Good morning, everyone, and welcome to this conference call for the Q1 2014. Joining me today, I have Michael Hallacher, Head of Investor Relations Lars Hoglund, Head of Debt IR and Olander, Group Head of Accounting. And the slides used for my presentation are, as usual, available at Handelsbanken.com. I will again start by showing you the familiar slide of the bank's value creation from a shareholders' perspective, Slide 2. Also adding the Q1 2014, equity per share including dividends continued to grow by 15% annually.
This is in spite of the fact that the bank has again continued to build capital with the core capital ratio now reaching 19.5% in fully loaded CRD IV terms. Return on equity for the Q1 was 14.1% and the bank distributed SEK 10,500,000,000 at the end of Q1, 2013. The bank's very stable quarter by quarter development is a reflection of the Handelsbanken unique business model, combining high organic growth with lowest risk. Going forward, with new regulation such as bail in, the potential measures resulting from the Liqener report, EMEA, etcetera, we believe the bank's very stable business model will prove even more robust also in the relative perspective. Then on Slide 4, you can see the profit and loss account.
Year over year, operating profit as well as profit after tax improved by 13% for the group. In the home markets outside Sweden, the operating profit rose by 30%. Net interest income rose by 2% for the group and by 13% for the home markets outside Sweden, most profoundly in the U. K, the Netherlands and Finland. Net commission income grew by 10%, driven by higher asset management and card fees.
Then net gains and losses on financial transactions more than doubled. However, here you should, of course, adjust for the extraordinary capital gain of NOK 306,000,000 made on the reallocation of the bank's shareholdings that was announced in March. Except this item, net gains and losses on financial transactions rose by 36%, mainly as a result of higher client activity in the foreign exchange business. In total, revenues increased by 8%, while total expenses rose by 2%. Other administrative expenses were down by 3%, while staff costs increased by 4% due to the continued expansion and the annual salary increases.
Loan loss ratio was 7 basis points and the credit quality remains solid. U. K. Had 0 loan losses and Denmark and the Netherlands had net recoveries. Let's then turn to Slide 17, where we analyze the development of net interest income in the Q1.
A 3 month STIBOR rate fell by almost 20 basis points in the Q1 and this has a direct negative impact on deposit margins in Sweden, reducing net interest income by SEK 32,000,000, while increased deposit volumes in Sweden added SEK 2,000,000. Lending margins in Sweden improved slightly, which added SEK 35,000,000. Our mortgage margin increased by 3 basis points to 91 basis points. Somewhat higher mortgage volumes compensated for a slight decline in corporate lending and lending volumes in total contributed SEK 9,000,000 to the net interest income development. Then in home markets outside Sweden, higher business volumes added SEK 66,000,000.
Margins reduced net interest income by SEK 12,000,000 and here higher corporate lending margins in the U. K. Contributed positively as did deposit margins in Norway and Finland. Lending margins in Norway, on the other hand, fell somewhat as did margins in Denmark. And the benchmark effect, together with the fact that the Q1 had fewer days, reduced net interest income by SEK 81,000,000 Other effects had a negative impact of SEK 99,000,000 and part of this was due to a lower interest on the bank's equity, which is financing assets with short duration and thus was affected by the lower short term rates.
Also as you know, the bank issued a subordinated Tier 2 loan in early January, which compared to senior funding carries an increased interest cost of roughly NOK 25,000,000 for the quarter. And at the end of the quarter, the bank also called a hybrid of SEK 2,900,000,000 which was issued in the Q1 of 2009. Then on Slide 11, we show the earnings contribution from the home markets outside Sweden. 32% of total home market branch office earnings are now generated in the home markets outside Sweden compared to some 19% 2 years ago, and that's on a rolling 12 month basis. This quarter, profit in the non Swedish home markets increased by 30% compared to Q1 2013.
Net interest income improved by 13%, while fees and commissions increased by 28%. The Wealth Management business in Hartford contributed almost half of the growth in fees and commissions. Loan losses in home markets outside Sweden dropped sharply by more than 60% compared to the Q1 2013. In all, 6 new branches were opened outside Sweden in the Q1. And since lending margins in general are higher outside Sweden, the continued expansion, and that's both in existing branches as well as in newly opened is supportive for the growth profitability.
In the Q1, all home markets outside Sweden, except Finland and the newest one in the Netherlands, are on par with or above Sweden when it comes to return on allocated capital. And that's, of course, in spite of the investments made in new branches. Now let's turn to Slide number 5 to touch a bit about the current credit market behavior. The slide shows the spread between sub investment grade or high yield CDS and investment grade CDS. As you can see, that spread is now back on pre crisis levels.
A similar pattern can be seen if you compare spreads between high risk and low risk banks such as Handelsbanken. The reason for this development, as I see it, is the huge excess liquidity in the market spurred by central banks who, for a long time, have provided almost unlimited liquidity. At the same time, the supply of new bonds from issuers continues to be muted. The result is that investors seem to chase whatever yield there is in this ultra low yield environment more or less nearly regardless of the riskiness of the asset. Apart from the obvious risks in the real economy, not least geopolitical, there are a few potentially important themes in the funding market in my opinion.
One of them is, of course, the bail in that was now decided or now has been decided by the European Parliament with the notion that senior bondholders and corporate depositors will actually lose their money if the bank in question into trouble. This will, of course, benefit the very strongest bank with the least likelihood for any scenario where a bail in could materialize. Another theme is the potential implementation of what was the leak in proposal now developed and adopted by the European Commission and the impact that may have for funding costs of those banks affected. Handelsbanken is not at all by this proposal since we are well under the 10% threshold. And the third theme is around collateral, which for some banks will, in my opinion, become scarce resource with a more profound cost attached to it.
Also here, Handelsbanken is in a very good position since we keep a very high degree of nonencumbered assets in the balance sheet to shelter all unsecured creditors. On Slide 6, we show the financial position of the bank, which has continued to strengthen further. Core equity ratio increased to 19.5% from 18.9% at year end. Year earnings for the period contributed 0 positive volume migration also contributing to the improved ratio. The total capital adequacy ratio improved to 24.5%, up from 21.6% at year end.
The Tier 2 issue made in January here contributed by 2.9 percentage points. And as can be seen here from the slide, our long term capital development has been very strong. In 2,009, the bank had a return on equity of 12.6% with a core equity ratio of 9.4% at the end of the Q1. Today, that ratio has more than doubled and we have a return on equity, which is above 14% for the Q1. And we have not been below 12% return on equity any single quarter during the crisis in spite of the very strong capital buildup that has continued also in the Q1.
As you also probably have seen, there is a lot of different liquidity ratios, either in the current or the future regulatory world as well as other ratios used by rating agencies. And we have therefore here provided summary of the most frequent ones. And as you can see, regardless of what ratio you look at, we are compliant or very close to be compliant be compliant on all thinkable ratios. And to be compliant on these ratios is therefore not an issue for Handelsbanken when and if these ratios becomes part of the regulation. Also, the liquidity ratio, total liquidity reserves divided by total lending to the general public is above 50% for Handelsbanken.
On Slide 7, you can see how the Basel Committee views the ranking in terms of stable funding in their revised NSFR proposal. The most stable funding sources are capital as well as bonds with a maturity of more than 1 year. Understandably, all source of deposits are deemed as less stable than long bonds. Large corporate deposits only receive a 50% stable funding weight. And I think this makes a lot of sense, especially now that the European Parliament has decided on the bank recovery and resolution directive, implying that bail in will be in force from the 1st January 2016.
Large corporate deposits will from this date be subject to bail in in a resolution situation, partly pursue with senior bond holders. This means that corporates have to be much more careful in where to deposit liquidity. And also, as soon as a potential problem for bank is underway, the deposit base will be quick to leave the bank in question. So I think it is safe to draw the conclusion that the importance for a bank of having a soundly matched balance sheet will now increase considerably. On this subject, looking at Slide number 8, you can here see how we have worked on this subject since 2006.
As you know, we started off already early in the crisis to prepare for a tough market and for new regulation gradually coming in, being alone in not funding ourselves through Central Bank Aid. With the constant continuous access to the funding market throughout the crisis, also for long senior bonds, we have chosen to even further increase the match funding of the balance sheet and increased our share of bond funding from 23% up to the current level of 40%. At the same time, the share of short term instruments and borrowing from credit institution has halved. This is in spite of the fact that we have built up our massive liquidity reserve during this period, including the equivalent of more than DKK 400,000,000,000 that we have now placed overnight with central banks. This position, together with liquid bonds, means that we could immediately pay back all our short term instruments and credit institutional funding maturing within a year, if we should wish to do that.
There is thus no reliance whatsoever on short term funding in Handelsbanken. And in foreign currencies, our currency reserve is in fact on par with the entire currency reserve of the Swedish Riksbank. We will still enjoy the lowest funding costs of any European bank, but the difference has narrowed though because of the enormous flood of liquidity in the market and of course, the chase for yield. This I think will normalize to much larger differentiation between banks again once the market starts to digest the new landscape in terms of various regulations. Now to Slide number 9, which shows our nonencumbered assets.
This is another important area for banks going forward and one area where regulation, again, will increase focus after AQR is done. Collateral will be a scarce resource for weaker banks and the price of collateral will reflect that, I believe. Corporates will demand collateral from weaker banks in order to make deposits in the bail in world. Many banks today write mutual collateral servicing agreements, CSA, also with corporates, stipulating that the bank needs to post collateral to the corporate for negative derivative exposures. The new framework, which will be gradually implemented, means that non cleared derivatives will demand also an initial margin or upfront collateral in addition to margin collateral.
And last but not least, the very extensive use of Central Bank funding that demands huge volumes of collateral for banks that have had to use this type of funding. In Handelsbanken, we don't have mutual CSAs with corporates. We have a very small derivative book compared to other banks and we certainly don't use any central bank aid funding. We keep our collateral to the benefit of senior bondholders. 36% of all our mortgage loans are kept outside the covered pool, nonencumbered in spite of the fact that they are eligible to include in the covered pool.
Altogether, nonencumbered assets cover unsecured funding by almost 2 30%. And the quality of those assets, as you can see, has for decades proven to be of the very highest standards. Then on Slide number 12, an update on our U. K. Operation.
The development continues to be very good as you can see with revenues up 28% and operating profit up 53% in local currency compared to the Q1 2013. Net interest income here increased by 30% and fees and commissions more than doubled to a large extent, thanks to Hartwood, but here also higher payment fees contributed. Looking at the volume development, we see the same pattern as we saw throughout 2013. More and more of the growth comes from existing branches, adding more and more business with Margins continued to develop favorably with a slight margin increase in the corporate lending. Credit quality remains excellent and there were no net loan losses at all in the Q1.
Five new branches were opened in the Q1 in the U. K. And another 7 branch branches have been appointed to open new branches. We continue to be very optimistic about our opportunities in the U. K.
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 13% year over year and for home markets outside Sweden, the increase was 30%. Non Swedish home markets now contributes 32% of the earnings in the total branch office operations. In spite of the continued investments in expansion outside Sweden, most of these home markets are now on par or better than Sweden in terms of return on allocated capital. Return on equity for the group increased to 14.1%, and the bank continues to build capital.
Core equity ratio improved to 19.5%, and that means that we have even further continued to improve our starting point for deciding a new capital target when the Swedish rules are clear. The credit markets currently are flushed with liquidity, chasing yield and are nearly not at all differentiating between very low risk such as ourselves and high or even higher risks. This, I believe, will change again to our benefit when the market starts to price the impact of the new regulation that I talked about and the regulation that we keep coming over the next few years, such as, for instance, bail in regime. And with that, I conclude my presentation and open up for questions. Thank you.
Our first question comes from Mr. Omar Kleenan from Deutsche Bank. Please go ahead.
Good morning. Thanks very much for taking the question. My first question is on the mortgage margin in the Swedish branches, which increased to 91 bps. I noticed there was an increase in the capital allocation towards the Swedish division, among others. Could you discuss please how your capital allocation calculation has changed quarter on quarter?
And what you believe drove the margin increase given that we're expecting margins wouldn't go up until we actually got the 25% risk weight come in? And then my second question on capital. What's the fully applied CRR leverage ratio on core Tier 1? And just the second part of my capital question is that even if we know the Pillar 2 outcomes in the next month and you're able to set a core Tier 1 hurdle rate for Handelsbanken, could you discuss any kind of second or third capital constraints we should be thinking about, such as sort of corporate risk weighted average ratio, for example? And what role the transitional rules on Basel IV floors taking place in RWA will have on your thinking on capital?
Thanks.
Thank you very much for those questions. We have not changed any allocation principles between Q4 and Q1. And as you probably know, the capital allocation principle is that each area, 1st of all, gets exactly what they need from as a minimum capital charge according to the external rules. And then of course, we after that allocate the extra capital that we have above the minimum capital requirements. And that allocation is then spread to the different parts.
So the analysis that you try to do to talk about the mortgage risk weights and see if that has come into the margins or so on from a capital allocation, nothing has happened on that side between the quarters here. More profoundly on that, 3 basis points is not a huge difference. And actually, if you take away the rounding up of the figures, it's more maybe than 2.5% or something like that. So it's not I don't think you should overestimate these basis points. Second question, if you're interested in leverage ratio, I'm very interested to hear your views on what definition one should use.
If you look at our Pillar 3 report, we have a section there where we do all sorts of calculations for the leverage ratio according to different ways to define the measurements. And of course, the change between the quarters are not immense when it comes to how the leverage ratio develop. But if you have any problems of taking you through those figures, very welcome to call our IR department. If you just give us your definition, we will give you the number. 2nd part of that question is, of course, a very interesting one.
How about leverage ratio? Will it come into effect? How about corporate risk weights? Will there be mortgage And I think both on leverage ratio and on corporate risk weights, I think this is very much now not a Swedish question initially. It's a Basel question.
And as you know, Sweden is, of course, participating in those negotiations and the views that this is now Basel has to formulate. And then, of course, the last step would be Sweden is not very Sweden is not very keen at all in principle of having a leverage ratio as the guiding principle. Sweden likes the risk weight principle and then have a lot of capital instead. And then with that thinking, if it's possible for Sweden, I think it would be a high likelihood that the leverage ratio will be more of sort of backstop thinking on that. But we have to see what comes up.
Okay. And thanks very much for that. And how should we think about the RWA sort of transitional sort of number going
forward? The transitional rules, as you probably have heard, in Sweden will still be there, the Basel I the old Basel I floor transitional rules. And I think that probably will be in effect until all has been said about leverage ratio and corporate risk weights and all risk weights. So I think you shouldn't expect that rule to disappear. That's my guess.
It's I'm only guessing here. But from what I hear, I think it's a high likelihood that, that will be in effect for a couple of more years until the full answer on leverage ratio on corporate risk weights is clear.
Okay. Thank you. That's very clear.
Our next question comes from Mr. John Walzer from Credit Suisse. Please go ahead.
Yes. Good morning, Jon Walther Credit Suisse. Just a follow-up question here. I think you said earlier, Par that 20% total capital could be necessary on the new regulatory regime. But earlier today, it was mentioned on presentation that above 20 percent could be necessary.
Is that mainly a function of lifting the core capital hurdle or rather the bank's ambition to increase the additional Tier 1 component in the capital structure, please?
I think you should interpret it as a general statement saying that if you add up the new regulation that is now coming into force and also bear bear etcetera, because of how the funding markets will react in a world where the central banks have taken back the large flows of liquidity, etcetera, In a more normalized world with the new regulation, it's a good thing to have a good capital situation. And therefore, if you add up the numbers to I mean, it's very easy to draw the conclusion that 20% total capitalization is certainly something that you should have and the above. And that was also mentioned today, then we have to see on the new rules and implementation on will there be more on top of that.
Thanks a lot for that. And just a follow-up there. When do you hope to update the market on new capital targets, please?
As we said before, we need to know the rules. And as what I've heard, there will be a lot of information coming out during May. The Swedish FSA has it has been said that they will come out with something on the 8th May. I heard today on the press conference. And also, there is a meeting in the stabilization program.
As you know, I think that is the 23rd May. So probably we'll know more about May. And we, of course, will follow this very closely. And as and when we think that we have the full information, we will, of course, come back with feedback on that.
Our next question comes from Mr. Anton Kiritsuk from UBS. Please go ahead.
Good morning. Thank you very much for taking my questions. Just two questions, please. 1 on capital and one on the P and L. Starting with capital, please.
If we do get more clarity on capital demands in Sweden this month, Would you expect to quickly adjust your capital base to new capital demands? Or do you think it's going to be a gradual process, which you would execute probably towards the start of next year? And the second question please on the P and L. I've noticed you have changed the cost allocation policy to Octogonen. I was wondering what is driving that and whether this is a sustainable cost reduction or would you look to reverse it back at some stage?
Right. Thank you very much for those questions. First question, if we would find ourselves in a situation where we would have too much capital when there is clarity on the rules and there's no need to have the amount of capital that we have at that moment. There are, of course, 2 ways you can go about that. 1 is buyback, which is something that can be done rather quickly.
And the second thing is, of course, dividend and the asking dividend. And then, of course, that's shareholder meeting question. So that is a longer process. But this is just my technical answer and it's I don't want to give you any sort of guiding on whether I think that it's likely that we will have too much implementation and also the other questions we touched upon. But from technical side, that's all the 2 means.
On Oktogonen, over the years, Oktogonen system is that's probably not very old. It was initiated in 1972. And over the years, there has been adoptions. And the adoption, of course, has to do with the fact that the dividends and the increase in dividends has been rather rapid, I must say, over the last years. And therefore, the hurdle, when we fulfill the our company goal of having higher ROE than the average of our peers, there is maximum amount that can be set off even if the difference is huge in terms of profitability between us and the peers.
There is a maximum and that is has been 15% and is now has now been anticipated for being 10%. This is a decision from which is totally discretionary from the board's side. But for calculation purposes, I think you should use the 10% going forward for these in coming years. And then, of course, one had to think about what is the likely dividend going forward And how do you look upon the difference between our ROE and our peers in your projections? I never do projections, as you know.
Our next question comes from Mr. Christophe Rose from Barclays. Please go ahead.
Thanks very much for taking the questions. First one is on margins in the foreign operations. You mentioned before in which countries the direction in the development of each of the countries. But could you please perhaps comment a little bit on the reason behind the decline? And I appreciate that you're a very decentralized organization.
There might be as many reasons as you have foreign branch managers. But perhaps if you could pick on some of the key underlying reasons for the decline in margins abroad? Then the second question is really on your sensitivity with regards to deposit margins in Sweden. So if in the next quarter we would have a similar decline in short term rates in Sweden, would you then see another 30 $2,000,000 decline? Or are you now more sensitive as we are in the lower interest rate level?
And then finally, if you could just comment on, I think credit losses in Sweden increased, albeit from a low level, but if you could comment on perhaps what's behind that?
Right. Credit losses in Sweden, to start with, it is not any sort of trend or doesn't say anything about any change in the credit quality in the portfolio. As we say in the report, the number is, to a large extent, affected the single event. Then on deposit sensitivity, we had some lowering of the interest that we pay to the clients early this year, which, of course, has affected the number you're looking for. But all other things being equal, I think it would the best proxy is to say it's linear.
But then, of course, you have to filter in how are we reacting towards the clients. We are still, of course, paying some interest rate also on deposit on parts of a part of our accounts. So there is still some room, although as you point out, as you come down to 0, the room also gets 0 to do something about it. But I think it's for calculation purposes, it's at this range, it's pretty linear, pretty linear. And then you had a question about margins and why does margin go down in the other countries outside Sweden.
I think the starting point here is to understand that we are not in any of those markets price leaders. We're not a price leader even in Sweden. And that has to do with the fact in our structure, as you know, it's the branch office that sets the price. And therefore, we are always the follower. So we take the market price.
So what has happened here is that it's the market price that has gone down. It's not on the funding side. It's the market price. And I think it take Norway, for instance, the large two banks there increased the margins and the price towards the clients very much when they stopped taking money or were forced out of the central bank there and had to do market funding. And then they tried to compensate that.
And you saw that last year. And our margins, of course, then went up very sharply because we have never taken any central bank money, subsidized money. So we got the full margin pickup. This year, competition has increased, and they have lowered the price towards the clients, not at all back to what it was before they started exercise, but a little bit the trend has been down. So that is what you see from the figures.
We have a question from Mr. Ricardo Rovere from Mediobanca. Please go ahead.
Good morning to everybody. Just a couple of questions from my side. Is it possible to have an idea of the reasons behind the collapse in corporate risk weights in this quarter, down another 2.5%, more or less 2.5 percentage points in just 3 months? And is it also possible to have an idea of the corporate risk rates in Sweden, U. K.
And the Netherlands? And last thing I wanted to ask you, what is your reading about the FSA, the regulators in general are willing to maintain the transition rules instead of eliminating them from your capital calculation?
Yes. Thank you very much for those questions. Transitional rules, as we touched upon, I think in all likelihood, they will be kept for quite some time until the whole new regime is safely implemented. And for instance, the questions about corporate risk weights is settled and also leverage ratio question and so on. So I think I'm only guessing, but from what I hear, I think it's reasonable to assume that the fluoro's will be here for quite some time.
But why are they keeping it?
The Swedish authorities are firmly believing that it's a very good thing that Swedish banks should have a very high capitalization. You have to understand that it's not so very long ago that the government had to implement a lot of rescue resources for 3 out of the 4 banks. And of course, they don't want to be in that situation again and want the Swedish banks to cater for their own needs as we have done all along in Handelsbanken. So it's a high pressure from authorities to say that Swedish banks should have a very good capitalization and part of that toolbox are the transitional rules. Then to what you referred to as a collapse, that sounds very dramatic to me.
I wouldn't describe it as a collapse in risk weight for corporates, but you're indeed right, they have gone down slightly. And that is a fact it's a mix effect, but more profoundly, as you know, in CID 4, there is a rebate in when it comes to risk weights for SMEs. It was implemented in the very large in the last stages of before the regulatory framework was decided. So that is the SME effect that you get an SME rebate.
SME supporting factor is what you're referring to, right?
Yes. In the framework, as you know, in the risk weights, it was in the last minute decided that the risk weights for SME would get a rebate.
Yes, okay. Yes, fine, fine. And with regard to the, let's say, a kind of breakdown of this 26%, Sweden, U. K, the Netherlands, if possible to have a rough idea?
We get out a lot of information on our books in the Pillar 3 report. So I would suggest that you look into that and then you can get a very good view of the different portfolios. As you know, we have the same strategy and the same credit process in all countries. And therefore, you will over time see actually the same kind of very, very low credit loss levels regardless of country. But the difference could be, of course, that we have a longer history in Sweden than in some of the newer countries.
So there you have a difference. But if you look at the actual losses over an extended period of time, you will find that they are not very much a function of geography, which is, of course, proving that we use the same credit process and the way you're looking at credits in all our markets. But looking at Pillar 3 and have you more questions, don't hesitate to call our IR department and we'll try to
We'll do. Thank you. Thanks.
Our next question comes from Mr. Omar Khainen from Deutsche Bank.
Sorry, just a follow-up question to Chris' question. Did you give us a figure for interest rate sensitivity? I might have missed it.
We my answer to that was the question was if we have a downturn in more specifically, a question regarding Sweden. And here, we had a downturn in STIBOR rates of 20 basis points on average for the quarter. If we will have another 20 basis points, will we see the same pattern? And my answer in principle is yes, it's linear. But you should also keep in mind that we did lower did some lowering of prices on what we pay on interest bearing accounts in Sweden earlier this year.
So that has offset it slightly. But otherwise, I think it's a good assumption to say it's rather linear. Of course, when you approach 0, of course, you can do nothing in terms of paying less. But we have already come down so very, very far. So that journey is not very long to go, I'm afraid.
I thought there were some sort of discussions in the past that the sensitivity to 100 bps was something like SEK1.6 billion. Is that still the case? Or kind of is that a ballpark figure that's right kind of excluding any impact from deposit repricing that can be done to offset that?
I would refer you to 2 things. First, you should look at the slide that we provide some quarters where you can see STIBOR and you can see the margins on deposit and on lending over time. And there you can very clearly see what type of sensitivity we have in our banking book, our lending and deposits. And then on top of that, you have, of course, the fact that we have our equity is from a financing point of view placed in short term assets. And that is, of course, coming in when you look at the analysis of the difference in the net interest income in the slides, you will see that there's an item other.
And the largest part of that other is the fact that, of course, the equity financing effect, of course, is worth less when the interest rate goes down, so to say. But look there and why don't you give Michael Hallacher a call afterwards if you have any problems.
Could I just ask a quick follow-up question on the deposits? I mean, if we get another interest rate cut, do you think there's space to do more deposit repricing down? Or do you think we're pretty much at the floor? One of your peers has been saying that kind of over the past couple of years, competition from niche has increased quite a lot, particularly in the kind of deposit gathering business. So do you think there's space to reprice more if we get to rate cut or not?
I think there's a little bit you can compensate in the rate downturn, but there's not much interest rates interest rates left actually, which plays around with. And when you talk about the competition, yes, there are, of course, banks that are competing for the process because they think they're important. We don't do that. I mean, as you know from our liquidity planning process, you have to realize that the deposit is not a terrific good thing when it comes to funding your balance sheet. You have to be very careful.
Now with corporate deposits being object of possible bail in in the new rules, of course, that will not be sticky. So we view deposit as something that, yes, it's part of the product range we offer for clients and we love all to do everything for our clients. But you have to be extremely careful when you look at the balance sheet not to make the assumption that if there comes a very rainy day that the deposit will be sticky. Some other banks are working in other ways. And of course, then I have seen examples where they are paying up for deposits.
We don't do that.
Okay. Thank you.
Our next question comes from Mr. Christoph Verus Klus from Barclays. Please go ahead.
Yes, thanks. Just one more question for me and it's on capital. You described in the report how some of the increase in your core Tier 1 ratio is due to that new loans are of higher quality than old loans. And I'm just trying to understand how long that trend might last. How much more high quality loans are there that you can win?
And also how this works logically? Because I understand that credit policy is one of the things that are centralized in Handelsbanken, and I also understood you as a very consistent bank. So how come there now are corporate clients that are of a higher quality? Have you previous have your stock turned out worse than expected? Or have you become more strict in your underwriting standards?
Thank you.
Thank you. I have only looked sort of 42 years back when we adopted our credit policy, and you can see the same pattern over these years. And it's not rocket science. 30% of whether credit will become a credit loss or a bad credit or so on has to do with the initial decision. 70% of the outcome has to do with how you handle the credit over the life time.
And that is one very important difference in how we handle credits and some other banks handle credit. And that means that our branches look through their whole portfolio each and every quarter. If they find a credit that is below average, they have to take action, talk to the client and see how we, in a mutual way, can make the risk calm us down because that is often what the clients also want and act at a very, very early stage. If you do nothing, if you just take in credits and put them in the vault and just wait, you will always have a deteriorating portfolio. That's a natural law.
You have to work very active with your portfolio because when you take in things, of course, although you have all the information, things tends to happen. And some things turn out to be not what they were from the beginning. So it's extremely important. And this is part of the explanation why we have consistently have the lowest loan losses of all banks over time. So it's not rocket science.
It's hard daily work from people that are in total responsible for the credit quality out there and that are sitting extremely close to the client.
But perhaps I misunderstood the driver here because it sounds to me, I mean, very simply put that you're now chasing, let's say, AAA clients instead of AA clients, which you've done previously.
It's not that, no, no. It's a constant thing that you take in clients that are better and the ones that are leaving the balance sheet, they are of in on average of lesser quality than the ones you take in. And of course, if it works like that actively with your portfolio, you will, of course, have a positive effect even in a situation where you might have a negative migration on the whole stock. Of course, exchanging less creditworthy credits with better credits gives you a mix effect that will put you in a better position. So it's not that we have changed policy, that we have changed focus, that we have changed our view on which customers we want, etcetera, etcetera.
It's same, same, same. But it's a constant factor that we work over time.
So the question in this is who do they the corporate clients that turn out to be of lesser quality than you'd hoped, which other bank takes them or do they go to the bond market?
In this environment today, there are many banks that love to take clients also if they are not top quality. We are back to a situation where the risk willingness is immense and covenants and all these restrictive things are getting out of fashion in the banking system. So there are plenty of money out there. On a high leverage and without covenants and so on. We are obviously not participating in this.
But if you look at it from a market perspective, there's lots of risk winning money out there.
Very clear. Thank you so much.
Our next question comes from Mr. Matthew Clark from Nomura. Please go ahead.
Good morning. Couple of follow-up questions on capital. Firstly, the FX translation seemed to be quite a beneficial impact this quarter. I was just wondering if you could remind me of your policy there and your tolerance to FX, either risk or benefit within the capital ratio, how you look to hedge or minimize that or whether you're willing to have that move around quarter to quarter? And then just coming back to the last question on this mix effect from inflow and outflow of higher and lower quality customers.
I get that you're consistently looking to improve the quality of your customer base. But in terms of the impact that it has on risk weighted assets, am I right to think that this will be cyclical that in order for there to be this differential between good and bad customers that comes through in the mix change, you have to first had a deterioration of customers that were better quality when you took them on in the first place. And if that's right, how long should we expect this beneficial mix shift to contribute? Because clearly, it's had quite a significant impact on your capital ratio growth year on year. Can we expect that impact to come through in a similar magnitude over the next 12 months?
Thank you.
Thank you. On the last question, I think it is very hard to say. I mean, theoretically, tip top and so on, there is nothing to work with. That's what you say. And even though you look at the portfolio each quarter, you will find only top, top quality and nothing to do.
It's a very theoretical situation. But of course, you're right in the context that the worst time you have, the more important this work is, I give you that. But I think you will have in all normal circumstances, you will have a mix effect and so on. Also, collateral here is of course part of this work to take in more collateral. And I think that we are looking forward to a very interesting development, which I touched upon when it comes to collateral handling from banks, both giving collateral and taking collateral.
And I can't see I mean, you're looking very short term when you say will this stop in 1 year's time or so on. It's much more long term than that. So I don't anticipate this as a very this is not a very temporary effect that we see. It's a constant effect in normal times.
I guess
You talked about the FX variation that we got in capital. And you can see here that year on year, it was 0.4 percent, it was 0.2 percent in the quarter. We have some match funding in our capital when it comes to the hybrids and Tier 2 instruments that we have issued. Of course, now we have a situation, as you know, with a lot of our capital is core activities outside Sweden is in foreign activities outside Sweden is in foreign currencies. So that is a hedging element.
We are trying over time to get as little volatility as possible in these items. But there are also problems from a tax point of view. You're not entitled to hold whatever capital you want in a foreign entity, etcetera, for tax reasons and so on. So it's technically not totally easy. And then, of course, we have to also admit that we are not doing any budget.
And of course, as you can see from the results, the proportion of profits that's coming outside Sweden is just increasing and increasing. This is, of course, very positive from other perspective, but I gave you that you get a little bit of volatility in the capital measurement here.
Can I just follow-up on the first part when you mentioned collateral paying an important part? Am I right to think then if simplistically then into mortgages, then that mix shift in risk weighted assets would show up in that inflowoutflow line item that you disclosed this quarter or would that show up in a different line item?
No, I was more referring to when this constant work, the quality work that our branches are doing each quarter and referring to a question regarding, for instance, corporates and so on. And then of course, taking in collateral, additional collateral if you have a more problematic situation and so on. And of course, there are mix changes, as you say, for instance, bank loans as opposed to loans with security in real estate, you have seen more of real estate backed loans than loans without any pledges. There has been some sort of trend, but that is not something that we are sitting central and deciding that's just a function of the market because that's how the demand from the clients have been, so to say. And of course, as you know, a lot of Swedish corporates nowadays have a lot of money themselves.
They are in a very good liquidity position and they don't necessarily have very big investment plans yet, although they are now starting to look at their future investments because of a bit more positive climate, one must say. But the loan demand on the corporate side has been weak as you can see from the general market statistics in Sweden from the corporate side.
Okay. Thank you.
That concludes our Q and A session. Please go ahead, speakers.
Then thank you very much for participating. And as usual, don't hesitate to call us if you have any more questions. And then as we say in Sweden, glad valbor. And thank you very much for participating. Bye.