Ladies and gentlemen, welcome to Handelsbanken's interim report, January until March 2014. Today, I am pleased to present Mr. Ulf Riese, CFO. For the first part of this call, all participants will be in listen-only mode, and afterwards, do a question and answer session. Speaker, please begin.
Good morning, everyone, and welcome to this conference call for the second quarter 2014. Joining me today I have Mikael Hallåker, Head of Investor Relations, Lars Höglund, Head of Dept IR, and Jörgen Olander, Group Head of Accounting. The slides used for my presentation are, as usual, available at handelsbanken.com. I will again show you the familiar slide number two of the bank's value creation. Equity per share, including dividends, has continued to grow by 15% annually, also when the second quarter 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 second quarter increased to 15.1%, up from 14.1% in the first quarter. On slide number four, we have the profit and loss account.
Operating profit rose by 10% in the first six 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. Compared to the first half of 2013, 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% quarter-on-quarter. Here, higher asset management and card fees continued to be the main drivers of this growth. Net gains and losses on financial transactions, adjusted for the extraordinary capital gain in the first quarter, increased by 17% in the first six 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 six basis points in the second quarter from seven basis points in the first quarter, and the credit quality remains solid. 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 krona, which gave a negative impact of SEK 43 million. Lending margins in Sweden, however, improved somewhat, as did lending volumes. In total, the Swedish lending business added SEK 58 million in the quarter, and the Swedish mortgage margin increased by one 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. All in all, deposits outside Sweden improved net interest income by SEK 29 million. Lending volumes continued to increase and added SEK 31 million. 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 in the quarter. Other effects, such as higher state fees, the benchmark effect, and that lower nominal interest rates in SEK decreased income related to the bank's equity together reduced net interest income by SEK 96 million. Currency effects and the fact that the second quarter had more days added SEK 110 million.
Going back to slide number eight, we here take a closer look at our 12-month rolling cost development since 2011. 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 four 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 longer period. If you sum it all up to 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 four quarters in a row on a rolling 12-month basis, with group efficiency even improving with the cost-income ratio decreasing now to 44.6% in the second quarter.
On slide number seven, we illustrate the profitability in our different home markets for the first half of the year. 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%. Finally, the Netherlands, a very small and new operation, is already above 10%, including all their expansion costs. I think this illustrates a 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 9, we show the cash flow contribution from the home markets outside Sweden on a rolling 12-month basis. As of the 2Q, 34% of home market branch office earnings before loan losses are now generated in the home markets outside Sweden, compared to 22% two and a half years ago. For the 1H of this year, net interest income outside Sweden increased by 12% and commission income was up 28%. Heartwood 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 2Q, branches in U.K., Finland, and Norway, and we have eight new branch managers appointed for new branches in U.K. and the Netherlands. On slide 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 1Q. Here, earnings in the 2Q contributed 0.4 percentage points. Total capital adequacy ratio improved to 25%, up from 24.5% at the end of the 1Q. On May 8, 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. The 17.2% ratio is still based on standardized general assumption. The bank, however, makes the assessment that the group is well capitalized also with the coming new capital rules. During the 2Q, the bank issued a SEK 3.2 billion staff convertible bond. Although the bond was priced totally on market terms, the issue was oversubscribed more than three 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.
Over to slide 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 2Q to more than SEK 475 billion. We have also shown that we are already compliant or very close to being compliant, even with all the future liquidity and funding regulatory measures. On the back of this, we have also in the 2Q 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 first Nordic bank to access the senior bond market in Australia, and in June we did the senior bond issuance in the U.S. market, and the price we achieved 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, thereby creating scarcity value in our bonds. 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 faster in the last couple of years, 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 352% two 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 is very familiar to you. This time we compare the current pattern with the pattern we saw five years ago, that you can see in the dotted line. What you can see from this chart is that the U.K. branches have in fact developed even better than the profile indicated five years ago. Revenues nowadays increase even a bit faster, the break-even point for the average U.K. branch happens a bit earlier nowadays. 60% of our U.K. branches are younger than four 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 fifth U.K. regional bank, to be headquartered in Leeds during the first quarter of 2015. Thereby, we will add even more resources to support further growth in the U.K. market. To summarize, shareholder value measured as equity per share, including dividends, continued the steady growth of 15% per year since the start of the financial crisis in 2007. Operating profit increased by 10% year-over-year, for home markets outside Sweden, the increase was 17%. Non-Swedish home markets in the quarter now contribute 34% 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, when we look at the income profile or branches, revenues nowadays grow faster than the situation five years ago. The expansion will be facilitated by our decision to open our fifth U.K. regional bank. Return on equity for the group increased to 14.3% for the first half and to 15.1% for the second quarter, in spite of the fact that the group continues to build capital. Core Equity ratio improved to 20.1%. With that, I conclude my presentation and open up for questions. Thank you.
Ladies and gentlemen, if you have a question, please press 01 on your telephone keypad and you'll enter a queue. Our first question comes from Mr. Omar Keenan 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 basis point rate cut from the Riksbank. On the negative side, STIBOR on average looks to be about 40 basis points lower in Q3, which clearly is going to impact deposit margins in Sweden. We're just left 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 basis points lower and the list prices cut about 25 basis points, 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 in Sweden, one basis point up to 92 basis points. 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 it's the branch offices that set the prices, and they, of course, defend their clients. If you look at our market share in the Swedish mortgage markets, I think we are the bank with the lowest volatility in market shares. We are very stable over time, 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, et cetera. 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. You see the very direct effect that lowering interest rates has on deposit margins. As you've probably seen in Sweden in the quarter, Q1 to Q2, we lost SEK 43 million 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 Riksbank and also the downturn in STIBOR, although some effect had come before, there were things being done in the mix between different accounts already in between. In that chart, you get some sort of feel for the dynamics with lower interest rates.
Okay. If I interpret what you're saying correctly then, if Handelsbanken is a price taker, then trends shouldn't be too different from what other banks are saying.
No, I think the difference 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 branches in every instance. There are others that do not do that directly. Then, of course, when you see differences in the description of margins in different banks, you can get different patterns.
Of course, we, for instance, when all the other banks took cheap central bank money and then were forced to go out on market terms their 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. You will get a different description of what the margin is. 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 clients because then you immediately will not have the business.
Okay. 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 the historical sensitivity that we've seen in the numbers. If I do that exercise, then the 40 basis points change in STIBOR should imply something like SEK 160 million lower NII in the quarter, about SEK 600 million annualized. Is there any positive offset on deposit rate repricing so that it should be lower than that impact in the third quarter?
There are some possibilities in mix changes. I think the historical pattern that we have described is virtually there. Of course, as the interest rate goes down to zero, the effect, the number of accounts that have zero on it is, of course, increasing. 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 zero on zero interest rate bearing interest rates.
Okay, thanks. That's very helpful. Thank you very much.
Our next question comes from Mr. Hakan Firra from DNB. Please go ahead, sir.
Yeah. Hi, Hakan Firra, DNB Markets. Firstly, on your deposit base growth. You highlight a few places in your presentation the significant growth we've seen both year-over-year and quarter-over-quarter in terms of deposits. Secondly, is this something you've actively been trying to achieve? 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. 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. Then as the branch matures, you get more and more of the deposits. That's the 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. 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. Especially if you've got corporate deposits, everybody knows that they could be very unsticky in a stressed situation.
Liquidity-wise, it's very important to have a prudent view on the stickiness of deposits. From a client perspective, from a business perspective, we are, of course, 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. You can see it also that the risk willingness now is very large. We have the same credit policy throughout the business cycle. That means that there are deals that we don't want to do, but we now are getting back to some banks taking away demands for collateral, et cetera. You can also see that in terms of margins, pressure on the margin side.
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.
Yeah. That's excellent. 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. 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. 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. You saw very strong capital generation this quarter, which was partially driven by some, I guess, temporary effects in other comprehensive income. Just thinking to the kind of buffers you'd like to hold in the future, if we can see a SEK 2 billion, SEK 3 billion 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 FSA 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? Do you think about that in terms of Swedish krona terms or in terms of percentage terms? I guess that's the first question.
Related to that, if you have any update on plans of issuing additional Tier 1 capital. 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 zero over time. 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 conference, what I thought if we were sort of upfront and in this respect, my best judgment is that it's rather balanced. Let me maybe explain. The effect comes mainly from the fact that we are funding ourselves sometimes outside Sweden in other currencies, and we take that currency and the interest period, and convert it by swaps. 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, that comes into the OCI. Over time, that is going to zero because it's totally hedged as a package from any economic risk. That's why you get these swings. It's not that we are upfront taking a vast amount and then we'll have the reverse it in the future. It's over time a neutral thing. The implication for the buffer, I think the important thing for the capital needs going forward is, of course, to have the definitions.
We have also stated that we are waiting for the Swedish FSA and the work on the 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, they have said that they will work with that during the fall. After having the definition clear, 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 to AT1, I think that in the end, when all regulation is there, the capital goal is set, 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. I think there is room for all this fine-tuning, it should never be a huge element in our capital base. It should always be very easy to understand the Handelsbanken capital, of course, the important part of it will be core. Yes, I do think that both AT1s and T2s has a meaningful place in the capital base. The fifth regional bank in the U.K., yes, of course, this is something that all other things being equal facilitates the expansion in the U.K. Starting a regional bank means that they have a regional head office we'll have in Leeds with credit expertise, personnel department, support functions for the branches in that region.
That means, of course, that the number of people supporting new branch office openings as well as supporting existing branches will increase. 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're very well received, we see many possibilities going forward. This should be viewed as a way, of course, to facilitate the future growth.
Thank you.
Next question comes Mr. Pavel Visinsky 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? The second one is on your funding cost. Has the funding costs come down more than the STIBOR 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 solved. There is a proposal, but it has yet to be seen exactly what will happen on that. 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 asset and lending mature with the same interest bearing period.
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 three years, we are now on a SEK 3 billion lower NII level than compared to 2011. On a yearly basis, SEK 2 billion comes from lower deposit margins and SEK 1 billion 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 SEK 689 million and SEK 155 million if you do Q1 to Q2.
All right, thank you.
Next question comes from Mr. Edward Firth from Macquarie. Please go ahead, sir.
Yes, good morning. It is Edward Firth here from Macquarie. Just another question back on the U.K., if that is all right. I hear what you say about opening a new regional branch in Leeds, but if I am looking at year-on-year growth, certainly on the loan side, it has 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 have TSB and various other banks are sort of equally now challengers. 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-over-year. Of course, you can get variations when you look at volume development quarter-over-quarter and so on.
You're absolutely right that the U.K. larger banks are getting in better and better shape. The counterbalancing part is that our way of doing this is very different from the proposition from the other banks, we see no difference in that respect. Actually, on the margin side, you're probably seeing that margins actually have gone up in the U.K. still. That is in a situation where we get two and a half times the margins we get in Sweden. 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 is a large cost base, and that won't change easily. 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, et cetera. All this implies that we are actually improving. I think one interesting slide to point to is slide number 10, which I talked about, where we compare the situation five years ago and today, what we call the vintage, which shows the cost and income development per branch according to how old they are. You can see in that slide that we have a dotted line that is on the revenue side, which is quite a bit lower actually than today. Also, we're talking nearly now on average nearly five months, maybe six months earlier break-even point now. There are improvements here, I do not subscribe to what you say.
I don't do any forecast, the general characteristics and the underlying possibilities are actually better now.
Just as a supplementary on that. In terms of that income profile on slide 10, is it your perception, have you come up with a better margin or better volumes, do you think? Not precisely, but just in broad terms.
I think it's a combination of things. One thing is, of course, when you start the first branch office, you learn a lot, and you learn with the second, et cetera.
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. Of course, it goes without saying that there are also scale effects in banking. When you start the first 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 stage 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.
One-stop shopping, you talk to the same person that delivers the documentation, a handshake, and price negotiation, everything from the start to the delivery of the product. That means that it's very important, of course, to 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. All of these kind of things. As I said, yes, we have seen also small improvement in margins in the U.K.
Okay, great. Thanks very much.
Our next question comes, Mr. Riccardo Rovere 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. What I noticed marked the swings between the different geographies. A sharp reduction in Sweden and a sharp increase in provisions in basically all the other geographies. Can you shed a little bit of light on what's going on the reasons of these market swings? 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 they will go up over time?
The second question I have is, given the current level of rates, do you think there is any way to offset the low yields that you get even 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 actually in all our countries. 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 one period in Denmark, and then it normalized. If you take a little bit longer period, this hold true. In a certain quarter, you will find it in one or two countries or whatever. We are now in total, of course, at low levels, six, seven 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 six basis points, but to be zero. We take it very seriously. As a number, it doesn't take much of a credit loss in order to impact it. That is what happened in, you can see, for instance, in Finland, which is a single event. When it comes to credit quality, there is no indication of deterioration in any segment, any country in general, or so on. You could also see that the NPLs went down to 13 basis points now in the quarter. There's no signs of deterioration in any sort of any market, any products. To offset the liquidity portfolio, we have, as you know, an extremely good liquidity situation with over SEK 800 billion in the liquidity reserve.
You have seen that we have SEK 475 billion or SEK 477 to be exact, placed with central banks overnight. 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 every reason to question the extremely good position of Handelsbanken. Secondly, it's also actually a flight to quality. We receive, for instance, US dollars from the large institutions that really wants to place their money in a very, very safe way. Since that is short-term deposits, we don't use it, of course, for our funding needs. We put it overnight with central banks. You're right, of course, there are room for improvements in this area.
It's not that the current situation costs us very much because we don't pay very much on those deposits. 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 149, or if you use the Basel definition, 162, 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, et cetera. I think when the situation normalize, you can come back to how would you Remix this. Of course, there is a possibility to do a yield pickup by taking out money from the central bank and instead buying, for instance, ultra safe covered bonds or state bonds.
Okay. Very clear. If I may, just one second on this again. When the situation will normalize, would you be prepared to invest some of this cash in central bank accounts in something that is not just, let's say, Nordic or U.K. sovereign yields? It's just trying to hunt for yields anywhere else out of your, let's say, core markets.
No, we would never want to take any sort of risk with that money. Having said that, does that mean that only central bank could be eligible? No, state could be eligible. Of course, there are different states, so you have to look at that. Then if you're going into, for instance, covered bond area, you have to be extremely cautious on what to buy. You will not find any opportunistic investing or so on in this, because the whole purpose is that it's there to be a reserve, and therefore we are not prepared to take a credit risk there. It will be a very prudent credit risk assessment, as in all of our way of dealing with those kinds of things.
Okay.
To make a good sum of money of taking excessive credit risk.
Okay. Very clear. Thank you.
I remind you that if you want to ask a question, you will have to press 01 on your telephone keypad. Our next question comes 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? Secondly, just on your liquidity, could you say anything about how much you have placed with the U.S. Fed and 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. You will see that the amount in U.S. dollars is SEK 269,533 million. That is SEK 269 billion equivalent, of course, placed in U.S. dollar, placed with the Federal Reserve. Yes, as I said, we don't do a 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. It's not a huge sum of money. 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 cost-income ratio of 30 or below 30. There are, of course, also in this environment, some Swedish branches that are at that.
If you look at the U.K., you would find that on average, if you are eight years old, you are under 13% cost-income ratio. Of course, the margins are much better in the U.K. In Sweden, it's very much a matter of 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. As you've probably seen, we've taken 24% of new net production in Swedish mutual funds, that is the best of all the banks. This is something that we have put a lot of effort into, now you will start seeing the effect. That is also good.
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, that is also over time helpful.
What is the central IT cost that you have today that you're potentially replacing?
There are two different methods here. One is how much we invest in IT systems, we have been very constant investing about SEK 1.5 billion per year in totally new systems.
Yes.
That's an ongoing investment. Of course, those investments over time, I think that maybe in two, three years' time, we do not have to run two computer systems. You can then, of course, bring down maintenance cost and cost for running the existing systems. What I'm talking about, firstly, when it comes to operational efficiency for the branch, is 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. With all this governance now, if you take over a family, two adults and two children, on average, if you do it the paper way, you walk out with 256 pages.
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. If you do it on the internet side, of course, that comes automatically because you get it in the mailbox, and you can sign by using your security solution.
Okay. Thank you.
Our next question comes to Mr. Nick Davey from UBS. Please go ahead, sir.
Yes, good morning, everyone. Two questions, please. The first one on risk weights. 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. It seems like a strange world in which your average corporate risk weight will be below your average mortgage risk weight in Sweden. I wondered if you could comment on that state of the world. 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 to 10 years, you may see some odd imbalances being formed in Sweden.
I wondered if you had any observations about that, whether 25% mortgage risk weights is the wrong number, is too high, or if 24.5% corporate risk weights is too low. It just seems like one of those numbers might be wrong. Second 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. I know that the base rate cut at the end of the quarter did have some pretty meaningful impacts on basis swaps and currency moves. I'm just scratching my head a little bit to be able to justify or explain these massive moves in those two line items.
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.
Thank you. On the first question, of course, you're right because the true risk weight from a historical credit loss perspective, as you know, on the mortgage side is five to eight basis points, and that's including sort of 80% security add-on from the historical credit losses. Yes, it's absolutely our experience that mortgages in Sweden is extremely safe way because of a number of reasons. 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 the extreme would be the leverage ratio.
If we ask very theoretically, I don't think that will happen, but if we think that it will come a regime with a very high leverage ratio, of course, you will get an even larger effect than the 25% risk weight that is now in Pillar 2 for mortgages. 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. 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. 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. It's a political decision. The OCI, yes, you're right. The variables that gives the volatility here are two. It's currencies and it's interest rates. It's interest rates, of course, in different currencies. It's hard 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. As I also said, over time it will be zero.
When asked, have we taken our lot of money, so to say, up front in the OCI, that will come back in a minus in the future. When we calculate it, that is not our impression. It's plus minus a billion or two. 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. Riccardo Rovere from Mediobanca. Please go ahead, sir.
Yes, thanks again. To follow up on your previous answer on the leverage ratio. Do you basically saying that the leverage ratio is something that is starting to concern you? Do you expect the regulators to be much harsher than they are today on the leverage ratio? 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. It's my impression that from the Swedish authority standpoint, they do not like the leverage ratio to be the ruling rule. Maybe to use it as it's suggested by the Basel Committee as a backstop at a low level. They want to use the risk weight system with a lot of backing than 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. That's the view of Swedish authorities. 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. The discussion will continue and continue.
The Swedish standpoint is that the leverage ratio should not be the ruling regime. That's what we have heard so far. Probably will come in as a backstop, and if you don't fulfill it, things will start to happen, so that you can fix it. It's the same, I think, the same methodology that is in the upper part of the Pillar 2, that kind of thing. It's early days, so it's not that anything has changed. 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. It's a saying in Handelsbanken.
Okay.
It was from the first day I started, 1983.
Okay. Thank you very much. That was clear. Thanks.
That was our final question.
Okay. Thank you very much for attending. 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.