Ladies and gentlemen, welcome to Handelsbanken's Q2 telephone conference. I now hand over to Ulf, the CFO.
Good morning, everyone, and welcome to this conference call for the second quarter 2013. Joining me today, I have Mikael Hallåker, Head of Investor Relations, Lars Höglund, Head of Debt Investor Relations, and Jörgen Olander, Group Head of Accounting. The slides used for my presentation are, as usual, available at handelsbanken.com. First, let me start with slide number two. This slide, the shareholder perspective, is familiar to you. As you can see, the value creation of our bank continues also this quarter with the same level of growth and stability as you have seen throughout the financial crisis, a stable 15% annual growth of equity per share, including dividends. On slide number three, we summarize the results achieved during the second quarter.
Compared to Q1, the operating profit in Sweden was up 5%, in U.K. up 16%, in Norway up 17%, in Finland up 12%, and in Denmark up 10%. In the Netherlands, earnings were down by SEK 3 million due to the continued investments to facilitate further expansion. In total, the operating profit rose by 9% compared to the first quarter. Net interest income rose by 2%. Higher lending margins in most countries except Sweden, also higher business volumes explain most of the improvement. Cost income ratio for the group improved to 45.6%. The Norwegian branch office operations had a cost income ratio of 30%. The bank has continued to build capital also during the second quarter. Basel II core Tier 1 ratio increased to 18.2%. Total capital ratio stands at 21.1%.
In spite of this high level of capital, return on equity improved to 15.1% in the quarter, compared to 13.8% in the first quarter. The level of pre-funding was unchanged. All bonds maturing up until September 2014 had already been pre-funded at the end of the second quarter. We keep our liquidity reserves above SEK 750 billion. On slide number four, we go deeper into the profit and loss account for the quarter. Here you can see that net interest income grew by 2% sequentially. Deposit margins in Sweden improved somewhat this quarter. Higher business volumes compensated for slightly lower lending margins in Sweden. Outside Sweden, net interest income increased by 6%, chiefly due to improved lending margins, also higher business volumes.
One percentage point of the increase was due to the fact that the second quarter had one extra day compared to the first quarter. Net commission income improved by 3%. Here, higher brokerage and asset management commissions were the main drivers, but also payment commissions increased. Net gains and losses on financial items increased by 70%, mainly as a result of higher customer activity in the fixed income and FX business. Total expenses increased by 1%, and staff costs were unchanged despite expansion, partly due to lower pension costs. Loan loss ratio amounted to seven basis points, and the credit quality in the bank remains solid. Moving on to slide number 22. This shows the details of the development in the net interest income during the quarter.
Here we can see that deposit margins in Sweden rose by SEK 67 million this quarter, mainly as a result of customer rates being lowered late in the first quarter. The short-term interest rate, the STIBOR, was more or less unchanged in the quarter. Increased lending volumes in Sweden contributed SEK 60 million, while slightly lower lending margins reduced net interest income by SEK 37 million. The gross margin on the mortgage lending in Sweden was, however, unchanged at 88 basis points. Improved lending margins and higher business volumes outside Sweden added SEK 104 million before currency and day counts effect, and those two factors added another SEK 28 million in the quarter. Net interest income increased in all home markets, also in local currencies.
The net impact of state fees, the benchmark effect, taken together with other items reduced the net interest income by SEK 86 million. On slide number 11, you will see the longer term development of net interest income in the branch office operations, both in Sweden and in the other home markets. In Sweden, deposit margins fell by SEK 754 million in the first half of 2013 compared to the first half of 2012, due to STIBOR being down on average more than 100 basis points. At the same time, improved lending volumes and margins in Sweden contributed with SEK 411 million. Our branch office operations outside Sweden increased net interest income by SEK 687 million before currency effects in the first half of 2013. And that is, of course, also compared to the same period last year.
In all, total branch office operation added SEK 344 million net interest income in the first half of 2013. Looking at the development in net interest income since 2007, you can see that in Sweden, the average annual growth rate for the period has been 7%, while our non-Swedish home markets have produced an annual growth rate of 16%. And I think this shows that our business model is not only balancing the current weaker development in Sweden, but also adding a meaningful growth on group level. Since the start of the financial crisis in 2007, our total quarterly net interest income has improved by 77%. Slide number 13 shows our sequential development in the various branch office operations. In all home markets, except our new market at the Netherlands, revenues grew faster than costs in the second quarter.
Net interest income grew sequentially in all home markets and in Norway, Finland, Denmark, and the U.K., lending margins improved while business volumes increased in all the home markets. This more than compensated for the lower deposit margins that were seen in most markets outside Sweden. The Norwegian branch office operation is now at a cost income ratio of 30%. Business volumes increased in all our home markets, as I said, and in Sweden, demand for corporate lending, however, continued to be quite muted. The mortgage volumes to households grew by 4% in the first half of this year compared to the level one year ago. In the non-Swedish home markets, where our market shares are much smaller than in Sweden, the volume growth came as a result of the expanding branch network and from selectively adding new good quality customers.
In the end of May, we also finalized the acquisition of Heartwood Wealth Group after having received the necessary approvals. By this acquisition, we take an important step towards also growing in the U.K. savings business. Slide number six shows that the financial position of the bank has continued to strengthen further during the second quarter. The equity in the bank grew by SEK 9.5 billion compared to the second quarter 2012. The Basel II Tier 1 ratio increased to 20.4%, and the capital adequacy ratio increased to 21.1%. The core Tier 1 ratio in Basel II terms was 18.2%, an improvement by 2.1 percentage points compared to one year ago. Earnings here contributed 1.4 percentage points, while increased lending volumes lowered the ratio by 0.6 percentage points.
The impact of improved lending mix contributed one percentage points, while a negative credit risk migration had a negative impact of 0.4 percentage points. In the second quarter, the bank started to report large corporate exposures according to the advanced IRB model. At the same time, the annual validation of the IRB models were conducted and net these two steps had no impact on the capital ratios. The core Tier 1 ratio, according to Basel III, we estimate to 17.8%. In May, the Swedish FSA decided that an additional capital requirement would be added for Swedish banks in Pillar 2, implying a floor on the risk weights for Swedish mortgage assets of 15%. The bank estimates that this will be a capital charge in Pillar 2 of around SEK 7 billion, which, of course, is very well covered by the bank's current capital position.
The bank has kept its unused liquidity reserves at an unchanged high level, above SEK 750 billion, and out of this, SEK 245 billion was placed with central banks overnight. Also in the second quarter, the bank has seen very substantial inflows of short US dollar deposits that were placed with Federal Reserve. On slide number seven are two graphs showing historic loan loss ratios for Handelsbanken as well as the average for our peers. We have, as you probably know, consistently had significantly lower losses than our peers and the peer group average. We have a very conservative credit policy, which is the same in all markets and which has been unchanged for the last 41 years. Lately, as you're probably aware, that there has been quite a lot of discussion in general about risk weights.
As you know, historic credit losses are the basic input when using IRB models to calculate risk weights. Consequently, low credit losses will, by definition, result in low risk weights and vice versa. If we then look on slide number 19, we there have used the average credit losses since 1997 for us as well as for our large Nordic peers, and then compared that to each bank's capital requirement 2012 for credit risk in Pillar 1 with the risk weights each bank use. As you can see from the graph, our conservative risk weights result in a capital requirement for credit risk that is 45 times our average annual credit loss. The corresponding number for the peer group ranges from only 10 to 25 times, with average of 17 times.
In other words, Handelsbanken's risk weights, safety margins, and models produce a much higher capital charge in relation to historical credit losses than the risk weights and models used by our peers. Due to the difficulty to obtain comparable data, we have not managed to include the financial crisis in the early 90s in this chart. However, as you can see on the previous slide I mentioned, Handelsbanken had a significantly lower credit losses than peers also in that period. Including also that period would not change the general picture. I think it's also interesting to note that the conclusion remains the same even when we exclude the period 2008 to 2009 from the calculation, a period when some our peers had fairly high credit losses in, for example, the Baltic countries. On slide number nine, we discuss our activities in the funding market.
The global funding markets were characterized by strong liquidity and tightening spreads throughout most of the first half of 2013. Investors searched for yield and were tempted to take on more risk than earlier in the financial crisis. Towards the end of the second quarter, markets again became very nervous and investors became hesitant, and more importantly, much more selective again. Recently, the European Commission has proposed a framework for resolution and also bail-in of unsecured debt, which has further added to investors' uncertainty. This has again started to increase the difference between the funding costs of different banks, which is natural, of course, with bail-in as a reality. Investors will have to more carefully assess the probability of default of any bank they invest into. They also have to analyze the capital buffers that protect the senior bondholders in the case of default.
All this, of course, benefits Handelsbanken with our very low risk profile and high level of capital. The elevated uncertainty has again increased the difference in funding costs to our advantage. The bank has continued to have full access to the funding markets at attractive terms. In the last days of the quarter, the bank made its first samurai issuance in the Japanese domestic market. With a benchmark volume of just over JPY 50 billion senior unsecured. This transaction, done in the middle of very turbulent markets, confirms our strong position in the conservative Japanese investor community. The price was lower than any non-Asian bank has achieved in that market for many years. Jumping to slide number 18, I'd like to talk a little bit more about some recent regulatory proposals.
First of all, going back to bail-in, this also means that large corporate deposits will rank pari passu with senior bondholders, while deposits from individuals, micro, small, and mid-size corporates will have a preference. For a large corporate to deposit money with a bank, this means that more credit work on that bank needs to be done, or if it's a weaker bank, that the bank ultimately will need to pledge assets against these deposits. In a scenario when the market perceives that there is even the slightest risk for a bail-in situation, this of course means that the corporate deposits will leave immediately. Relying on corporate deposits as a funding tool will therefore be even riskier than today. This again, in my view, reconfirms the belief that senior bond funding is a superior funding tool. Apart from this new regulation, EMIR is also in the pipeline.
To simplify, EMIR requires banks to post an initial margin upon entering into a new derivative contract. That means posting even more collateral than what is already posted when underlying prices change, as is the case today. Collateral may become a very scarce resource once this new regulation starts to be implemented. The final details are not decided yet here, but banks with large derivative exposures may end up with a large degree of their balance sheet encumbered, which implies a high risk for the senior bondholder and also for the large corporate depositor. This will, of course, also increase the funding costs for such banks. As you know, Handelsbanken has a very small derivative book, and as you can see from today's numbers. These volumes has also been reduced even further during the second quarter.
As can be seen from this slide number 18, the bank keeps a very substantial proportion of high-quality non-encumbered assets, NEA, for the benefit of all unsecured creditors. Going then to slide number 14, we here show the development in our U.K. branch office operations. We have opened up nine new branches in the quarter, taking the total to 14 for the first half of 2013. In addition, 12 branch managers have been appointed for further branch openings later this year. As you know, we started a fourth regional bank in Bristol in January to facilitate more branch openings. We continue to be very optimistic about our opportunities in the U.K. market.
Looking at the development in the U.K. since 2009, you can see that revenues have grown on average by 41% per year in local currency, while costs only grew 25% per year, and that the gap continues to widen. Net interest income continued to show a strong growth in the quarter, but also fees and commissions improved sharply. Heartwood Wealth Group was consolidated in late May and contributed one month to this growth. To summarize the second quarter, operating profit increased by 9% sequentially and by 7% compared to the second quarter last year. Revenues increased more than costs in all our home markets except our new market, the Netherlands. Return on equity improved to 15.1%, up from 13.8% in the first quarter. At the same time, the capital position of the bank became even stronger.
Basel II, quarter one capital ratio improved to 18.2%, and in Basel III terms, we estimate the ratio to 17.8%. The pre-funding has continued and all bonds maturing up until September 2014 were already pre-funded at the end of second quarter. The liquidity reserves were kept above SEK 750 billion. Nine new branches were opened in the U.K. in the second quarter, taking the year-to-date total to 14 new branches. Another 12 branch managers have been appointed for new branch openings. We finalized the acquisition of Heartwood Wealth Group in May, and now also have the platform for growing our U.K. savings business. With that, I conclude my presentation and open up for questions. Thank you.
Ladies and gentlemen, if you have a question, please press 01 on your telephone keypad. Our first question comes from Mr. Omar Keenan from Nomura. Please go ahead.
Good morning. Thanks very much for taking the questions. I've got two questions, if I may, both related to capital. Firstly, common equity Tier 1 on the Basel III reached 17.8% at the end of the quarter. If I make the assumption of about SEK 7.6 billion of dividends at the year, which would put a 10% year-on-year growth in your dividend per share, which is in line with what you've done over the past few years, then I see year-end common equity Basel III of at least 18.2%. How are you thinking about your potential core Tier 1 target range, given one of your peers seems to be focused more on the 15% level? Just secondly, you talked around the very interesting slides on page seven and eight, which seem quite a robust defense of the risk-weighted measures.
Is the Pillar 1 requirement as a multiple of historical LLP a metric you discuss with a regulator? How does he think about that metric, and what would your expectations be on any non-risk-weighted leverage constraints the regulator might apply? Thank you.
Thank you. On the first question regarding our capital goal, I do not do any forecast when it comes to the capital growth, your analysis when you see the historical figures, you see that we are building capital, although we have had recently a payout ratio of 50% and growing value at a pace of 15% per year. On those terms, your analysis is right. When it comes to the target, we are awaiting clarity on the regulation. I think the most important piece here is the resolution and recovery regime, because it is so very dramatic. I touched upon one thing in the telephone conference for instance, the large difference that will be when it comes to the value of corporate deposits.
Of course, from a capital perspective, it has large implications because at one stage, a bank can be taken over from the state when you reach certain levels, then you have to know that. Our best guess is that towards the end of the year or something like that, this clarity will be there. It is really a political question how soon they decide. There are smaller elements also when it comes to, for instance, what kind of capital should you have in terms of when you meet Pillar 2 requirements. The third one might be the instruments that you can use, what kind of features should they have to be eligible? I think those kind of questions are the most important. To be clear, we are not awaiting the implementation of the new regulation.
We are awaiting clarity on what the new regulation will be. Secondly, risk weights. Yes, we have a very good dialogue with authorities, of course meet them regularly, and so on. We have received no doubts whatsoever to the accuracy of our risk weights. The question about risk weights, I think has to do more with general considerations from authorities looking ahead, also, of course, when you look at macroeconomic aspects from the consumer side and so on. We are publishing these slides you referred to today, I think when you do it in this very simple way, you get a very clear picture on the differences between banks. I think there will be quite a lot of people maybe that will look into this metric for different banks. I think it is a good metric.
Okay, that is great. Thank you.
Our next question comes from Mr. Jeff Doors from Societe Generale. Please go ahead.
Yeah. Hi, good morning. Jeff Doors here from Societe Generale. Two questions from myself. First of all, on mortgage margins, obviously you would have noticed that Swedbank gave some quite cautious guidance on that yesterday and some cautious tones on what they've seen in the second quarter, as well as looking forward. In your report, you really didn't express any pressure on mortgage margins. You said they were flat over the second quarter. Can you just talk about why the difference? Second of all, whether there's any kind of outlook statement that you're willing to give on mortgage margins. Second question is on Finland. Very good revenue growth there, which you attribute to better lending margins. Can you just give us a little bit more color on that in terms of products? Particularly on the mortgage side, how you're able to achieve that mortgage margin expansion.
Thank you very much.
Thank you very much. When it comes to the mortgage margins in Sweden, as you see from the report, they are flat 88 basis points. I've also noted what you talked about the communication from some competitors that have different experiences. I have no comment why they see that. We certainly do not see that if you look back in the quarter, the kind of development that they are talking about. We can see absolutely no trend at the moment when it comes to mortgage margins. It has been very flat. We don't do any forecast. It's very hard to forecast because it has to do, of course, with that some competitors are very keen on taking on board new volumes, and then you can get price pressures. It's often rather local, for instance, in the big cities and so on.
It's very hard to have any views going forward. I think it's interesting to note that Sweden is the only country where margins are not widening. We see widening of margin as you know in Norway, we see it in Denmark, we see it in Finland, as you commented upon, and also as a matter of fact, in the U.K. In all of these countries margins are better than in Sweden. Sweden is a little bit of an odd place in this respect. Finland, you're right. The market leaders there have chosen to take up the price towards the client. Of course, since all our funding is already in place on market terms and so on, we experience an increased margin. It's also a function of that we are taking on new business, of course.
Finland is definitely developing in the right way.
Okay. That's really clear. Just to clarify on Sweden, you don't see any margin pressure even if you look at the books right now as opposed to the average for the trailing quarter?
No. As I said, you can't really see any trend. You can see local observations in different parts of Sweden and the local markets could be rather different. When you sum it up, you can see no trend.
Very clear. Thank you.
Our next question comes from Mr. Nick Davey from UBS. Please go ahead.
Yes. Good morning, everyone. Three questions please, if I can. The first one is on risk-weighted assets and what's happened in the course of Q2. You mentioned that the net impact of some A-IRB approvals and the FSA's validation process, the net impact of those two is 0. Could you please just let us know if there are significant swings between the two? Exactly what A-IRB did to your capital ratio isolated, and then if there was any impact on the capital ratio from the validation process. Just separate please, those two impacts. The second question please, on Handelsbanken International. It's been obviously a long process of loan book shrinkage in that particular division. It seems like this is the first quarter where we found some kind of a bottom.
Could you please just talk through some of the trends you've seen there in previous quarters, and whether or not we think this is now some kind of a stable loan book going forward, albeit that you won't clearly make any explicit forecasts. The third question is just around allocated capital. I just noticed Q2 allocated capital in your Nordic home market seems to have declined by between 5% and 9% versus where it was in Q1. I just want to fully understand if you're making any changes to your capital allocation model, just as it may filter through, I guess, to how your branch manages price lending. Please, any color on that would be helpful. Thank you.
Yes. Thank you very much. On the first question, we had a positive effect of going into advanced method as was communicated for a long time. It's not dramatic, it's not a big number, it was a negative number from the validation. I have to point out here that that is the validation that we do ourselves. If I should summarize, it's nothing in our book or credit quality or anything actual that has happened. The effect of what we do in this validation makes the models marginally more stable. We'll get it back in improved PD numbers going forward. It takes some time. Please don't exaggerate this effect. Now I'm really taking out the microscope here. We're talking utterly small effects, but I think it's very clear to understand that this is the negative effect of the validation.
It's not a function of a deterioration in the credit book or anything like that. The good thing is that it actually creates a little bit of, how should I put it, buffer or safety margin or so on. Once again, it's not a dramatic thing. It's a very small thing. The net of those two was actually zero. Handelsbanken International As you know, Handelsbanken International has, since Pär Boman and myself came into office, we have reoriented Handelsbanken International, we are focusing on our home markets, we have developed the Netherlands as a new home market, that has been a task of Handelsbanken International. Handelsbanken International today, its task is really to cater for the needs of the home market clients around the world. It's not a matter of doing local business with local clients, but servicing the home market clients.
Since we have the most extensive international network of all our peers, this is a task which we think is very important. Let's take, for instance, our presence in China and so on. The reorientation, you're right, the decrease in volumes structurally, we are at the kind of levels that are probably around bottom. Of course, there can be differences between quarters and so on. Allocated capital, no change whatsoever in the allocation model. What you see here is the effect of that at the start of each quarter, we allocated the capital to the business units. What you see the difference here between Q1 and Q2 is, of course, the dividends that have been paid out.
Since we allocate capital in the beginning of the period and not at the end of the period, we are not sort of restating it back in time, you will get this effect that you see. It's exactly the same allocation model, but it's done quarterly.
Very clear. Thank you.
Our next question comes from Ms. Sofie Peterzens from JP Morgan. Please go ahead.
Thanks very much for taking the questions. Here is Sofie Peterzens from JP Morgan. I had a few questions as well. One was on the new Basel III proposed leverage ratio. Have you calculated that for Handelsbanken, and where would you come? My second question is around the bail-in. I realize that there is quite a lot of uncertainty still, but do you envisage in future that you will cover the regulatory capital need by capital, or will you also add bail-in debt to meet the minimum capital requirements under the bail-in? In Norway, you mentioned that you had a 30% cost-income ratio. How low do you think your cost-income ratio for the group can go? Should we think about a 30% cost-income target for the longer term for Handelsbanken? Thank you.
Thank you very much. First question, Basel III leverage ratio. No, we have not calculated it because of the simple reason that nobody can tell how it should be calculated. We leave it to anyone how you want to calculate it. If you have any calculation problems, please call us. We got good calculators. All the numbers are in the report here. Will it come? You know, it's a political debate. It's very hard to say whether leverage ratio will come and then when it will come. If it comes, of course, one has to see to the structure of the balance sheet. For instance, we hold, as you know, a very large amount at central banks. Of course, if that means that our shareholders will have to have capital for that, of course we have to rethink that.
ultimately, if it would be a very high leverage ratio, I think that is highly unlikely myself. If that would come into effect, a very high leverage ratio, of course you should do like the Americans do. You don't have those assets on the balance sheet. The value creation in Handelsbanken does not come from having the assets on the balance sheet. The value creation comes from how we treat our clients and how we originate the credits and how we handle it, and our credit policy and all those things. There are, of course, shadow banking will become an immediate thing. You can already see that kind of tendencies where you got private equity firms and others that try to buy these kind of assets. I think if you got leverage ratio, of course one would take out assets.
It's not a fundamental problem for the Handelsbanken value creation model, but it might be rather bad for the market. We have actually written a small report on this. It's Martin Blåvarg, the former chief economist of Swedish FSA. If you're interested, it's in Handelsbanken's series of small publication. Just call the IR department. We would be happy to send that to you. Bail-in question, do we need bail-in debt? Nobody knows because nobody knows how much bail-in you should have and what levels. We have to come back to that. As you see from the numbers, we have a high capitalization, probably maybe the highest of any bank in Europe, and it's a very good quality of the capital. A large portion of it is core. We have a very good starting position, I would say, when the new regulation comes into force.
Cost income ratio on group level, we have no target. The cost income ratio on group level is of course a combination of 2 things. One is the investments we make, and we do that because we think it's very good investments. New branch offices, for instance, in the U.K., SEK 1.5 billion in totally new computer systems every year, et cetera. When you look at the operating cost income ratio for the branch office network, we run Sweden, as you know, in the ballpark between 30%-35%, and we have said that we think it's possible in the longer term to run, and some branches actually already do run under 30%. As you see now, Norway in this quarter are at 30%.
In Great Britain, of course, when you look at the graph where we show the older branch offices, you will find that they have a cost income ratio under 30%. Of course it's a function of time. It's of course easier outside Sweden to get to low cost income ratios because the margins are so much better. We're talking the ballpark of 2.5 times the Swedish margins when you look to the U.K. market, for instance.
Okay. Thank you very much. That was very clear.
Our next question comes from Ms. Clare King from RBC. Please go ahead.
Hello there. I just have a couple of follow-up questions. I think your illustration of the safety margins on your risk weights is a very robust defense, as someone else has already said. I guess the same could have been done on the mortgage side, but we saw that the regulator just went for the simple approach of introducing a floor. Could you tell us what you think the risk is of that coming on the corporate side, just generally for the whole market? Whether that is something that you are concerned about, and if it is holding you back from setting a capital target at the moment.
My second question is if you could perhaps update us or give us your current thoughts on how you plan to address the excess capital, once you have decided what the target should be, and if that should be through buybacks or if you would consider a special dividend to make the step change. Thank you.
Thank you. It's not explicitly a fear of increased risk weights on the commercial or the corporate sides that makes us wait until we fix the capital goals. On your question, will it come any changes on the corporate side? It's very hard, I think, to judge there. This is a totally political thing. Once you start abandoning the historical credit losses, and you can use any number, it's just a political issue on what you think about the future and what will happen and so on. You have left really the statistical part of the equation. It's very hard, I think, to judge if there will be any changes and so on European level or Basel level or so on.
On the excess capital side, when we have clarity on regulation, we will fix a goal, and if we find that we have more capital than that goal, the most probable thing would be to do an extraordinary dividend or to combine that with share buyback. Share buybacks is something that ordinarily one uses in my mind to, as you go along, adjust the equity base while the ordinary dividend should have a stable reflection of the underlying value creation. You can get differences in different year, of course, if you have excess capital, you can use buyback for that. That is how we have reasoned in the past.
Great. Thank you very much.
Our next question comes from Mr. Riccardo Rovere from Mediobanca. Please go ahead.
Good morning to everybody. Most of my questions have already been asked and answered. I have just one curiosity. Is leverage ratio something that you discuss with rating agencies and with the Swedish FSA? Is it something that never comes around when you talk to counterparties? Thank you.
Thank you very much. As you know, different rating agencies have different models and also different ways of looking at capital. Standard & Poor's, of course, have the RAC model, for instance, and so on. Of course, we talk with all the ones you mentioned about the capital and the quality of the capital and so on. The leverage ratio is, once again, a political question where the debate right now in Europe is going back and forth, and a lot of people involved on different levels from central banks and Basel Committee and European Parliament people and so on. From the political side, I feel a strong sense that if it would come into force, it will be a form of backstop. That means that it would be implemented, most probably in my mind, then on a rather low level.
The steering mechanism is the risk-weighted regime, but it is more of a backstop thinking. There are of course a lot of different views, but when I sum it up, I think maybe that's the most common interpretation. If it comes more forcefully, of course, that will have a detrimental effect on economic development and the business cycle. As you know, with the current proposals, let alone leverage ratio, there is a large, huge lack of capital in the European banking system as a whole. If you calculate that, you're talking big numbers. If that capital should be put up, how could that happen for those European banks? What effect will it have on the loan growth and economic activity if you impose all these regulations, let alone leverage ratio?
Okay. If I may change one second. On the Netherlands and the U.K., the fact that the economic recovery in the Euro area keeps being postponed, do you expect the strong growth ratio experienced in lending loans in the loan book to somehow generate higher loan losses than the current one in the foreseeable future?
No, we have no reason to believe that. As you know, we are very selective in both the U.K. and the Netherlands. We are targeting the top 15% of the market, one, five percent, 15%. People with better cash flow, companies with better standing. Both those markets are huge as markets, and we are a very small player yet. We can grow. For instance, we calculated in Great Britain we can grow at this pace for at least 20 years before running out of potential clients in these segments. The other thing is that in this way we get very macro-independent. We are not at all dependent on the general loan growth in, for instance, England or Netherlands. We are not a reflection of the whole market. That's also a good thing.
I agree, we have an advantage that there are slower or rather bad times in these economies because it's much easier to do the credit evaluation when you have adverse economic climate. The hardest point in time to make credit decision is at the top of the business cycle where most people don't perceive any risk, and leverage is going up in the economy, et cetera. You saw that very clearly in the Baltic countries at the height of the cycle there, for instance.
Yeah. Thank you. Very clear. Thanks.
Our next question comes from Mr. Jacob Kruse from Autonomous. Please go ahead.
Hi. Thank you. Just to follow up on the bail-in side. I am a bit surprised that you feel that there is no way of really knowing where the limits are. I thought the European Council at least gave some fairly clear guidance on what they wanted to do with the 8% bail-in buffer to liabilities and a potential for 20% to risk-weighted assets. Have you not considered how you would react to either of those limits, and what kind of roles you see for sub-debt in that? Also, if we assume that something like this is put in place, if you think that you can keep your senior as bail-in-able, or if you think that needs to be covered by a buffer of sub-debt.
My other question was just, if I look at Handelsbanken over the last 10 years or so compared to other Nordic banks, you used to have a very wide margin of outperformance when it comes to cost income, and that has, to a very large extent, been closed or near closed. I think if I look at consensus data, expectations are that you are middle of the pack in operational efficiency by 2015. Are you slowing down a little bit when other people are catching up? Are we just underestimating your ability to grow revenues faster than cost over the next couple of years? Thank you.
Thank you. First question. We have seen the proposals, and we follow the debate. It is not that. When I say that I don't want to have a firm view is because I want to see the whole package and in the context. Because it has to do with the resolution regime on how much capital you should have, because capital as such is also sheltering, of course, senior bond holders. It is not only sub-debt that is sheltering. You have to look at the whole package, actually. As a general remark, not having any firm view, but as a general remark, it is not necessarily so that using sub-debt is a good thing because it can make the analysis of your resistance capacity a bit more complicated. Look at the hybrids in the U.K. example, for instance, when the U.K. bank overused hybrids with very different sorts of mechanisms inherent.
I think that as a general remark, to keep the balance sheet simple and easy to understand, I think it is something that we will always try to do. Cost income ratio, we don't do any forecasts, as you know, but I can assure you that cost efficiency is one of the two core cornerstones of ourselves reaching our company goal. Our company goal, having a higher ROE than the average of our peers, something that we have reached now for 41 years in a row, as you know, each and every year. That is built on two things: having more satisfied clients than the peers, which we have and which we measure each quarter, and the second, to have a better cost efficiency than our peers. This is coming from that we are a fewer people. We are a more decentralized organization.
We have not as many layers, and also the fact that there is no, in our mind, there is no more cost-efficient way to run a bank than to do it through branch offices. If we have problems with cost efficiency, of course, maybe we should then pace up the growth of the branch office network. We have scale effects, for instance, in the U.K., which, of course, each time we open a branch office in the U.K., we become more efficient. If you would scale up that, of course you would become quicker and more cost efficient from an operative point of view. Having said that, of course, we would never increase any pace that would change our risk profile. Quite frankly, we are not worried. If you talk to people working at Handelsbanken, we really treat cost as our own money.
It's not so hard to understand because the employees of Handelsbanken are the largest shareholder of the bank, as you know. It is actually our own money.
Okay. Thank you.
Our last question comes from Mr. Edward Fern from Macquarie. Please go ahead.
Yes, good morning, all. It's probably a similar question to the last one, actually. I'm just struggling if you look at your branch operations in Sweden. Year to date, you've got revenue down 2% and costs up 6%. I guess my question is that something that you are satisfied with or should we expect to see that turn as we go through the rest of the year and into next?
Right. As you know, when you talk about Sweden, it's a market now characterized on the lending side on very flattish demand on the corporate side and a small growth in the mortgage side, sort of 4%. Of course, the Swedish figures have been very much influenced, as you know, by the decrease in deposit margins. That cost us a lot of money, and that, of course, all things being equal, is the historical pattern will come back the day interest rates goes up. The good news is that we have managed to offset all of these effects, or not all, but a huge portion of that effect. We're talking in the first half year, 2013 compared with 2012, we're talking SEK 754 million lost because the nominal interest rates went down.
We have a slide on slide number 10 where you can see this historical pattern. If you look, for instance, sequentially, you see that income is growing in Sweden 3% and cost is at 0% growth. Of course, one would like to have more growth in the Swedish economy. The good thing is that you can see from the next slide 11, that in spite of this, Handelsbanken is growing NII because of the growth outside Sweden.
In terms of the sort of Swedish cost growth, somewhere around 5%, 6% is not something that you think we should be surprised at. That's a sort of reasonable level going forward?
We don't do any budgeting. Of course, the important thing here is the cost-income ratio. There are effects here when you look at the first half-year and compared with the first half-year last year, there are effects here that you won't see going forward. The important thing here is that you grow revenues faster than costs, of course. If not revenues in the Swedish market is growing very rapidly, of course you cannot have cost increases like the ones you mentioned. In Handelsbanken, this is an automatic process because each branch decides how many people there should be, and all salaries are set at the local branch office themselves.
Okay, thanks so much.
There are no further questions on the telephone.
Okay, I thank you very much for attending, and as usual, do not hesitate to contact ourselves and the IR department if you have any more questions or things that you want to discuss. Thank you very much. Bye-bye.