Ladies and gentlemen, welcome to Handelsbanken's Interim Report January to September 2013. Today, I'm pleased to present Mr. Ulfher as 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. Speakers, please begin.
Good morning and welcome to this conference call for the Q3 2013. Joining me today, I have Michael Hallacher, Head of Investor Relations Lars Herglund, Head of Debt IR and Jorgen Olander, Group Head of Accounting. The slides used for my presentation are as usual available at handersbanken.com. First, let me start with slide number 2 and here I hope you are not tired of the fact that this chart has looked the same for quite some time. Again in this quarter the average annual growth rate in shareholder value or equity per share plus dividends of 15% continued.
And again, as you know, this is the result of our business model which has been the same for the last 42 years regardless of business cycles being at overheated highs or at depressive financial crisis levels. Looking back some 30 years when I started in the bank then we only had branches in Sweden. And when I compare ourselves at that time with Handelsbanken of today, the big difference is that we today have a proven organic growth strategy. This strategy is repeatable, scalable with low risk and simply means doing the same thing over and over again. The growth here was slow at first, but since some 7 years ago by carefully and steadily taking the branch office to more and more places, it is now starting to be meaningful in a group context.
The persistent and vast investments done over the years is now starting to show in the figures with 30% of the group operating result now coming from home markets outside Sweden. Then on slide number 3, let me summarize some key points from the period. Compared to the 1st 9 months of 2012 profit after tax increased by 10%, Return on equity was 14.2% for the period as well as for the 3rd quarter and that was in spite of the fact that we continue to build capital. Quarter 1 ratio in fully loaded Basel III CRD4 terms increased by 1 percentage points during the Q3 to 18.8%. Growth outside Sweden is now starting to have a group impact with net interest income rose which rose in all home markets outside Sweden together by 6% quarter on quarter and with the result here increasing by 7% in the quarter.
Group loan losses decreased somewhat in the 3rd quarter to 6 basis points, down from 7 basis points in the 2nd quarter. The bank has further total liquidity reserve, which now exceeds SEK 800,000,000,000 And finally around capital, there are still uncertainties, actually recently increased uncertainties with regards to the implementation of CRD 4 in Sweden. However, we sincerely hope that these uncertainties will clear soon to enable such clarity that we can decide on our future capital target. Meanwhile, as you can see, we focus on building capital and with improved quality. On slide number 4, you can see how the 3rd quarter results look like.
And as you probably know, normally the 3rd quarter is seasonally weaker than the 2nd quarter. But this year's Q3 is however the highest of 3rd quarter results ever. And then going to slide number 5, you will see that for the 9 months period this also hold true. The 1st 9 months of 2013 being the best 9 months results of the bank ever. On slide number 6, we have the profit and loss account for the 9 months periods year on year.
And here you can see that net interest income rose by 2% in spite of deposit margins in Sweden having deteriorated by not less than SEK889 1,000,000 due to lower nominal interest rates. In branch office operations outside Sweden, however, net interest income increased substantially or 22% in local currencies. This was due to both increased number of clients and in combination with improved lending margins in all home markets outside Sweden. Net commission income increased by 4% mainly driven by higher asset management and advisory fees. And here strategically we focus on growth in the Swedish savings markets and we continue to grow our market share here.
Net gains and losses on financial items increased by 40%, chiefly as a result of improved earnings driven fixed income and FX businesses. Total expenses increased by 3%, where staff costs were up 2% and other costs were up 6% mainly due to increased IT related expenses. In total, we invest SEK 1,500,000,000 in completely new IT systems in 2013. Low loss ratio was 7 basis points for the 1st 9 months, but 6 basis points for the 3rd quarter and the credit quality remains solid. Then on slide number 19, we take a closer look at the net interest income in the 3rd quarter.
Here you can see that deposit margins in Sweden increased slightly this quarter and the deposit business improved net interest income by SEK 31,000,000 driven both by improved margins and higher volumes. Here Handelsbanken was the only of the 4 large Swedish banks that increased its market share of household deposits during the 1st 8 months of the year according to the Swedish National Statistics Bureau. Lending margins in Sweden continue to be stable both on mortgages and corporate lending. However, due to a slight mix change with decreased corporate and increased household volumes, combined lending margins declined by SEK 21,000,000 while higher total volumes contributed SEK 12,000,000. In all our home markets outside Sweden, both deposit and lending margins improved and here higher lending margins contributed even more than volume growth to this €160,000,000 improvement in net interest income.
Higher state fees in Sweden and the benchmark effect reduced net interest income by SEK 47,000,000 while other items including lower return on the bank's equity and lower net interest income in the liquidity portfolio gave a reduction of SEK 147,000,000. Then back to slide number 11, we here look at the net interest income growth by market since 2009. And I think this is one way of describing the strong dynamics in our organic growth model. Here you can see the compounded annual growth rate is 4% in Sweden, where loan demand is sluggish and decreased nominal interest rates have lowered deposits margins. On the contrary, in the U.
K. With our expansion there, the annual growth has been 42% in local currency terms. And looking at the other Nordic markets, you will see that annual growth has been at least 10%. It's also worthwhile to keep in mind that the margins we get on lending outside Sweden where we are growing are much higher than we get in Sweden. Thus, the incremental lending volumes we are adding have higher ROE than our group back book.
Then back to slide number 10, you can see net interest income in a loan perspective. Adding all home markets together, this slide show the growing importance of the non Swedish operations over the last 10 years. With the large investments we have done over the years outside Sweden, we are optimistic about our organic growth model going forward. Moving back to slide number 7, you can see that the financial position of the bank, which has continued to strengthen further, both in terms of liquidity and capital. In Basel II terms, the Tier 1 ratio increased to 21.5%.
The capital adequacy ratio increased to 21 point 7% and the core Tier 1 ratio increased to 19.3%, up from 17 point 3% 1 year ago. In fully loaded Basel III CRD4 terms, the Core Tier 1 ratio increased to 18.8%, up from 17.8% at the end of the second quarter. Towards the end of the Q3 this year, concerns around the U. S. Budgetary situation and the debt ceiling started to emerge in the market.
And as always in stressed markets, also this time the bank has had very high inflows of short U. S. Dollar deposits. So again, as so many times in this financial crisis, we have to say stop and reject U. S.
Dollar deposits from customers in order not to increase the bank's balance sheet too much. On the back of the increased uncertainties in the U. S, however, we allow the liquidity reserve to increase to over SEK 800,000,000,000 Out of this, SEK377 7,000,000,000 was placed overnight with central banks. And the total liquidity reserve now corresponds to more than 50% of our lending to the public. On Slide number 8, let me talk a bit more about the regulatory situation on capital.
As you can see, the starting point for the bank in deciding new capital target is very strong. During the last quarter, a lot of things have indeed been clarified, but at the same time also more uncertainties have materialized in Sweden. The Swedish government, FSA and Central Bank in the joint statement 2 years ago, very clearly stated that the SIFI buffer would be 5%. But in exchange, the transitional rules would be abolished when the CRD4 is implemented. However, the formal decisions for the implementation have still not yet been taken.
What will the calculation method of the SIFI buffer be? What about the capital requirements for Swedish banks volumes outside Sweden? Swedish rules or local rules or as suggested by some analysts a blend of these 2? On Pillar 2 in Sweden, what is the mix of capital allowed to meet the requirements? What are the types and size of the different buffers that will be included in Pillar 2?
What happens if a bank breaks through a Pillar 2 buffer? Then what instruments like hybrids, cocos, etcetera will be eligible in Sweden for Pillar 1 and or Pillar 2 purposes? A lot of questions Slide number 9 shows our activity in the funding market. Handelsbanken the euro senior market in August after the turbulence that came back to the funding markets in June. Our transaction generated reverse inquiries for a sterling transaction that we executed a couple of days later.
At the same time, we got a lot of interest from Switzerland and therefore also followed up with a smaller Swiss franc transaction. All of these were senior bonds. Then in September, we came to the U. S. Dollar senior market with an issue to take advantage of the very strong demand we have from U.
S. Dollar investors. Here as in all the international issues we have done, demand has been strong not only from domestic investors in the various markets, but sometimes even more intense from investors in other jurisdictions such as Asia. Then on slide number 14, a few words on the development in the U. K.
As can be seen from this slide, costincomeratio decreases by age of the branch and after 8 years the costincome ratio declines below the 30% level. During the Q3, we opened up 18 new locations, that is branch openings and branch managers having been appointed to open up new branches. We don't have any targets for the number of branches we open. The only thing that is important for us is to do the expansion with top quality and finding the right people. More and more new branch managers are nowadays also recruited internally.
The development in the U. K. Continues to outperform. Revenues in local currency increased 37% in the Q3 compared to Q3 2012. This year we have also seen a strong increase in deposit volumes as expected when branches mature.
The growth in end of period deposits was 51% since year end 2012, while lending grew by 12% in the same period. During the Q3, the absolute volume growth of deposits was twice as high as the volume growth of lending. Then on page number 15, we have another slide showing the U. K. Development.
Since the Q1 2019, in annual growth terms, income was up 41%, cost 20% sorry, 27% with an increased GAAP. The 3rd quarter was the 1st full quarter with Heartwood Wealth Group included in the numbers And the integration process here works very well. Since the acquisition, assets have grown by £200,000,000 to £1,700,000,000. Customers of Handelsbanken as well as Hartford are very enthusiastic about the new opportunities that have been created by the combination. A very high degree of our U.
K. Private customers have a profile which fits very well into the hotwood high end service and product offering. Total fees and commissions in the U. K. For the 1st 9 months increased by 92%.
Excluding Hartford, the growth was 30% and was explained by higher payment fees. So to summarize, equity per share including dividends continued its steady growth of 15% per year. Outside Sweden, we grow in lending where margins are a lot higher than in Sweden, outside Sweden increased by 7% in the quarter. In Sweden, the growth is focused on the savings area where the capital charge is minimal and we continue to take market share. The bank is building capital and the core Tier 1 ratio in fully loaded Basel III, CRD IV terms is now 18.8%.
We hope to soon have clarity on the Swedish capital rules, but meanwhile we had a return on equity of 14.2% in spite of the strong capital situation. The liquidity reserves have been increased and now exceed SEK 800,000,000,000. And with that, I conclude my presentation and open up for questions. Thank you.
Our first question comes from Mr. Alvaro Santo from Morgan Stanley. Please go ahead.
Hi, yes. Alvaro Santo from Morgan Stanley. Just a question a couple of questions. Today on we've seen from the ECB some details about their asset quality review, which clearly doesn't directly affect Handelsbanken. But given they're saying that they're going to review among others the risk weights and the leverage ratio is going to be taken into account in Europe.
Obviously that's the U. K. Regulator
looking at it in the U.
S. As well. Can you update us on what your thoughts are about the views on the Swedish regulator? And if that were to be implemented, can you give us a bit more detail where Handelsbanken stands and what constraints that could raise? And second, much more sort of detailed question about your results.
On Sweden, in your NII, we saw yesterday Swedbank report an increase and today both in yourselves and Nordea, that you've seen NII shrink quarter on quarter. Can you explain what drove that and what you're seeing in the mortgage market competition? Anything you could provide us on the outlook would be very useful. Thank you.
Thank you very much for those questions. On the first question AQR or rather the Swedish regulators view on risk weights and leverage ratio. There has been as you know a debate on risk weights on mortgages, whether it should be higher than the 15% that has been implemented by the FSA in the Pillar 2 context. Since this was just so recently implemented, the FSA really wants to see what is happening. So I don't personally anticipate any change in the near future on this.
On the more general question, leverage ratio, I think the general belief is that it will be implemented in probably a bit distant future as a sort of backstop. And I think the view here is that the risk weights are really the right way to see the system, but a leverage ratio could play a role as a backstop. For ourselves, of course, for Handelsbanken, I think it's very important to know that the value creation in Handelsbanken that you see that is coming from what's called origination or distribution that is our local presence and the high service level to the clients and also the ability to very, very granular do credit assessments being very, very close to the clients. But if a leverage ratio on a very high level would be implemented, of course, one would do as they do in America to securitize mortgages etcetera. But quite frankly, I think that is highly unlikely to happen and will only then be a very, very distant question.
On the NII increase and decrease in Sweden, for us you see that we have a mix effect. That means that lending to corporates volumes have gone down a little bit, while mortgage lending volumes has gone up a little bit. And you get these kinds of effects. So it's nothing dramatic. If you look at the margins for different products like mortgages and corporate loans, it's really very flat.
We have a very, very slight microscopic increase in mortgage margin, but it's so little. So when you look at the full basis points, it's still the same. Maybe you can say that we see in the market generally an increased competition in Sweden when it to the very, very largest corporate, but that's not something that has affected numbers very much. Thank you.
Our next question comes from Mr. Jantayoshi from Nomura. Please go ahead.
Hi, good morning. Can I ask a couple of questions as well? First one is on capital. On one of your slides, you clearly highlighted there are a number of unknowns that can impact your target definition. But if I try and be fairly bearish and say take the 5, add the 2.5 countercyclical buffer, add 25% mortgage risk weights, that's 2.8% pillar requirement give or take.
Your minimum is still 17.3% when I add all of that up. So and you're already at 18.8%, you'll probably be above 19% by the end of the year. Where is the constraint in your mind on the constraint in your mind on the capital? Even if I'm bearish, you're still above kind of where I can see bearish minimum levels for you. And if that is not a constraint, then what should we be thinking about payouts as we get into the end
of the year? That's the first one. Yes. Let me start with that question then. Well, as we say, we have seen actually during the quarter increased uncertainties when it comes to the Swedish implementation of the rules.
And we have listed the different parts of this, the SIFI buffer, how that will be Swiss that there will be a 5% SIFI charge in Sweden and that the transitional rules will be abolished. But the formal decision how this is going to be implemented has not yet been decided. And there are different ways that you can construct this. And that also comes into the second question, also what kind of capital should you have to also what kind of capital should you have to meet those fulfill those demands? And then, of course, we've got the question of which instruments that are eligible in terms of COCUS and Tier 1 instruments, what will the trigger levels be and so on.
While I think that the resolution recovery regime which was of course a large uncertainty in the Q2 that has been if not resolved. But the discussions if you have followed this more closely on the European level, I think one knows pretty much where that will stand. But of course, we have to know the levels. And then to your second question, when you talk about our numbers 18.8 and how is that in relation to the new regulation? Well, that is the main question, because we don't know the new regulation.
So it's very hard to say. But I think you're right when you say that we are probably the most well capitalized bank in the whole of Europe or at least one of them. So we're really at the top. And also as you can see the very good news, it's not news, but still is that we are very capital efficient. So the 15% growth that we generate is building capital.
And of course, we don't want to build capital indefinitely. So if there is any money left after having taken care of the needs for our growth, we will of course redistribute it to our shareholders. But we have to come back to your exact question when we know the regulation.
So it's unlikely then that we'll have visibility by end of Q4. It sounds like we'll only know next year.
We certainly hope that we will have that. And of course that as you know, the CID 4 regime is actually implemented as a general rule from year end. And then Sweden is late in its national implementation. But I know that authorities are very well aware of that there are annual general meetings coming up in the spring. And of course, therefore, the Q4 has a special meaning in this respect, because that is when you talk about how the dividend would look like and so on.
So we really, really hope that we will have enough visibility to be able to come back to that question in the Q4 report. But the frank answer is that we don't know. It's addressed with the regulators. Okay.
And the second question was on the leverage ratio. Can you tell me what your common equity Tier 1 CRD for leverage ratio is?
Then you first will have to tell me what is your definition of the ratio I have mentioned. If you have followed the debate on the leverage ratio, there are a vast number of different definitions how you should look on items like derivatives, other off balance sheet commitments and so on. And also, of course, the fact of whether you should include, for instance, Central Bank deposits and so on. But it's just it's very easy. If you have problems calculating yourself, just give our IR department a call and give you a definition and we will get you the number.
Okay. Thank you.
Our next question comes from Mr. Ronit Ghosh from Citigroup. Please go ahead.
Hi. Sorry about that. Just a couple of questions to follow-up on. First of all, on the positive side, net interest income in your Nordic operations outside Sweden progressed very nicely as you mentioned in your presentation. Could you give us a little bit more color around particularly Denmark and Finland?
How much of this do you think was a one off in terms of repricing? And how much do you think you can continue to see NII, these positive NII trends continue? The second question was a small point in detail. You probably mentioned it, I missed it, but your cash balances at the Central Bank went up about 60% year on year and looks like you had a big inflow of deposits on the other side of the balance sheet. Can you just give us some more details?
I'll repeat if you already mentioned that. And thirdly and finally, and I hesitate to ask this question, but a couple of days ago, S and P put out their usual stability, funding stability analysis again. And we've talked about this before, but I just want to give you an opportunity to make a comment about it because they've again highlighted you as one of the weaker banks in Europe on their version of the stable funding ratio.
Right. First question, NII outside countries outside Sweden. You can say, if you look at countries outside Sweden. You can say, if you look at Norway, it has the pace has decreased somewhat in the last quarter, but it's still on the rise. But in Denmark, we see a very strong effect.
And also in Finland, the difference between Denmark and Finland is that in Finland, it takes more time for the back book to reprice and that has to do with consumer legislation and also how you can change margins towards corporate clients. But definitely the margins are on upside. And because of this reason one would anticipate this margin increase to continue in Finland as the back book is repriced. In Denmark, you see a very big effect in the quarter. You see NII going up very, very, very much.
And then there's also a mix effect for us. As you know, the big two players have raised price towards the clients and we are really a price follower. But it means that we have always we have also been able to take on new clients with very good prices. When you look at the aggregate volume numbers for the quarter, you won't see a growth here and that's because that we have exchanged other deals for these new deals, but they have a clearly better margin. So you see big uptick in the NII.
And it's hard to predict the future, but I think the Danish market looks promising also going forward and we have lots of things to do there. So I'm a bit optimistic about also about Denmark. Cash flow sorry, cash inflow, deposit inflow, yes. Once again, this was a quarter, certainly at the end of the quarter where, of course, the U. S.
Situation with the question whether the U. S. Would pay on their treasury bills was, of course, creating a lot of recession in the market. And as always, when the turmoil is bigger, we get a lot of inflow from huge international companies and institutions that don't know where to place their dollars. So we are really the safe haven.
So we have to say stop actually in the quarter in order not to increase the balance sheet too much. But we did because of the turmoil and decide to increase our liquidity reserve. So it's now over SEK 800,000,000,000 and Swedish kronor. Then on Standard and Poor, well, as you know, Standard and Poor put us on their credit watch. They have implemented a somewhat new measurement and they looked at all banks throughout the world and they put some banks on CreditWatch.
We were one of them. And that was the starting point for their analysis really. So they came to Stockholm and we met and we described how we work and they went home and took us off the credit watch list. I think the whole on a more fundamental what is the risk, what is the liquidity risk what is the risk, what is the liquidity risk. And as you know, we have a very practical approach.
We would never want to end up in a situation where we will have liquidity problems. And as you know, we have a long tradition in this. We are the only bank in our vicinity that have not taken any central bank money, not in the last financial crisis nor in this financial crisis. I actually put in SEK 100,000,000,000 to the Swedish Riksbank, which they then use to save the other banks. And we look at the whole cash flow curve.
So we don't look only at 30 days or 1 year. We look at how long can we run the bank without taking up any new money from the market and in a situation where 10% of deposits leaves day 1, a catastrophe situation. And the answer is that we can run the bank for more than 2.5 years without taking on any new market funding. That for us is a very high degree of prudence, because if you have a situation like that, of course, you've got a lot of time to act and do other things. The measurements that some analysts looked at that's loans to deposit ratios and so on.
And then of course you have to make assumptions of how sticky are deposits. And in our view and in the practical world, of course, for instance, corporate deposits are not for are not sticky at all. And if you combine that with the new bail in regime that will soon come into force where corporate clients will actually lose their money in a bad situation for a bank. They haven't got any insurance, deposit insurance guarantee. Of course, corporate deposits will be even less sticky than they are today.
And therefore, of course, we do not use corporate deposits as a stable ground for the liquidity planning. We allow corporate deposits and deposits for other reasons because it's part of the clients' needs. And of course, we're happy for deposits, but for liquidity purpose when you plan liquidity it's not so good. And that I think is something that is now slowly shifting. But I think that's probably if you look at lists where we will end up in a sort of lower part of the list, that is the main question to assess how do you look at deposits.
Great. Thank you. That was a really helpful comprehensive answer. Just to circle back to my first question on the NIMs. You said you've been quite happy with what's happened in Denmark.
So there's a mix of both pricing and also market share, and I guess they're interconnected. But is it I mean, is the positive pickup you're seeing at NII really pricing across the market? Or is it that you're gaining business because the market leaders have been pushing too aggressively on pricing?
[SPEAKER JACQUES VAN DEN BROEK:] No. I mean, we are not that large in Denmark. So it's not a massive market share picking at all. It's also a fact that margins in the Danish markets are going up or let me rephrase that and say prices towards clients has definitely gone up. Then margins, of course, it depends on how you look how your funding We have always funded ourselves on market terms.
Our 2 main competitors in Denmark, the big two banks, they have not. And of course, when they have now starting to get out of their central bank funding and have to pay market prices, they have charged their clients a bit more. So therefore, it's not necessarily so that every bank gets the same margin pickup when the price towards the client goes up.
Great. Thank you. That's really clear.
Our next question comes from Mr. Nick Davy from UBS. Please go ahead.
Yes. Good morning, everyone. A couple of questions please from my side. First is the top level question really on Swedish Retail. You've clearly outlined a couple of the underlying drivers of the NII and trends in this quarter.
But if I just take
a step back and look at performance in the 1st 9 months of the year, I think you're running at revenues down 2% versus the equivalent period last year and costs up 6%. I know there are maybe a couple of funnies in that blurring comparability. But I just wondered if you could give some top level observations about how you think the decentralized model is reacting to the current low growth and sort of margin sub margin pressure environment in Sweden and whether you're happy with pre provision earnings trends there? The second 2, just a couple of follow-up questions, please. It was a very comprehensive answer on the S and P side.
I just wanted to get complete clarification. I realize that when they're in Stockholm, they saw you and SBAB. And I've seen some commentary from SBAB that they're adapting their funding plans in some respects and that was one of the reasons why they were taking off watch negative. I see in your case that your issuance run rate through the course of Q3 seems pretty much in line with what you did in the first half. So could we just get absolute clarity that there's no change at all from your perspective about your funding plans going forward?
And thirdly and finally, just to come back on the money market funds and the inflows of deposits, clearly a sign of your relative strength. But could you give us a favor of any earnings contribution they
make to the P
and L? Because I think from a trying to work out if the Eurozone temperature cools over time and some of those deposits flow out, if there's any earnings impact we should start to bake it? Thank you.
Yes. First on cost income ratio, I think really that is your question in Sweden. We have said that we see in the longer term possibilities that a cost income ratio in Sweden that is getting below 30%. And currently we are at sort of 35% and it has been at 33%, 34, 35 and so on. So I certainly understand your question here.
I think the main drivers we see for the possibility to improve the cost income ratio in Sweden is what we are doing on the savings side, which is now starting to get effects. 1st, you get the cost and then you get a better efficiency on that side. It's moving in the right direction. Secondly, we have rather large investments when it comes to our IT systems. I know we have talked about this before where we go from our old backbone systems into the web based way of meeting the clients and also for the branch office to conduct their business.
And thirdly, of course, it's a very adverse situation as you know in Sweden where we have lost a lot of money on margins on the deposit side, SEK889 1,000,000 if you take it year on year. So yes, to your answer, we think we can do a lot better in Sweden than we are Margins are very flattish in Sweden. They are the lowest of all Margins are very flattish in Sweden. They have the lowest of all our markets. Demand for lending on the corporate side is at best flat and we have a slow increase in mortgages, but as you know very low margins.
So that is the adverse situation. But so we think it's certainly scope for improvement. Standard and Poor, your question was really have you changed funding plans according to Standard and Poor? And no, we have the philosophy of the bank that we run the bank according to what we think is right and then the rating agency comes and rates us, but not vice versa. We don't run the bank according to what consultancy firms or rating agencies or so on want us to do.
We run the bank in the way we think is right. Having said that, of course, we always follow regulation and there is one piece of regulation in terms of liquidity that we are, of course, still waiting for. And that's the NSFR if it will come into effect, which is the sort of long term measurement that also, of course, has the implication on some of the measurements that I know Standard and Poor uses. You say that we have a lot of money from money market funds. I don't know where you have got that from.
That's not my impression. We got a lot of money from institutions. How should I put it? The United Nations of the world and corporate large corporate clients, which have a hard time finding a safe haven to place their money, but it's not the money market funds. We have never been reliant or had any sums to talk about from money market funds.
You saw that very clearly when you got the liquidity shock. We were the only bank in the whole of Europe that had full access when all the money markets funds withdraw, for instance, from French banks. So that's not correct. The earnings contribution question, no, this is not any business in itself. Why do we do this if you take the large institutions that place money?
Why do we take them? Well, they have credit department, which then take the effort to analyze Handelsbanken as a credit. And then when we go to the to the market for our bond funding, we know they are very interested in us, because they know us. And that's the part of the fact, one of many facts that always when we issue like for instance today we are in the Eurobond market, you see immediately a huge demand for our bond. So from that perspective, it's a good thing to do to help them, but it's not a business in itself.
So taking down that would not have any effect on the income statement.
Okay. So no positive carry. Okay. That's very clear. Can I ask just one follow-up question please on the savings, where you are clearly having some decent success there?
If I look at your net fee and commission income growth split that you give us helpfully in the fact book on report page 34. I'm just surprised it's not really translating into net fee and commission income growth in the Swedish business. Is trend growth there seems to be about 2% year on year in fees and commissions. And we're just seeing slightly higher pace of fee and commission income growth from some of your peers. Is there something I'm missing?
Is there some higher commission expenses that are coming through and offsetting? Or I suppose given your outlook that volumes are pretty stable, margins are pretty stable. I'm just wondering what upside risk we can find to this 2% fee and commission income growth run rate that's undergoing currently. I know you don't make any forecasts, but just any more color you can give us on that run rate currently and how you think it might trend? Thank you.
Yes. It's a good observation. We got a good inflow when it comes to mutual funds for instance and we take market share, but you're absolutely right. The potential the full potential of getting the bottom line effect has not been realized. And that has to do with the fact that we are taking costs for, how should I put it, the infrastructure things like education for staff and so on in order to be created.
So it's not a matter of that necessarily the fees from the clients has gone down. There is some sort of mix effects of course that some people use index funds rather than active funds and so on. But there is in our view definitely a scope for being even more efficient when it comes to translating this mutual fund inflows into bottom line result. That is correct. The first focus now has been to make sure to get the inflow and the clients.
And as you know, the mutual fund business is a tick business. So as time goes by, you will have the revenues. And if you have also schemes, which is very popular in Sweden, where you save monthly into mutual fund. And when you add those kind of volumes, of course, you get a nice effect over time, although it takes time to build up. But I think you're right and we're certainly working in that direction to get better effect on the commission income in terms of commission result, net the net result from this.
Okay. That's very clear. Thank you.
Our next question comes from Ms. Sophie Peterson from JPMorgan. Please go ahead.
Yes. Hi. Here is Sophie Pettenes from JPMorgan. I had 3 very short questions. First of all, you mentioned the transitional floor rules that they are still applicable in Sweden.
Can you just remind us what your core equity Tier 1 ratio under the transitional floor rules is? What the minimum requirement is? And then my second question, you had a 1% improvement quarter on quarter in your Basel III core equity Tier 1 ratio. Should we expect these kind of level of improvements going forward? Do you see more positive rating migration and other benefits helping your Basel III core Equity Tier 1 over the coming quarters?
And lastly, could you tell us what your Swedish LCR ratio is? Thank you.
Thank you. Let me start with the last question. The Swedish LCR ratio, we don't publish and no bank does. It's not regulation as you know in Sweden. And it's a simple fact to that, because if you add up all the Swedish banks, you will find that the banking system in Sweden has a lot less household deposits than other economies, which has to do with the fact that the Swedish savings to a very large extent are in pensions, the Swedish state pension system and also private pensions, they in turn then buy a cover bonds.
And that's the reason also why the Swedish authorities have not implemented the Swedish Krona LCR. So that is it's not a meaningful measure. We follow our liquidity in terms of, as I said how we can withstand an adverse situation and so on. Then when you asked about the core Tier 1 improvement of 1 percent. And it's of course you have to look at each quarter individually, but you can see that there is large important effect coming from the fact that new business entering the balance sheet has better credit quality than the ones that are leaving the balance sheet.
And this is the ongoing work that all our branches are doing and by looking at the credits each quarter. We look at each credit each quarter. And then if something very good improvement, constant improvement in terms of the core Tier 1 ratio. And we publish it as you see each quarter how the elements of this is coming. Apart from that, I can't see any sort of one offs.
I don't want to do any sort of prediction of how this can improve in the future, but there is certainly no one offs that I can see in the quarter improvement. And then when you come to the first question, transitional rules, there are different parts of this. Mikael, you have dug out the numbers. I think we can say if you look at in the numbers, we have a Tier 1 ratio according to transitional rules of 10.0%. That's what we disclosed.
And you can also see that the very large part of the capital base is core capital. So you would have to calculate that from that actually.
The the minimum requirement is? Because in Norway, the transitional floral minimum under the core Tier 1 is 10%. So what is it in Sweden?
There is no rule in Sweden when it comes to core capital. The Basel I rules are Tier 1 capital and total capital measurements.
And what is the minimum level there?
8%.
So just to clarify the transitional rules even if you kind of mentioned them in your presentation, it won't have an impact for your dividend payout or limit you when you pay your dividend?
The transitional rules as such we are as you can see clearly over, yes.
Okay, great. Thanks.
Our next question comes from Mr. Ricardo Doroughverde from Mediobanca. Please go ahead.
Yes, good morning to everybody. I have just one question. It's on risk weighted assets. As far as I understand, the improvement in the Basel III core capital is mostly due to risk assets also to risk assets going down. And you mentioned positive rate in migrations.
This is something I'm a bit confused. The Swedish economy in general has improved over the past 3 months, fair enough, like anywhere else in Europe, hopefully. And this has been immediately reflected in your capital requirements. In the previous quarters where there was not any kind of improvement and maybe also deterioration, I don't personally don't remember any particular deterioration in the risk weights. So I'm just wondering how can this be possible that immediately after a positive period everything is reflected in the models?
And before there was no deterioration in the risk weights? I just don't get it. Thank you.
Well, I think maybe you confuse 2 things. If you divide it into the portion of how the back book migrates to either positive or negative, that's one effect. The other effect is what we call volume migration and that is that the new volumes that we are taking on has a better quality than the volumes that are leaving the balance sheet. And you can see here that the volume migration in the quarter was 0.3 percent positive, but it was a negative credit risk migration of 0.1. So you're absolutely right.
And you can see if you look at our quarterly report, you can see the reflection. Of course, it's not one to 1 to GDP developments or so on, because it depends on your portfolio. But the point here is that the constant credit work done by all our by this constant credit work done by all our branch offices.
Okay. But what is the risk weight of the new originated credit?
That depends in total on what it is. You can see all the risk weights and the distribution how it looks in different categories both in one of the notes. It's on, let's see, page 49 and note 20. And then you will soon after year end get the new Pillar 3 report. It doesn't change very much from year to year.
So you can actually look at this year's Pillar 3 report. And then you will get an example of a description of all sorts of credits and the PDs and LGDs then leading on to the risk weights for the different categories. But I understand correctly, it means that Geographies and in terms of types of credits and so on. So there will be sort of El Dorado for you if you like to dig into the details.
But if I understand it correctly, and I'm not sure I understand it correctly, that means that I don't know mortgages are written the new mortgages are written with a risk weighted is less than 5%, 6% and new corporate loans are written with a risk weight that is less than 35%. Am I getting it right or not? Because
On average, you can see from the table how mortgages are and corporates are risk weighted, yes. So I mean, for instance, you have on it's actually on Page 50 in the English version, 49 in the Swedish version. You can see, for instance, that loans under the advanced approach, large corporates, you've got the risk weights of 51.6% currently. So we've got a whole table there. And if you've got any questions about this, we will be happy to take a session with you with our risk control or the higher department.
We can go through how this works. And I think it's very important to understand that all the models we have used are based on the historical credit losses. And then on top of that, we add security margins on that. And we actually have a slide where you can see that our models are about 3 times as conservative as our peers. And we are very happy to elaborate on the statistical evidence here and the models if you like to go into deep here.
You could call Mikael Hallacher after this session and he can guide you through this.
All right. I'll do that. Thanks.
Our next question comes from Mr. Karl Sorgeszlik at Arctic. Please go ahead.
Karl Sorgeszlikz, Arctic here. So looking at your U. K. Operation, I think it's been very impressive, even if it's impacted by startup costs right now. So when growth stabilizes in the U.
K. Over time, it looks to me that the return on allocated capital will at least approach the level seen in Sweden right now. So even if you don't guide or anything, broadly speaking, do you think that this is a fair assumption given the long term trends you see in the market right now?
No. I think it will be higher ROE for a very simple fact and that is that the margins we receive in the U. K. Is about 2, 2.5 times the Swedish ones. You can very clearly see that if you look at the chart where we show how cost and income develop per branch as they grow older.
And you can see from that chart that our 8 years old branch offices already have a costincome ratio going below 30%. And that's in spite of the fact that we are not terribly efficient in the U. K. Because we don't have the scale effects yet. So I definitely think that there is scope for that ROE in Great Britain will be a lot higher than in Sweden.
And of course, if we when we reach the same type of efficiency in Great Britain, it will be a lot higher. Purely mathematical reasons to have 2, 2.5 times in the margins that really helps profitability.
And loan losses running at around 20 bps right now. Where do you think them being in the long run?
Run? We don't give any sort of guidance on this or we don't have any view. We bullish the budget in 1972 and our target on ROEs is purely relative. We want to have higher ROE than the average of our peers, which we have succeeded now for 41 years to have. But that's based on having more