Ladies and gentlemen, welcome to Handelsbanken's Year End Report 2013. Today, I'm pleased to present Mr. Olesdenst, CFO. For the first part of this call, all participants will be in listen only mode. And afterwards, there will be a question and answer session.
Speaker, please begin.
Good morning, everyone, and welcome to this conference call for the Q4 and full year 2013. Joining me today, I have Michael Hallacher, Head of Investor Relations Lars Hoglund, Head of Debt IR and Nolander, Group Head of Accounting. The slides used for my presentation are as usual available at handersbanken.com. As before, let me first start with the well known Slide number 2, since it's such a good summary of the bank's performance from a shareholder perspective. Here you can see that the annualized growth in equity per share including dividends is 15% also after adding 2013.
We have kept the equity generation at this level throughout the financial crisis in spite of the adverse business climate and increased capitalization. Another way of putting it is that equity per share plus accumulated dividends have increased from NOK 110 per share when the financial crisis started in the Q3 2007 to NOK 263 per share at the end of 13, all generated internally by the bank's business model. The business model in itself is unaltered now for some 40 years, and growth is generated by taking this way of doing banking to more locations, new branches and new clients and especially outside Sweden where margins are much better. Altogether, a well functioning, proven and repeatable organic growth model. It is also an efficient model in that the business itself creates the capital needed for future expansion.
And as you know, we are the only bank that has not taken cheap Central Bank funding nor stated nor asked our shareholders for new capital. On the contrary, the Board proposes a total dividend of SEK 16 spite of this, capital In spite of this, capitalization continued to increase both year on year and sequentially quarter on quarter. It goes without saying that we will, however, not increase capitalization indefinitely. A new capital goal will be decided when the new capital rules have been finalized. On Slide number 7, you can see the profit and loss account.
If you compare the Q4 2013 to the same quarter in 2012, operating profit improved by 13%. Revenues were up 4% with net fee and commission income up 10%. Expenses were 1% lower despite our continued expansion in 2013. The cost reduction was driven by other administrative expenses that fell by 7%. Loan losses decreased by 18%.
If we then look at full year 2013 compared to 2012, profit after tax increased by 16%, adjusted for the one off reversal of deferred tax that we recorded in the Q4 2012. Operating profit improved by 6% for the group and by 27% for branch office operations outside Sweden. Net interest income rose by 2%. And outside Sweden in local currencies, the increase was 20%. Net commission income improved by 6% driven by higher asset management and advisory fees.
And compared to the 3rd quarter, the increase was 11%. In Sweden, the bank had the largest net inflows of mutual funds of all players for the 4th positively to the higher fees and partly through the acquisition of Hartwood in the UK. Net gains and losses on financial items increased by 21% mainly as a result of higher client activity. And in total, revenues increased by 4%, while total expenses increased by 2%. Staff costs were up 2% and also other costs increased 2% mainly as a result of a higher cost for IT development.
Loan loss ratio was 7 basis points for the full year as well as for the Q4 compared to 8 basis points in 2012. And the credit quality remains solid. Then on Slide number 24, we show the development of net interest income, up 1% during the Q4. On the back of lower interest rates, deposit margins in Sweden decreased in the 4th quarter and had a negative impact of SEK 80 7,000,000. However, deposit volumes in Sweden increased and added 12,000,000.
Lending margins in Sweden were again stable. Our mortgage margin remained at 88 basis points for the 4th consecutive quarter. All in all, net interest income from Swedish lending increased by 29,000,000 in the quarter, driven primarily by a slight volume growth in mortgages. The corporate loan demand remained weak. In the home markets outside Sweden, net interest income improved by EUR 42,000,000 and here lending margins continued to improve in most home markets and deposit volume growth more than compensated for decreased deposit margins.
The benchmark effect, together with lower state fees and some other items, increased net interest income by SEK 66 1,000,000 and currency effects gave another SEK 27,000,000 improvement quarter on quarter. Then back to slide number 9. We look at the net interest income development in Sweden. During 2013, net interest income was negatively affected by lower interest rates,
which lowered the deposit margins in Sweden,
taking away EUR 9.50 billion The stable rate in the 4th quarter again declined by 7 basis points. With lending margins in Sweden being With lending margins in Sweden being stable and loan demand still weak from the corporate customers, the increase in net interest income from Swedish lending could not fully compensate for the decline in deposit margins with the Swedish lending business adding some SEK 637,000,000 to the net interest income. Then on Slide number 8, you can see the development of total net interest income in the group since 1998. With Sweden showing limited growth, this slide, I think, clearly illustrates the impact from our expansion in home markets outside Sweden. Since 2,007, the group compounded average annual growth in net interest income amounts to 9% in spite of weak corporate loan demand in Sweden and in spite of the large negative impact from lower deposit margins.
The growth is, of course, the result of our decision back in 2,007 to enhance the UK expansion, but also by the contribution from the other home markets outside Sweden. I think it's also interesting to note that the lending margins in the home markets outside Sweden where we grow are higher than those margins in Sweden. The increased portion of volumes outside Sweden is thus gradually beneficial in ROE terms with the new volumes being more profitable than the group back book. In local currencies, net interest income in home markets outside Sweden grew by 20% in 2013. The largest improvements were in the UK, up 23% Finland, up 18% and the Netherlands, up 30%.
Here, not only higher business volumes, but also increased lending margins outside Sweden explained the strong improvement. Now let's turn to Slide number 15, which illustrates the increased importance of the non Swedish home in terms of earnings generation. Here you can see the non Swedish home market share of the group's 12 months moving average operating profit. The share has gone from 15% in the Q1 2011 to 29% in Q4 2013. And looking at the Q4 2013 isolated, the share was 30%.
In 2013, operating profit in home markets outside Sweden grew by 27%. And this is, of course, in spite of the expansion costs for our new branches. Earnings growth has not only been driven by the increase in net interest income, but also by net fees and commissions. Deeper customer relationships also mean more fee related business as the branch penetrates local markets and gets a larger share of wallet. Fees and commission grew by some 20% in 2013 for the home markets outside Sweden with 8 percentage points coming from the acquisition of Hartwood, which is included from the end of May.
In 2013, the bank opened in total 30 5 new branches outside Sweden and 2 in Sweden. Even though new branches contributed to the volumes growth, it is also clear that the existing branches have been very successful in penetrating local markets and attracting new good customers. Also with the branches building deeper relationships with existing customers, deposit volumes have grown more than lending during 2013 in both U. K. And the Netherlands.
This trend has also strengthened more and more throughout the year and also in other home markets, including Sweden. Then moving on to Slide number 11, you can see the financial position of the bank, which has continued to strengthen during the Q4. The Board is proposing a total dividend of NOK 16.50 per share, of which NOK 11.50 is ordinary dividend. The total payout ratio for the year then amounts to 73%. Despite increased dividend, the bank has continued to build capital and the fully loaded Basel 3 quarter 1 ratio rose by 0.1 percentage points sequentially to 18.9% in the Q4 2013.
The total Basel III capital adequacy ratio ratio has increased throughout the year and now amounts to 21.6%. The capital adequacy ratio in Basel II terms also improved to 21.6%, while the core Tier 1 ratio in Basel II increased to 19.2%. The result and improved lending mix throughout the year compensated for the decline in quarter 1 that was a result of the higher proposed dividend, higher lending volumes and slight negative migrations. Then on Slide number 12, regarding new capital regulation. I will regrettably have to repeat a lot of what was said after the Q3 report as the final new capital regulation still remains unknown.
The Swedish uncertainty regards Pillar 2, the mix of capital required as well as which buffers will be included and also the potential consequences that could come from a breach of a Pillar 2 buffer. And in order for us to be able to set the long term capital goals, these uncertainties must first be resolved. The good part is that we have an even stronger starting point now in deciding a new capital target, having improved our Basel III core Tier 1 capital ratio throughout 2013, and that is in spite of the proposed higher dividend. Needless to say, we hope that clarity regarding the new capital regulation will be provided shortly and that we can decide on the new capital goal. Slide number 13 shows our activity in the funding market.
Here in total during 2013, the bank has issued SEK 281,000,000,000 worth of long term funding. 38% of the issued volume was senior unsecured debt and at the same time, bond volumes of SEK 149,000,000,000 matured during the year, out of which 28% was senior debt. The bank has thus continued to increase its share of senior unsecured debt in relation to capital bonds. As you know, we think it's very important to keep high volume outside the cover pool to serve as collateral for senior unsecured stakeholders. The total share of nonencumbered assets versus unsecured funding increased further in 2013 from 2 0 7% in 2012 to 2 22% at the end of 2013.
We also started off 2014 by issuing EUR 1,500,000,000 of subordinated debt in Tier 2 format. And we think regardless of the Swedish implementation of CAD 4, it's clear that Tier 2 will still play a role in the capital base going forward. The bank has called a total of SEK 30,000,000,000 worth of subordinated debt since 2011. And since we have had many requests from global investors for such an investment for a very long time now, We took this opportunity in early January. The interest was overwhelming.
And after only 33 minutes, the book exceeded the amount we were looking for. The coupon, 2.66%, was the tightest coupon ever received for this type of instrument from European Bank. This was enabled by an extremely high quality order book where more than 220 global investors put in orders in excess of EUR 5,500,000,000. Then let's turn to Slide number 17, which shows the development in our UK branch office operations. Here, we opened 20 new branches in 20 13.
Out of these, 10 were opened in the 4th quarter. And in addition, 9 more branch managers have been appointed for further branch openings. And if we include this, we just had 170 branches in the UK at year end. But it's also clear that more and more growth in our UK business comes from existing branches. They are both adding good customers but also deepening and broadening the relationships with existing customers.
This becomes very visible if you look at the volume growth in deposits, up 92% year on year compared to the lending growth, which was 15%. In spite of the investments in the branch network expansion, operating profit in local currency increased by 20% in 2013. Revenues increased by 34%, where net commissions more than doubled. Here, Hartford, of course, made an important contribution with assets under management growing some 20 percent since the acquisition in the end of May. Credit quality remains strong with net loan loss recoveries of SEK 2,000,000 in the 4th quarter.
And for the 5th consecutive year, Handelsbanken also had the most satisfied customers of any bank in the UK, both among corporate as private customers, and this is according to the EPC survey. So to summarize, shareholder value measured as equity per share, including dividends, continued a steady growth of 15% per year since the start of the financial crisis in 2,007. Profit after tax adjusted for tax one off item 2012 increased by 16% year on year. And the bank has further strengthened the capital position also after deduction of the proposed higher dividend. In spite of the strong capital position, return on equity amounted to 13.9%, an increase of 0.8% compared to last year adjusted for the 2012 one off tax item.
The Board proposes a total dividend of NOK 16.50 per share, of which NOK 11.50 is ordinary dividend. This correspond to 73% total payout ratio for 2013 And the new capital goal will be communicated when the new capital regulation has been finalized. Our efforts in the savings area are paying off not only Sweden but also in other home markets with growing fees and commissions as well as market share. We continue to grow outside Sweden both through existing branches and through the 35 new branches in total that we opened in 2013 outside Sweden. Here, the new volumes generate higher ROE than the back book since lending margins outside Sweden are at a high level.
The proportion of operating results generated in home markets outside Sweden has steadily increased and now reached 30% in the 4th quarter. And with that, I conclude my presentation and open up for questions. Thank you.
Our first question comes from Mr. Hakan Fodder from DNB Markets. Please go ahead.
Yeah. Hi. Hakan Fodder, DNB. Two quick questions on distribution. Firstly, on the total payout ratio level.
Given your current growth rates, I still you should still see capital generation with the current total payout ratios. Hence, is there any reason why extraordinary dividends shouldn't become a recurring feature for you going forward? And then secondly, a peculiarity.
If I
look at your extraordinary dividends and the employee convertible bonds, these are the exact same size. Is there any relationship here? Or is that just a mere coincidence? Thank you.
Thank you very much for that. When it comes to dividends, as you probably know, we first prioritize the growth and the capital need for our growth. And then if there is any money left over, so to say, we are, of course, keen to distribute that to our shareholders after having taken into consideration that we should have enough capitalization in the bank because of our very prudent stance when it comes to financial matters. So we have no as you may know, we have no target when it comes to the payout ratio. The payout ratio would seem to be a residual of the other things.
And we don't have any, as you know, any budget or projections for this. When you talk about the personal convertible, as you say, it happens to be the same amount. I think when thinking about capitalization, I think a very positive thing for us is that as you've probably seen, the Basel III core capital ratio is actually increasing and also increasing after this dividend and which I think we have communicated very clear now. We are awaiting clarity on the new capital regulation and are then of course after that keen to formulate our capital goal.
Okay. Excellent.
Our next question comes from Mr. Nick Davy from UBS. Please go ahead.
Yes. Good morning, A few questions from my side please. First on costs. I know as you said you don't make a budget in the future. Just wondered if you could reflect on cost growth this year particularly in Swedish Retail Banking up 4% year on year.
I know we've touched on this in previous quarters. Just wondered if you had some comments on what you would see as a or how happy, how content you are with that level of cost and what you're seeing from your branch managers as far as cost investment at this point in the cycle? And maybe any outlook statements you can make there? Secondly, please on potential high mortgage risk rates in Sweden. Just if you could please remind us how quickly that would get translated through to your branch managers, where at what point you'd be pushing out more equity into the Swedish Retail Banking operations just to get a flavor for how quickly you would respond to any proposed regulation on that side?
And the third question, please. Clearly, you've highlighted a few areas of uncertainty on capital regulation. And clearly, we're all sympathetic to the amount of uncertainty. I think you also referenced a lot of these discussions are the same as at Q3. It seems from the outside in that what's changed Q3 is some discussions of Pillar 2A and Pillar 2B buffers.
And I just wondered whether you could shed any light at all as far as any early preliminary discussions you've had on those buffers. Some of your peers seem worried that this may be a 300 basis point capital requirement at the worst point, whether you've done any preliminary estimates about how sensitive you might be to those kinds of themes? Thank you.
Thank you very much for those questions. When it comes to the costincome ratio, as you've seen, we have an improvement year on year. Costincome ratio now for 2013, 47%, down from 47.6 percent. And if you look more specifically into our Swedish operation, we now run-in the 4th quarter Swedish operation with a costincome ratio of 35.3%, and that was 36.1 percent in Q4 2012. So the cost level is in that sense, of course, not of any concern.
But you also probably in your question point to the fact that we have a situation where income is not growing as fast as costs are. And that is always a warning sign. And of course, in our system, automatically taken care of since we don't have central decision taking in this. But all, of course, that are responsible for the results automatically when this happens do a lot of things. Secondly, on the 25% risk weights, our steering system is very easy to understand that all legislation that is decided is all is immediately filtered through in the internal cost pricing.
But then in our system, it's the branches that is totally free to set the prices towards the clients. So when we see have a regulation change, of course, even though different branches. And it's in a matter of as a matter of fact, handled very individually towards each client what is reasonable. One extreme example was in the 1990 financial crisis where the overnight rate was 500 percent. And I can tell you that no client in Handelsbanken paid 500% at that time.
So you have to see the whole chain of how we work in order to understand how the repricing in the book will come alive over time. And from a group perspective, as you know, we have never run the bank on the sort of the minimum capital standards. We have large buffers over that. So from a group perspective, this is, of course, not dramatic in any way. We have ample buffers in our capital.
And from a profitability point of view, I am absolutely sure that over time, not immediately but in a couple of quarters, of course, the market prices will always in a market economy reflect the sales cost that you have for producing the products. Then the third question is a very good one, and I'm afraid I can't give you any inside information or light on this. In my mind, there is a lot of confusion because of the complexity of implementing the CRD4 rules in Sweden and also applying what has been communicated in 2011 according to what's referred to as the Swedish Finnish. And especially when you come into the Pillar 2 questions, it becomes very obvious that you have very important decision to take, how the buffer should be in line, also which capital to use and to realign that with the ambitions that Sweden has to have very safe and stable banks. So we are awaiting this, and I have no educated guess on how this process where it will end.
And in the meantime, we have prepared ourselves, as you know, with our capital situation in 2 ways: the level that we have, also the T2 issue that we did in Q1 and also, of course, the fact that a very high proportion, about 89% of our capital is core. So there is room for fine tuning probably when definitions are known on, for instance, what is a cocoa and what is the meaning of the cocoa and when can you use it, etcetera, etcetera.
Okay. Very clear. Thank you.
Our next question comes from Ms. Claire Kane from RBC. Please go ahead.
Hi. Thanks for taking the questions. I had a quick follow-up to Nick's question on Pillar 2 and then one on the leverage ratio. So on Pillar 2, would you maybe be able to give us or tell us what your current Pillar 2 buffer is in terms of total capital in percentage points? And whether or not you think that what they brought in, in the U.
K. In terms of this pillar 2 the stress buffer is something that's being discussed in Sweden. And then my question on the leverage ratio. You mentioned you would give some scenarios in the Pillar 3 documents. And I was just wondering if you could give us a range potentially or where you see the biggest
As you know, in the current regime, the Basel II regime or I should say the regime we used to have, the individual add ons that was put from the FSA towards the Swedish banks is not officially communicated. And I think that has to do with the fact that in order for that number to have a meaningful meaning, you have to understand how they set this. And this has not been communicated from the FSA. And also, of course, what is the meaning in the Basel 2 world if you don't adhere to the capital need. But rest assured that we are totally compliant and have ample buffers above what is needed.
But you point to one very important question, which I think has to be considered now when the Pillar 2 questions are to be decided Because if Pillar 2 has a sort of Pillar 1 meaning that is a hard measure, something that you will have consequences if you do not adhere to. Of course, you have, from the authority side, be very specific on how you set this and why you set these numbers. So that is part of what has to be decided from the authorities now when they implement Pillar 2 in Basel III terms. When it comes to leverage ratio, much have been said and much more has to be said before that will be any sort of binding or any measure to take into consideration. And that is the reason why we don't have put out any numbers.
I know that you are very educated and very capable of calculating yourself. But as a matter of service for those that are not so into the details we have in the Pillar 3 report just listed, starting from the deductions? Well, it's, of course, derivatives, netting of derivatives. It's Central Bank placings that you got that's 100% safe or perceived if you have a good central bank at least. And then also at the other end, taking away mortgages.
So in all that kind of range, you will, of course, end up in different numbers. And this is just to show that it is very hard to have any sort of educated guess where this will land. Here again, of course, it will maybe in the end also be a matter of national implementation. You also asked if in the Pillar 2 discussion, if the British proposal is something that is used as a benchmark or so on. And of course, I only know that everyone is very, very aware of the British proposal and rules here.
Whether that will influence the authorities here or not, I don't want to speculate in that. You have to ask the authorities here.
Okay. Thank you very much. Still very clear.
Our next question comes from Mr. Omar Khinner from Deutsche Bank. Please go ahead.
Good morning. Thanks very much for taking the questions. I just had another just two questions. 1 on the €3,200,000,000 employee convertible program. Is it determined yet what kind of capital instrument before conversion this will be?
And how exactly it fits into the bank's capital planning. I know you've done similar programs in 2,008 11 for the employees, but is there any additional thinking around capital this time around? And I was also just wondering whether the 7% trigger, whether there's been any sort of hint from the Swedish regulators to what the appropriate level could be? And then I just had a second around core Tier 1 target.
Thank you very much. That was a lot in one question, so to say. Let me try to just address what I think you are asking. As you know, we had a convertible in 2,008 that have now matured during 2013. So we issue another one.
It has been it will be issued on totally market terms. So there's no subsidizing in this. When it comes to the exact mechanics of this, we put out some now in the press release. And of course, all the details will be reported in when you look at what's it called, the not the invitation, but the invitation to the Annual General Meeting. And that, I believe, is next Thursday that, that will be issued.
And then you will have more of the bits and pieces there. You also asked, if I understand you correctly, about trigger levels and in relation to this. And there have been no official communication as far as I know from the Swedish authorities as to the decision on where trigger levels should be. But again, then you have to ask this question from different angles. I mean, a capital instrument is what it is in itself, protecting bondholders and so on.
Then you have regulation. And in some aspects, an instrument might be something that you can calculate with and in other instances not.
And here, of course, there is a lot of confusion
when it comes to the Pillar 1, Pillar 2 aspects of it. Okay, great. So thanks. Core
Tier 1 target. I understand core Tier 1 target. I understand that the regulatory uncertainties are sort of preventing you from sort of giving us a clear picture of where you think the goal could be. But could you possibly set a floor for what you think those requirements could be? I mean if we assume a 12% Swedish finish, 25% risk weights and up to 2.5 countercyclical buffer then it feels like the hurdle rate will probably be around 17.5% core Tier 1 before any kind of additional sort of Pillar 2 requirement.
So do you see 17.5% as a floor? Or do you think the floor could potentially be lower than that? And just a related question. How will you manage further special dividends once you are at a point when you can determine the target and whether there is surplus capital or not? Are you going to think about doing a one off special dividend adjustment?
Or should we think about the extra five special dividends as a stream of payments from here? Thank you.
Thank you. The question was asked also in the press conference on the last portion of your question. And it was we were very clear to say that when we make this dividend, it's in relationship to that, we have actually increased our capitalization also off these dividends and in relation to the capital need for the lending we have done, so to say. That's why you have this total distribution this year. It is not in anticipation of any special outcome of the rules that are coming.
And then you asked firstly about these rules and how you should put the buffers above each other or if not or and you also in your calculation, if I understand your you correctly, you sort of put the maybe the 25% maybe risk weights on top of the Pillar 1 numbers. That could be one outcome. But I can think about at least 5 other outcomes. And again, I don't want to speculate on how they would think about this. We will we are very well prepared, and we just wait for what will come.
And after that, of course, we will formulate our capital goal. We are very ready, but we have to know the rules. You talked about dividends or maybe buybacks or so on. I think there has been a shift now in investors I meet in favor of dividends. If you are in a situation you've got extra capital, how should you distribute it?
Well, then most people, I think, today say they prefer dividends compared to buybacks. But of course, the buybacks also have another function, and that is that during the year can calibrate a little bit. So that is the reason that the Board, as you've probably seen, proposes that the current possibility of buyback will be extended. So that is the proposal to the ANGI and are meeting on this.
Okay. So how quickly do you think a decision if you do determine the surplus capital once you calibrate the rules exactly, which will probably take a couple of months. Then after that, do you see a kind of quick decision in terms of sort of how any surplus if there is indeed any surplus will be managed?
Again, it's so hard to speculate when you don't know the outcome is and when which clarity will be reached. So I think it's very hard to comment upon that. As a general rule, as you know, we have ROE as our company target, something that we have fulfilled now for 42 consecutive years. So it goes without saying that we are not interested in having too much capital. So of course, we want to take a decision as soon as we can.
But again, I think it's very hard to point to any point in time at this moment when this clarity will come.
Okay, great. Thank you very much.
Our next question comes from Mr. Jacob Kruse from Autonomous. Please go ahead.
Hi, thank you. I just wanted to follow-up on the dividend outlook question. If we assume that you don't get clarity and we continue to have regulatory uncertainty going on for basically an indefinite period of time or for the next couple of years, Should we think about your dividend just from your comments as a function of not building more capital, but also not reducing your capital levels, so effectively earnings less capital consumption for risk weighted asset growth? And secondly, just on the cost side in Swedish retail, I think you mentioned a number of 30% or below cost income as a potential target in Q3. Is that something that you have developed in any way in terms of how you could get there?
Thank you.
Well, again, on the capital, I'm afraid I can't be clearer than I've been that you have to listen to what the authority says and where the regulation goes and then calibrate the capital. And we want to make sure that we always got capital for our expansion. We know that, that is the best way to put our shareholders' money in our organic growth model. And but of course, there is a limit on how fast we can grow because we are wanted to be 100% quality, and we got a stringent credit policy, etcetera, etcetera. So and when we grow at that pace, if we got extra capital, we are very happy to pay it out.
So I think as you go along now, we have to look at the regulatory situation. Having said that, of course, there is, as you know, immense uncertainty now. I mean, if you look in history, I don't think there have been many instances in terms of capitalization where there have been such immense difference of numbers out in the air. And hopefully, this cannot continue for a very, very long time, I hope. But again, we have to come back on that.
Cost income ratio, you talked about we have said that in a longer perspective, we think it would be possible to run a branch office network with a costincome ratio below 30%. This is what we do now in Great Britain, for instance. If you take branches that are older than sort of 8, 9 years, we're already there. In there, you can see also many general level, of course, when you look at Sweden, that's At the general level, of course, when you look at Sweden, that's about 35%. It's, of course, influenced by the fact that interest level is very, very low.
Structurally, we have been talking and that is certainly something that we are working with on the cost side, the transformation of letting our branches use the same platform, digital platform as our clients, the Internet solutions and also the platform in the mobile telephone banking that we got and so on. And thereby, we can reduce the IT costs for the backbone the whole backbone system. That's an ongoing process that seems promising. It's a gradual process. So we have not changed at all our view in this respect.
Okay. Thank you.
Our next question comes from Sjoani Ekblom from Bank of America. Please go ahead.
Thank you. Just two questions from my side. First, on net interest income, I think at least relative to my expectations, the non Swedish branch operations were a bit weaker than expected, offset by a big pickup in the corporate center. Can you talk about what's going on there? I mean, is this a timing issue in terms of passing on better funding costs?
Or what's driving that pickup? And if it's just pressure related, how sustainable is the current level there? And then secondly, I just want to come back to the contingent convert. I mean, you made the point several times with convert, I should say, that no rules have been set. So why do you put this 7% trigger level in there If the rules are so uncertain, why not wait until they are known?
What drove that decision?
Right. I'm not totally with you on the NII, but I'm afraid I haven't calibrated our results to your projections. But as a general remark to your question, there's nothing odd about the group net interest income as such in terms of one offs or so on. You always got the benchmark effects and so on, but we are very transparent on this. And there's nothing else that is sort of strange between the what you refer to as the corporate center and the segments and so on.
As you know, in terms of timing, since we've got the central treasury function, they are in charge of the funding. And of course, there is time lag between the funding they take in and when it's used for the lending in the segments. But over time, there's no I mean, there's no special effects. This is, of course, filtered through the internal pricing system. The 7% trigger, well, as I think maybe the most important starting point is that a capital instrument is what a capital instrument is.
And regardless of which rules that will apply on how we can calculate different measures From a bondholders, senior bondholders' view, the capital instrument is what it is. Also actually from a ratings point of view, the capital instrument is what it is. Then also rating agencies got ratios where they got definitions what you can include in those ratios. But also rating agencies take into consideration what is facts, what is the actual instrument. And of course, the 7% trigger gives a protection to senior bondholders.
And so that is the answer to that. But again, we it's not based on any firm commitment from the Swedish authorities, about the 7% trigger.
Okay. Thank you very much.
Our next question comes from Ms. Sophie Petersen from JPMorgan. Please go ahead.
Yeah. Hi. Here is Sophie from JPMorgan. I had one follow-up question on the Pillar 2 buffer. Could you just confirm that the Pillar 2 buffer only incorporates higher mortgage risk rates?
Or is there something else in the Pillar 2 buffer that also will be included? And then I was wondering if you could just talk a little bit about kind of your macro view and how you view the competitive environment in Sweden and also the Nordic region. You mentioned that you saw relatively low corporate loan growth, but if you could just elaborate a little bit more on that. And then lastly, I was wondering how we should think about your RWAs in 2013, your loans were up 6%, but your RWAs were down 5% and your corporate risk rates are at 28%. How should we think about your the corporate risk rates?
Do you think there is some chance that the Swedish regulator will also include or will also increase the corporate risk rates? Thank you.
Thank you. Well, your first question is a very relevant one. As you know, in Pillar 2 terms and sorry, Basel 2 terms and also Basel 3 terms, there is ample possibilities for the FSA to put in whatever kind of requirements that they want. So that is an outstanding question, what will the buffer to what is the content question that is certainly outstanding and we are waiting for to know. The macro in Sweden, yes, loan demand from corporates, as you've seen, has been weak, while mortgages has been increasing in sort of a rate of around 5%.
And you can see a slight increase in the demand for what's called left hand Promises. Promises and commitments. You can see a slight increase here. But and that can sometimes be a signal that we are seeing a better term. I think the underlying tone in Sweden when you talk to the large corporates is that although that has certainly not been seen in the reports from these corporates in Q1, the underlying tone is that it is an underlying improvement, although it's a slow one.
And if you look at margins, as you probably have seen, margins in Sweden has been very flattish, while in Norway, you have seen a sharp increase. And then Q3, Q4, that has stopped and stabilized. While in Finland, there is certainly an increase and also which has to do with the fact that it takes some time, quite a considerable time to reprice the book because of the legislation in Finland. You also see from our numbers in Finland that we have a much higher increase in NII than volumes, and that means that margins also has gone up in Denmark. RWA, you had 2 questions.
One is on the banks functioning. As you've probably seen from the figures here, the volumes that is coming in is of a higher quality than the volume that's going out. We are constantly looking at each and every credit in the bank each quarter. Each branch office does that. And they always try to make this happen that try to get out and get more securities pledges for lending that is not top quality.
And then of course, when you take in new volumes, make sure that it's top quality. So this is an ongoing improvement processes that's always there. Apart from that, you asked about the authorities and risk weights. And here you go again. There is a debate, as you know, in Basel.
There is a general debate, leverage ratio, minimal risk weights and so on. When it comes to the quality, and I think this is very important, the quality in our figures, our models and the amount of conservativeness in our models, we are feel very, very safe and have every reason to believe that everybody saw the same opinion that we have ample buffers in how we have calculated our risk weights in relationship to the historical credit losses that we have had. You may have seen that, for instance, as the metrics on this, we hold 47 times an annual yearly credit loss, while our peers in the Nordic countries are at 17%. So we have no question mark on that. But then again, you have the general discussion on risk weights and leverage ratio and so