps, you do market valuation on them, but not on the funding or on the lending side.
It means that the journey is a bit volatile and that comes into the OCI. But over time that is going to 0 because it's totally hedged as a package from any economic risk. But that's why you get these swings. But it's not that we have upfront taking a vast amount and then we'll have the reverse in the future. So over time a neutral thing.
When the implication for the buffer, I think the important thing for the capital needs going forward is of course to have the definitions. And we have also stated that we are waiting for the Swedish FSA and their work on methodology on the Pillar 2 when it comes to addressing things like interest rate risk in the banking book concentration risk pension risk and those kind of things where they will have a new methodology. And they have said that they will work with that during the fall. And then after having the definition clears, you can have any you can start to have a view on how much buffer do you need in order to take care of the volatility as such. When it comes additional Tier 1, I think that in the end when all regulation is there, the capital goal is set.
And there is, of course, a scope for us to fine tune, I would call it like a fine tuning, the structure of the capital in terms of T2 and T1s. And I think there is room for this fine tuning. But it should never be a huge element in our capital base to always be very easy to understand the under banking capital. And of course, the important part of it will be core. But yes, I do think that both 81s and T2s has a meaningful place in the capital base.
The 5th regional bank in U. K. Yes, of course, this is something that all other things being equal facilitates the expansion in the U. K. Starting the regional bank means that they have a regional head office in now also we'll have in leads with credit expertise, personnel department, support functions for the branches in that region.
And that means, of course, that the number of people supporting new branch office openings as well as supporting existing branches will increase. And this is as you know the bottleneck for the expansion. It's the recruitment process. It's setting up the branch and helps to support. We really feel that the market is really there for us We are very well received and we see many, many possibilities going forward.
So this should be viewed as a way, of course, to facilitate the future growth.
Thank you.
Next question comes from Mr. Pavel Vesinski from Nordea. Please go ahead, sir.
Yes. Hello, Pavel here. Two questions from my side. The first one is on the proposed tax deductibility for Cocos. Has that in any way changed your view of issuing these instruments going forward?
And the second one is on your funding cost. Has the funding costs come down more than the cyber movement? Or is it fairly similar to that?
Or is it even less?
Right. No, the tax deductibility question as you know is not yet sold. And there is a proposal, but it has yet to be seen exactly what will happen on that. So but of course, at the end of the day, when you calculate how much you should do, how you should do it, of course, you should take into consideration the taxation part as well. The funding cost, the way we look at it is that we have a large degree of match funding in our balance sheet.
And that means that when interest rate moves on the funding side and we take old funding mature also assets and lending mature with the same interest bearing period. And that means that apart from the effects we talked about earlier when it comes to margins on deposits and also the fact that we use equity for funding short term lending not long term lending means that yes, we do lose when interest rates goes down. As a matter of fact, if you look at the last 3 years, we are now on a SEK 3,000,000,000 lower NII level than compared to 11. Euros 2,000,000,000 on a yearly basis. Euros 2,000,000,000 comes from net lower deposit margins and 1 from the effect of the equity financing short term lending.
The correspondent number as you can see from the report, if you go year on year is €689,000,000 €155,000,000 if you do Q1 to Q2.
All right. Thank you.
Next question comes from Mr. Edward Hirst from Macquarie. Please go ahead sir.
Yes, good morning. It's Edward Hirst here from Macquarie. Just another question back on the U. K, if that's all right. I hear what you say about opening a new regional branch in Leeds.
But if I'm looking at year on year growth, certainly on the loan side, it's slowed quite markedly relative to what you were running at last year. And I guess in the broader environment, it would appear competition is picking up. We've got TSB and various other banks as sort of equally now challenges. Could you just comment on how you see the environment? How you see the margins?
How you see your appetite for new business? And is it sort of low double digits where we should be expecting going forward now?
No, I don't subscribe to what you say. If you look at the result in local currencies, it's up 38% year on year. Of course, you can get variations when you look at British larger banks are you're absolutely right that the British larger banks are getting in better and better shape. But the counterbalancing part is that our way of doing this is very, very different from the proposition from the other banks. And we see no difference in that respect.
And actually on the margin side, you've probably seen that margins actually have gone up in the U. K. Still. And that is in a situation where we get 2, 2.5 times the margins we get in Sweden. And that in turn I think has to do with the fact that the British banking system is not particularly cost efficient because of its structure.
There's a large cost base and that won't change easily. And that means that there has to be high margins relatively to a country like Sweden. From the client perspective, when we look at client satisfaction, when we look at what people think and the number of referrals we get etcetera, etcetera, all this implies that we are actually improving. And I think one interesting slide to point to is slide number 10, which I talked about, where we compare revenue side, which is line that is on the revenue side, which is quite a bit lower actually than today. And also, I mean, we're talking nearly now on average nearly 5 months, maybe 6 months earlier breakeven point now.
So I mean there are improvements here. And so I do not subscribe to what you say. I don't do any forecast, but the general characteristics and the underlying possibilities are actually better now.
So just as a supplementary on that, in terms of income profile on Slide 10, is it your perception, is that have you come up with a better margin or better volumes do you think? I mean not precisely, but just in broad terms.
I think it's a combination of things. One thing is of course when you start the 1st branch office you learn a lot and you learn the second etcetera, etcetera. Banking is an experience based business. It's not something you can learn at business school and just do. You have to have experience.
And the more you do it, the more you can fine tune and so on. Then of course, it goes without saying that there are also scale effects in banking. When you start the 1st branch office, you have to have the whole head office and everything in place, but you don't have the volumes to get that. In the U. K, we also now are starting to reach the stadium where it's more and more interesting to increase the operational efficiencies.
We are now putting out better computer system, which takes down the administrative time in the branch. As you probably know, our branches do all the back office work in the branch in order to be able to serve the client immediately. 1 stop shopping, you talk to the same person that delivers the documentation, a handshake and price negotiation, everything from the do whatever we can to make the branch more administrative efficient by providing better IT. That is not important when you start having the volumes. So all of these kind of things.
But as I said, yes, we have seen also small improvement in margins in the U. K.
Okay. Great. Thanks so much.
Our next question comes from Mr. Riccardo Robere from Mediobanca. Please go ahead, sir.
Good morning to everybody. I have just two, three questions from my side. First of all, on loan losses, they remain at pretty low levels, but we what I noticed kind of marked swings between the different geographies. So a sharp reduction in Sweden and a sharp increase in provisions in all the other geographies. Can you shed a little bit of light on what's going on, one of the reasons of this market swings?
And still related to that, do you think loan losses in the Netherlands can remain at basically 0 for a long time? Or do you think that will go up over time? And the second question I have is the given the current level of rates, do you think there is any way to offset the low yields that you're getting on the liquidity of the group trying to, let's say, compensate or offset the balance this level of rates on your liquidity portfolio in NII? Thank you.
Thank you. When it comes to the credit loss level, you will find that if you look over a little bit longer period than just quarter to quarter, you will find very similar patterns patterns actually in all our countries. And that has to do with the fact that we have the same credit policy in all our countries and over the cycle. You could see that we had a little bit more credit losses for 1 period in Denmark and then it normalized. But if you take a little bit longer period, this hold true.
But in a certain quarter, you will find it in 1 or 2 countries or whatever. But we are now in total, of course, at low levels 6, 7 basis points numerically. From a Handelsbanken perspective, we think it's a high level because we really hate credit losses. We want the credit loss figure not to be 6 basis points, but to be 0. So we take it very seriously.
But as a number, it doesn't take much of a credit loss in order to impact it. And that is what happened in you can see for instance in we have in Finland, which is a single event. So when it comes to credit quality, there is no indication of deterioration in any segments, any country in general or so on. You could also see that the NPLs went down to 13 basis points now in the quarter. So we there's no signs of deterioration in any sort of any market or any products.
To offset the liquidity portfolio, we have, as you know, an extremely good liquidity situation with over SEK 800,000,000,000 in the liquidity reserve. And you have seen that we have EUR 475,000,000,000 or EUR 77,000,000,000 to be exact placed with central banks overnight. And of course, in a normal situation, we would not hold that much. It's a combination of the uncertain times. We know this is something that is very well received in the funding markets.
Nobody have ever a reason to question the extremely good position of Handelsbanken. And secondly, it's also actually flight to quality. We receive, for instance, U. S. Dollars from large institutions that really wants to place their money in a very, very safe way.
And since that is short term deposits, we don't use it, of course, for our funding needs. We put it overnight with central banks. So you're right, of course, there are room for improvements in this area. It's not that the current situation cost us very much, because we don't pay very much on those deposits. But of course, this whole question has to do what will happen when all the new liquidity regimes will come into effect.
We are in a very good position. We've got an LCR of 100 and 49,000,000 or if you used Basel definition 162,000,000. And we are compliant or very, very near to be compliant with all sort of measure regardless if you take rating agencies or NSFR in different ways of calculation etcetera, etcetera. But I think when situation normalizes, you can come back to how would you remix this. Of course, there is a possibility to do a yield pickup, but by taking up money from the Central Bank and instead buying for instance ultra
safe and central bank accounts in something that is not just let's say Nordic or UK sovereign yields that's just trying to hunt for yields anywhere else out of your let's say core markets?
No. We would never take want to take any sort of risk with that money. And having said that, does that mean that that's only Central Bank could be eligible. No state could be eligible. Of course, there are different states.
So you have to look at that. And then if you're going into, for instance, a capital bond, you have to be extremely cautious on what to buy. But we'll not find any opportunistic investing or so on in this, because the whole purpose is that is there to be a reserve. And therefore, we are not prepared to take a credit risk there. So it will be a very, very prudent credit risk assessment as in all our way of dealing with those kind of things.
Okay. To make a little chamom money of taking excessive credit risk.
Okay. Very clear. Thank you.
Our next question comes from Mr. Jacob Kruse from Autonomous. Please go ahead, sir.
Hi. It's Jacob from Autonomous. I guess two questions. Firstly, on the cost you spoke at the end of last year, I think about potentially bringing down the cost income ratio over time in the retail bank below 30 in Sweden. Do you have any updates on what your thinking is there?
And secondly, just on your liquidity, could you say anything about how much you have placed to the U. S. Fed and what you any changes you see to that money given Fed activity and if you're making any spread on that at the moment? Thank you.
Yes. On the first question, you can find it in our report on Page 51. And you will see that the amount in U. S. Dollars is SEK 269,533,000,000 that is SEK 269,000,000 69,000,000,000 equivalent, of course, placed in U.
S. Dollar with placed within the Federal Reserve. Yes, as I said, we don't do minus business on this. It's a small surplus between what we get the deposits in for and placing it overnight with the Central Bank. But it's not a huge sum of money.
And the second or the first question was cost income ratio. Yes, we're in a more normalized interest rate environment. We think that it's possible to have a costincome ratio of 30% or below 30%. And there are of course also in this environment some Swedish branches that are at that. There are and if you look at the U.
K, you will find that on average, if you're 8 years old, you are under 30% costincome ratio. Then of course, the margins are much better in the U. K. In Sweden, it's very much a matter of efficiency operational efficiency and a more normalized, of course, interest rate environment. Also the fact that we are as you know growing now very good on mutual funds is helpful.
Production in Swedish mutual Funds and that is the best of all the banks. This is something that we have put a lot of effort into and now you start seeing the effect. That is also good. And then on operational efficiency where we are rolling out as we talked about before our Internet facilities, Internet IT systems to our own branches, the same platform that our clients use. And that is also over time helpful.
And what is the central IT cost that you have today that you're potentially replacing?
There are 2 different methods here. One is how much we do we invest in IT systems. And we have been very constant investing about SEK 1 point 5,000,000,000 per year in totally new systems. And that's an ongoing investment. But of course, those investments over time, I think that maybe in 2 or 3 years' time, we do not have to run 2 computer systems.
And you can then, of course, bring down maintenance costs and costs for running the existing systems. But what I'm talking about firstly when it comes to operational efficiency for the branch it's not the IT cost per se, but more the administrative time that's taken down. One example, if you use the Internet way of doing things in a branch instead of the old backbone system, it means that it becomes totally paperless. And with all this governance now, if you take over a family 2 adults and 2 children, on average, if you do it the paper way you walk out with 256 pages. And that is because of regulation because we have to give this to the client and they have to sign a lot of papers because that's the regulation.
But if you do it on the Internet side, of course, that becomes automatically because you get it in the mailbox and you can sign by using your security solution.
Okay. Thank you.
Our next question comes from Mr. Nick Davy from UBS. Please go ahead, sir.
Yes, good morning, everyone. Two questions, please. The first one on risk weights. Obviously, you mentioned already that you'll likely pass on 25% mortgage risk weights in October. You're at a point now where under advanced methodology your average corporate risk weight is now below 25.
So I just wondered it seems like a strange world in which your average corporate risk weight will be below your average mortgage risk rate in Sweden. I wondered if you could comment on that state of the world. And I know you don't make credit decisions centrally. You allow things to be done decentrally. But I just wondered if this could be the one exception whereby if decentralized models are allowed to work under their own steam in this world for 5, 10 years, you may see some odd imbalances being formed in Sweden.
And I wondered if you had any observations about that whether 25% mortgage risk rates is the wrong number is too high or 24.5% corporate risk rates is too low? It just seems like one of those numbers might be wrong. 2nd question please, sorry, just to come back to this other comprehensive income point, which you've already touched on. Just looking back in time through the crisis, I don't think we've seen a quarter of anywhere near this magnitude of swing in other comprehensive income, be it either on the cash flow side or on the translation differences side. And I know that the base rate cuts at the end of the quarter did have some pretty meaningful impacts on basis swaps and currency moves.
So I'm just scratching my head a little bit to be able to justify or explain this massive moves in those two line items. So any more color you could give us please on which numbers we should be looking at, which basis swap rates or FX rates that can drive such a big swing would be very helpful.
Thank you. On the first question, of course, you're right, because the true risk weight from a credit loss, historical credit loss perspective as you know on the mortgage side is 5 to 8 basis points and that's including sort of 80% security add on from the historical credit losses. So yes, it's absolutely our experience that mortgages in Sweden is extremely safe way because of a number of reasons. And therefore, of course, it's very strange when you artificially get 25%. From a practical purpose, this is not a problem in that, of course, it has ultimately to be paid in the system by the client.
And of course, that will happen over time. There is another problem, of course, that if risk weights keep going up and that's in the extreme would be the leverage ratio. If you ask very theoretically, I don't think that will happen. But if we think that will come a regime with a very, very high leverage ratio, Of course, you will get an even larger effect than the 25% risk rate that is now in Pillar 2 for mortgages. And then of course, the good thing to know is that the value creation in Handelsbanken is not coming from having these assets on the balance sheet.
We could easily place this elsewhere outside the banking system securitization or doing a joint venture with someone or whatever. So when you get the difference between the economic capital that is needed for an asset lending. When that is very different to what the regulation says, of course, there's a drive to get it out of the banking system. You have seen this, of course, in America where a lot of things are not in the bank's book. So that is in my mind the real political question, how do politicians want the future banking system to be in the banks with social responsibility or outside in what's usually referred to as shadow banking, which are not affected by those rules.
But it's a political decision. The OCI, yes, you're right. The variables that gives the volatility here are 2. It's currencies and it's interest rates. And it's interest rates, of course, in different currencies.
And it's hard to get to give any more guidance than to say that there will be swings. I agree with you that the swing now is very large because of the movements that we saw in the quarter. But as I also said, over time, it will be 0. And when asked have we taken our lot of money, so to say, upfront in those side that will come back in a minus in the future. When we calculate it, that is not our impression.
I mean, it's plus minus €1,000,000,000 or €2,000,000,000 But when things goes in exactly points in the same type of direction, there are different variations, but the effect goes in the same way. You can get this kind of pattern.
Okay. Very clear. Thank you.
Our next question comes from Mr. Riccardio Rovere from Mediobanca. Please go ahead sir.
Yes. Thanks again. Just to follow-up on previous on your previous answer on the leverage ratio. Are you basically saying that the leverage ratio is something that is harsher than they are today on the leverage ratio? And are you harsher than they are today on the leverage ratio?
And are you saying that the leverage ratio has started to be matter of discussion with them just to try not to get your statements wrong?
No. It's nothing that is immediate. And it's my impression that from the Swedish authorities' standpoint, they do not like the leverage ratio to be the ruling rule. Maybe it's used it as it's suggested by the Basel Committee as a backstop at the low level, but they want to use the risk weight system with a lot of backing then add ons on the capital side. As you see Swedish banks now if you're a large Swedish bank, you have 5% in the systemic risk buffer for that.
So that's the view of Swedish authorities. And no, there is no immediate ongoing discussion on that. When I talked about leverage ratio, I'm just referring to the general debate. You've seen the British authorities coming out with some suggestions on methodology. This is, of course, a European question very much so and so on.
So the discussion will continue and continue. But the Swedish standpoint is that the leverage ratio should not be the ruling regime. That's what we have heard so far. But probably will come in as a backstop. And if you don't fulfill it, things will start to happen and so on so that you can fix it.
It's the same I think the same methodology that is in the sort of the upper part of the Pillar 2 that cannot be. But it's early days, so it's not that anything has changed. I'm just it's in my role to always think of the worst thing that can happen. Think and prepare for the worst and hope for the best is the saying in Handelsbanken. Okay.
What's on the first half of 1983. Okay.
Thank you very much. Very clear. Thanks.
That was our final question.
Okay. Thank you very much for attending. And as usual, do not hesitate to call us if we can provide you with any more information. Thank you very much and have a very nice summer.