Welcome to the Handelsbanken first quarter presentation. I now hand over the word to Ulf Rådberg, CFO. Please go ahead.
Good morning. Welcome to this conference call for the first quarter 2013. Joining me today, I have Mikael Hallåker, head of investor relations, Lars Höglund, head of Debt IR, and Jörgen Olander, group head of accounting. As usual, the slides used for my presentation are available at handelsbanken.com. First, let me start with slide number two. This slide here again shows the value creation in the bank, equity and dividends per share since the start of the financial crisis. As can be seen, the growth rate in value is 15%. Even more importantly, we think is the very stable development that our business model continues to generate. As you know, the model is the same that we now have used for more than 40 years.
Since the model is not built on regulation, but on customer satisfaction and close customer relationships, it means that we don't need to change the model when the regulation changes. Rather, we continue to grow by bringing this model to more and more new locations. On slide number three, we summarize the results received during the first quarter. Here you can see that operating profit increased 10% compared to the fourth quarter. Net Interest Income increased by 3% sequentially, excluding currency effects and adjusted for fewer number of days in the first quarter. This increase was achieved in spite of, again, lower deposit margins. Profit after tax increased by 6% compared to one year ago and 25% quarter-on-quarter, adjusted for the one-off tax effects, in the fourth quarter. The bank continues to build capital.
Here, Basel II, Core Tier 1 capital ratio increased to 18%. According to CRD IV, which has now been decided, it increased to 17.5%. Return on Equity was 13.8%. Pre-funding was extended further. All bonds maturing up until June 2014 were already pre-funded at the end of the first quarter. Handelsbanken was the first Nordic bank to issue Covered Bonds in the U.K. market. In the quarter, Handelsbanken also was appointed one of the 10 most highly reputed of all companies in Sweden, according to the reputation index provided by SIFO. On slide number four, you can see the profit and loss accounts compared to the fourth quarter. As you may know, in accordance with IFRS rules, we have provided restated numbers for 2012 on the back of the new IAS 19 rules for pension.
With IAS 19, pension costs increase since the discount rate for pension liabilities is now used to estimate the return on pension assets rather than expected return, which was the case earlier. Throughout this presentation, all relevant numbers in the profit and loss and balance sheet, as well as capital base and ratios, are shown restated in accordance with IFRS rules. Net Interest Income increased by 1%, as can be seen in the slide. In Sweden, lower deposit margins reduced Net Interest Income by SEK 73 million, while higher business volumes and lending margins increased Net Interest Income in local currencies in all other home markets. Adjusting for currency effects and the impact from fewer days in the quarter, the increase for the whole group was 3%. Net Commission Income was down 2% due to seasonally lower payment commissions as well as lower lending commissions.
This was partly mitigated by higher equity brokerage and asset management commissions and by the fact that advisory fees more than doubled in the quarter. Net gains and losses on financial items, which on purpose is a small item for us, decreased by 29%, partly as a result of lower customer-driven FX transactions. Expenses fell 8%, mostly driven by other administrative expenses that are seasonally high in the fourth quarter. The previous quarter also contained some non-recurring items. Loan Loss Ratio fell to 6 basis points compared to 9 basis points in the fourth quarter. Credit quality remains solid. By the way, Netherlands, our new home market, continued to have no loan losses at all. If we then move to slide number 18, you can see here how Net Interest Income developed during the quarter.
Deposit margins in Sweden decreased by SEK 73 million, since the average three months STIBOR rate fell by 24 basis points in the quarter. We lowered deposit rates to customers both in January and in March, which has mitigated some, but not all of the impact. Increased lending volumes in Sweden added SEK 32 million, and a slight improvement in the lending margins added another SEK 8 million. Continued expansion and lending margin improvement outside Sweden contributed SEK 50 million before currency and day count effects. The net impact of higher state fees, a positive benchmark effect, and more importantly, the positive effects from the bank's strong position in the funding market gave an addition of SEK 145 million. Currency effects reduced Net Interest Income by SEK 72 million, and the fact that the first quarter had fewer days gave another reduction of SEK 36 million.
The underlying increase in Net Interest Income, excluding these two items, was 3% or SEK 165 million. On slide number nine, we illustrate the development of Net Interest Income in the Swedish branch office operation. Here, since the first quarter 2012, the STIBOR rate has fallen some 123 basis points, and quarterly Net Interest Income on deposit margins have been negatively affected by SEK 506 million. In the same period, though, quarterly Net Interest Income on our lending in Sweden has improved by some SEK 228 million. At the same time, outside Sweden, our Net Interest Income has increased by SEK 332 million. This being, of course, a reflection of the balancing effects of our universal bank business model. On slide number seven, you can see Net Interest Income sequentially in all our home markets, adjusted for currency together with effects of fewer number of days.
As can be seen, except for Sweden, Net Interest Income improved in all our home markets sequentially. Increased lending volumes was the main driver, but also improved lending margins in some cases. The underlying development in the U.K., up 7% in the quarter, and the Netherlands also up 7% in the quarter, continue to be very strong. Back then to slide five. This shows the financial position of the bank, which strengthened further in the quarter. The equity in the bank compared to the first quarter 2012 increased by SEK 11 billion to SEK 100 billion. 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 was 18% compared to 15.8% one year ago. As you probably are aware, on April 16, the European Parliament decided on the CRD IV.
The final version contained some new details, which have an impact on our Core Tier 1 ratio in Basel III terms. At the end of the first quarter, with the final definition, Core Tier 1 amounted to 17.5%, compared to our estimated ratio of 16.4% at year-end. Risk-Weighted Assets regarding Credit Value Adjustments risks are now calculated for financial counterparts. Also, risk weights for lending to SMEs are lowered in the final definition. These two changes together explain 0.6 percentage points of the increase, and the remaining half percentage point is explained by the bank's development in the first quarter. The bank has kept its unused liquidity reserves at a level above SEK 750 billion. Out of this, SEK 259 billion was placed with central banks overnight.
Again, in the first quarter, the inflow of short-term U.S. dollar deposits, which was placed in the U.S. Federal Reserve Bank, has been substantial. On slide six, let me talk a bit more about our capital and capital goal. As you know, unlike some of our peers, Handelsbanken has not yet decided on any new capital target for the bank in the forthcoming regulatory environment. Meanwhile, our energy has been totally focused at providing the best possible position for that decision. The strong capital position we now have, together with the fact that 85% of our capital base is Core Tier 1 capital, gives us the best flexibility to optimize the capital position once all new regulation is in place. CRD IV was, as you know, decided upon on April 16 in the European Parliament.
There are still important regulatory issues that are not yet known nor decided. The directive regarding resolution and recovery regimes and bail-in of senior bondholders is still being negotiated, and a decision here is yet to come. It is, of course, utterly important for a bank to know the outcome of this regulatory framework before a new capital target can be decided. The resolution regime will contain several different trigger points where a bank's stakeholders will gradually lose control and values. In Handelsbanken, we want to have clarity about these trigger points before we decide on how much capital buffers we should keep. We think this is fair for our stakeholders. There are also expected changes in the capital requirements in the Pillar 2 framework.
Some of today's Pillar 2 buffers will be included in the resolution regime framework. We still need to know how the Pillar 2 capital requirement will look in the new regime. For instance, what kind of capital can you use here? Just to give you another example, now that CRD IV has been altered in the final decision, technically pushing the Core Tier 1 number up, if we would have set a target on the measure known one quarter ago, then with the same risk appetite, now the target should have needed to be increased in proportion. Nothing in reality has changed. Measures and numbers have. Yet will banks that already decided on uncomplete information now change their targets? I don't know, but we hope that regulatory clarity will come during the course of this year.
Once these boxes are ticked, we will decide our view on the capital position. On slide number eight then, I would like to talk a little bit about our funding activities. The bank has been quite active in various markets during the first quarter. We choose to extend the pre-funding a little bit further. Now all bonds maturing up until June 2014 are now already pre-funded with new bonds. It was not directly triggered, I can say, by the Cyprus events in itself, but more importantly, that these events so clearly evidenced that the importance of deposits in liquidity risk management terms is so vastly exaggerated. Matched long-term funding is simply so much safer. Total issued volume of bonds in the quarter was SEK 65 billion, and 32% was done in the senior unsecured market.
As the first Nordic bank, we developed a new source by issuing covered bonds in the sterling market. Handelsbanken is the only Nordic bank now that has covered bonds outstanding in EUR, USD, sterling, and AUD. On top of the ordinary bond funding, the bank also issued extendable notes in the USD market, and the total volume of this issuance corresponds to another SEK 26 billion. With this, the bank in total issued more than 50% of its long-term funding in the unsecured market. On slide number 12, we show a summary of our different branch office operations. We have opened up nine new branches in the quarter, five in the U.K., two in the Netherlands, and one each in Sweden and Denmark. 14 branch managers have been appointed for coming branch openings in the U.K.
All home markets outside Sweden improved their operating profits in the first quarter compared to the last quarter 2012, and the profit in Norway was the best quarterly profit ever with a cost-income ratio of 33%. Lending volumes increased in most markets and most profoundly so in Denmark, where the branches have been successful in selectively attracting new, very good customers to the bank. Improved lending margins also contributed to the increase in profits. The acquisition of Heartwood Wealth Group that we announced in February has been very well received by customers, both of Heartwood and of Handelsbanken, and we are very enthusiastic about the opportunities in the wealth management business that Heartwood will add to the bank. We expect to get regulatory approval and to finalize the acquisition during the second quarter.
The Netherlands, now a new home market for us, albeit still small, continues to develop very favorably, and we are looking at new locations for further branch office openings this year. If we go to slide 13, that shows some more information about the development for our U.K. branches. Including branch managers recently appointed, the bank now has 152 branches in the U.K., and revenues in the first quarter grew by 22% in local currency. As you can see from the slide, 60% of the U.K. branches are younger than four years, and after four years of operation, the average branch starts to contribute more materially to the earnings. This process continues for many years as the branch keeps adding good customers in its area. Still, the cost development in the branch, as can be seen, is limited.
Typically, when a branch grows bigger after eight or nine years, we will spin it off and start up a new branch nearby. This is done in order to keep the branches efficient and close to all customers, and that is also the explanation for the lower growth rate in revenues for eight to nine years old branches that you can see in the slide. The slide also shows that a branch, on average, breaks even after slightly less than two years, and you can see that the cost-income ratio for the average old branch is at the 30% level. To summarize the first quarter, profit after tax increased by 6% compared to the first quarter of 2012 and 25% sequentially, adjusted for tax effect in the fourth quarter. Operating profit was up 10% sequentially. The Norwegian operation had its best quarterly result ever.
Loan loss ratio fell and was six basis points in the first quarter compared to seven basis points one year ago and nine basis points in the fourth quarter. Return on Equity was 13.8%. The capital position of the bank has strengthened further. Basel II Core Tier 1 capital ratio was 18%, up from 15.8% one year ago. With the final definition of CRD IV, the Basel III Core Tier 1 capital ratio was 17.5% compared to our estimate at year-end 2012, which was 16.4% with the CRD IV definition as we then knew it. The bank has extended the pre-funding and all bonds maturing up until June 2014 were pre-funded at the end of the first quarter. Liquid reserves were kept above SEK 750 billion.
In the quarter, nine new branches were opened in the U.K., the Netherlands, Denmark, and Sweden together, and another 14 branch managers have now been appointed for new branch openings in the U.K. With that, I conclude my presentation and open up for questions. Thank you.
Ladies and gentlemen, if you'd like to ask a question, please press zero one 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 just had two questions related to net interest income, please. The first one is just on mortgages. One of your competitors made the comments that margins on the front book had moved about five to seven basis points lower in relation to the stock. Is that a trend that you recognize from the first quarter? Could you perhaps make some comments on how the front versus back book dynamic evolved in the first three months of the year? Then just the second question, net interest income seems to have improved about SEK 160 million coming from the group. I think you mentioned that SEK 145 million of that was on cheaper funding cost, which seems like quite a big number for one quarter. Can you give an idea of the back book cost of funding that was rolling off? Thank you.
Thank you very much for these questions. On the first question, for competitive reasons, we don't communicate numbers on back book and front book, or rather, the numbers we communicate is totally back book. I can be very open and say that we saw very marginal trends in the quarter. If you look at the whole back book, you're talking one basis points. Actually, it's also a round-up thing. It's less than one basis point change. With that kind of portfolio and a lot of things happening, of course, that is just a reflection of that actually nothing has happened in the quarter. It's the same actually when you look at the different components.
You're talking, for instance, on slicing it into new deals and old deals, you can also slice it into old deals that are rolling off and sort of getting new deals and so on. When you look at all these numbers in the background, my best takeaway is that nothing much has happened actually. It's just some goes up a little bit and other portions goes down, and it varies locally. No, I cannot say that we see any trend at all in all of these respects that you asked about in the quarter. The second thing is that the interest increase you see in the segment, which is not a segment called others, which also include the funding activities of the bank, that is a real net interest income effect. It's nothing strange or one-off or so with it.
It's the fact that the internal pricing mechanism works in such a way that it takes some time before it's getting out through the internal pricing towards the branches, and it has to do with the pace that they are making deals and so on. It's actually a real Net Interest Income. Of course, coming from the fact that we have a superior funding situation, and as you can see from the figures, we've done quite a lot of funding in the quarter.
I would just comment that SEK 145 million just seemed like a very large number. I was just wondering if you could give a bit more flavor as to what the back book cost of funding rolling off is. If I do a quick calculation, then you would have had basically all your SEK 65 billion that you funded would have had to roll off at 1% more expensive funding to get to the SEK 145 million number. Is that the kind of scale of improvement of front versus back book funding cost that you're seeing?
No, it's not like that. When you look at the funding of the bank, you have to also see it into relation to the asset side, of course. It's just a reflection of that the internal prices have not fully got out the full effect to the branches. Usually, the internal pricing is quicker of getting out these effects. In this quarter, we have such an effect. You cannot look at it like old funding going out and new funding coming in, and what is the difference? Because you have also to take into consideration the asset side. The way we operate the bank is that we look on both sides. The old funding has been funding old deals and the new funding is funding actual new deals and incoming volumes.
I saw that one of our competitor, for instance, talked about 40 basis point decrease in their Covered Bonds funding. The relevance figure for us would be 43 basis points, it is totally irrelevant figure because it doesn't say anything because you have to look at what's happening on the asset side as well in terms of turnover.
Okay. If you put those together, then the margin's better?
The margins in total in the quarter is very flattish on the lending side. It's SEK 8 million altogether in Sweden.
Okay. Thanks very much.
Our next question comes from Mr. Johan Ekblom from Bank of America. Please go ahead.
Thank you. Just two questions on my side, please. First, on capital. I understand, I think you've been very consistent in saying that you need to get full regulatory clarity before you can communicate your capital targets and around potential capital return. Can you just update us on what the expected timetable is? I guess, number 1, forgetting any sort of Swedish versions before we get final implementation by the end of the year, when do you expect to get clarity on the treatment of the mortgage risk weights for whether it's going to be a Core Capital requirement or a Tier 1 Capital requirement? Where are we in terms of the getting clarity on the resolution regime? Just secondly, coming back to Net Interest Income.
Clearly you've been very successful in offsetting the deposit pressures we've seen. I just want to try and get a feel for is there any timing effect? We've had two quarters now of very significant short-term interest rate declines and there's been a very good timing in terms of offsetting it on the asset side. Are we at an equilibrium now? If we assume stable rates, there shouldn't be any negative pressure coming through going forward? Is there a chance that there is some time lag?
Thank you for those questions. On the first question, on the resolution and recovery regime, as you may know, it's currently negotiated in Brussels. There have been voices out saying that this should be finalized in June. I just noted that the meeting was postponed now a couple of weeks and so on. Certainly, I would expect and certainly the ambition is to get it all sorted out at least during the fall, and maybe even quicker than that. Realistically, I think we're talking about the fall there. When it comes to the Swedish Pillar 2 and what capital you should have that, and also the question of Swedish implementation, as you may know, the government has appointed an investigation into how this is going to be done from a legal standpoint, and if I understand it correctly, this investigation should be presented during May.
It might be that the question of what kind of capital you should have against Pillar 2 maybe even could be commented there. Also there, all in all, when you take bail-in, you take resolution recovery regime, you take Pillar 2 Capital requirements, all of these, the best guess is that before year-end, we will have sufficient clarity on all these issues. As you know, they are moving together. In Sweden now, for instance, it's a debate on the macro-prudential advisory group between the central bank and the FSA, and also of course, the government's role into this and where are these tools going to be used. For instance, who is going to set the cyclical buffer requirements if there is 1, and so on.
Talking to the decision makers both in Brussels and here in Sweden, I think everyone is nowadays rather keen on actually achieving clarity on these matters. I'm hopeful on that ground. Deposit pressure, yes, you're right. If nothing happens with the STIBOR and all things being equal, there is no lagging effect. There's only one exception to this, and that is in Norway. You may know that in Norway, rules are such that before you make any interest rate changes, you have to tell the clients before. It's called Varselfrist in Norwegian. There, it's official that DNB increased their prices by 30 basis points, and it's also official that we have followed that. That effect, of course, is not yet seen in the numbers, as you understand.
You may have noted that Danske Bank has started a second round of a 25 basis points increase recently as well.
Thank you.
Our next question comes from Mr. Nicholas Davey from UBS. Please go ahead.
Yes, good morning, everyone. Nicholas Davey from UBS. Just a couple of questions, please, on the same theme here. I see now that you give us allocated capital in all of your various international regions. Just wanted to understand a little bit better about some of the dynamics there. Firstly, if you could just remind us at least a little bit around how the allocated capital model works. I'm just surprised at some of the outcomes here about, for example, how much capital ends up in Denmark, somewhere near what's in the U.K. with a loan book that's around half. Just a bit of a reminder on that, please, and then maybe a comment on how it's changing over time.
Again, if I look at Denmark or Finland, places where you're getting the lowest return on allocated capital, there is growth rates in the capital consumed by those businesses at around 30%. Obviously the capital allocated to those groups seems to be growing a lot faster than the loan book is. Some commentary around that would be helpful, please. Then a second question on that theme, which is that when I look at the return on allocated capital in Denmark and Finland, clearly it's below what we've got at the group and below, I guess, what you'd think of as acceptable. Just please, some comments around those two regions. It feels like a lot of management attention on the U.K. and the Netherlands currently, and what efforts are being made in those two geographies to improve profitability. Thank you.
Right. Yes, you're right. As you know, we have changed now the segments reflecting our growth outside Sweden. We are much more granular now in the segments. We're also providing the capital allocation numbers. The capital allocation can, of course, be done in different ways, and it, of course, has to do with the steering mechanism of different institutions. Our principle is very simple. You first get what you need from a purely regulatory perspective, depending on the balance sheet that you have and the business you generate. Then on top of that, of course, we have much more capital than is regulatory, the regulatory minimum requirements, and that we allocate to the different entities based on historical profits. That is why you see these effects that you talked about.
We, of course, benchmark all our activities in ROE terms when we compare different countries with each other. Of course, nobody in the Handelsbanken system wants to be below average. When that is the case, of course, you are very much thinking on how to adjust either the cost side or the income side or the business or whatever is needed to be in the position of being above average and contributing, of course, to our company goal. More specifically, if you talk about, I think you mentioned Denmark and Finland being below average, as you see from the figures. In Denmark, it's of course, a reflection of the situation the country is in, and we have had some credit losses, although they are much, much smaller than found in other banks.
If you look at the underlying business and the trends, I think there is a lot positive that can be said about Denmark. If you look at the kind of volumes they are now taking in with very, very good companies and clients and also margins increasing, I think we can see a positive trend here. In Finland, you can see in the quarter that Finland is moving in the right direction. There have been a lot of management actions taken in Finland, and that is continuing. Margins in Finland has moved in the right direction. Finland has been very hard competition when it comes from some large players, but we now see an improvement on the margin side, and hopefully that could be an ongoing process.
Okay, thanks very much for the detailed answers.
Our next question comes from Ms. Sofie Peterzens from JPMorgan. Please go ahead.
Yeah. Hi, here is Sofie from JPMorgan. I had one question around Norway. The regulator in Norway has said they want to have the same capital rules for everyone, no matter if you're a branch or a subsidiary. I was wondering, what's your view on the capital rules in Norway, and how do you think it will impact Handelsbanken? My second question is on your capital plans. You say that you are looking to revisit your capital position end of the year once we have regulatory clarity. What are the options that you're considering? Could you just remind us what it is? Thanks.
Thank you for that. Norway first. Our business model, as you may have seen, is based on having more satisfied clients and a better cost position than our peers, including lower credit losses, better funding costs, lower administrative cost, higher efficiency. Of course, we are not counting on that we will get any better rules than anyone else in any country where we operate. Having said that, when you talk about a level playing field, you should also take into consideration that being Swedish-based as we are and having operated as a branch with operations we have in Norway, we pay to the Swedish Stability Fund, and that Norwegian or Norwegian-based banks do not, for instance. There are different parts to the equation you mentioned. You have to take all of that into consideration.
We actually have a disadvantage because of this stabilization fund fee in Sweden. When it comes to risk weights, we have to see, I think it's also part of a greater debate in the whole of Europe about level playing fields and different regimes in different countries. The capital plan, the options we have, it's pretty straightforward. When we know the rules, we will set our capital goal, it could be done as we've done it now in a range. That is one way of doing it. If you find that you have too much capital, it's of course easily fixed either by giving an extra dividend or using buybacks. Then, of course, you would look at adjusting your equity position and then from that starting point, continue to have healthy and good growth in ordinary dividends going forward, reflecting the value increase in the bank.
You can see, of course, from the figures that the value creation in Handelsbanken has been very stable quarter by quarter. There is a marginal question also on which kind of capital should you have. As you maybe know, we have positioned ourselves to a position where we have the most flexibility, where we got 85% of our capital now is core capital. Of course, there is room for fine-tuning when you know about other sorts of instruments. Maybe, for instance, CoCo instruments would be allowed to fill Pillar 2 requirements, maybe that's interesting. Let me stress that these would be marginal things on top of our core capital, because we will never want to end up in a situation where it's hard to understand how our capital works.
I think one has to be very careful about which kind of instruments you use so that it never becomes complicated for your bondholders to understand your capital structure. I think you saw very warning examples, for instance, in the U.K., in the use of hybrids some years ago, some of our Nordic peers, in certain instances, have been, in my view, rather complicated in these instruments. It should be simple to always understand Handelsbanken's capital base. There is room for some fine-tuning here, probably.
Okay, great. Thank you. Can I just have one follow-up question? In terms of your dividend increasing the payout, what restrictions does Oktogonen put on the dividend? What's the link between Oktogonen and the dividend payout?
There is no link in the sense that Oktogonen is the largest shareholder besides Industrivärden and of course, apart from that, it has no link. It receives the dividends as all shareholders do, and so on. You can say there is an indirect link, of course, to our company goal in the fact that we would never want to end up in a position where we have too much capital because our company goal is to have higher ROE than our peers. Of course, we have the same interest as every shareholders from every angle to be capital efficient. There's no special situation about Oktogonen apart from ordinary shareholders.
Okay, great. Thank you very much.
Our next question comes from Mr. Riccardo Rovere from Mediobanca. Please go ahead.
Good morning to everyone. I have just three questions. The first one is on the capital. Just want to try to understand what could be the potential downside. My question is leverage ratio or, let's say, corporate risk weight harmonization, a matter of discussions with the regulators, or this is something that is not part of any kind of discussion with the Swedish Finansinspektionen? The second question I have is on asset quality. Do you see any reason why the asset quality that we have seen in Q1 should suddenly deteriorate in the foreseeable future? The third question is actually more a clarification from a previous question.
When you stated that there is no lagging effect with the possible exception of Norway from short-term interest rate, are you basically saying that the level of NII, everything else being equal, the level of NII that we have seen in Q1 is basically the run rate going forward? Thank you.
Right. First question on risk weights and leverage ratio. In Sweden, we have no information other than that the 15% risk weights on Swedish mortgages, that is what the authorities want to have and want to implement, and now they look on how to do this in a legal way. It's proposed to be done in Pillar 2 add-on requirement. You have, of course, the Norwegian discussion, which has ranged from 35%, and lately we have heard more sort of 20%, 25%, but that is an ongoing debate. Something I'm sure will come there. None of these is a big question when it comes to putting out our capital goals. It's not that we are waiting for that clarification in such. The other questions are so much more important, like the resolution regime and so on.
Leverage ratio, as you may know, was really an agreement within the G20 framework between United States and Europe. The idea was that United States would adopt Basel and Europe would adopt leverage ratio. Now, one can say that the USA have not yet totally adopted Basel rules. What I hear from the European side is very much that leverage ratio discussions should be brought forward to the future, and the political side does not seem to be very keen on implementing a leverage ratio. No, we have no discussions whatsoever with the Swedish authorities on the leverage ratio questions as of today. When we look into the fall and the capital goal and so on, I would not envisage things to have changed when it comes to leverage ratio. Let me also add that leverage ratio is not so dramatic.
I think it's a very small likelihood it will come into effect in such a way it will be detrimental to us. If that would happen, it's very easily solved. The value creation in the bank comes from talking with the clients and doing good business. It does not come from holding the assets on the balance sheet as such. Of course, the obvious solution is to do like the U.S., where you sell securitized papers, and you don't hold the assets as such on your balance sheet. Asset quality, second question. If you look at migration in the first quarter, it was very flattish, microscopically positive, but I would call it flattish. From all the figures we see and so on, there is no information other than that.
When it comes to NII run rate, of course, when I said that there's no timing effect except Norway, of course, it's all things being equal. We talked about what will happen if the interest rate level would come down or rather be stable. Of course, there are a lot of other things going on in NII. You have seen the increase we have outside Sweden in terms of lending volumes and business, and you also have, of course, changes in margins and so on going on in different markets. I was only referring to what will happen if all things being equal, if the interest rate is still at the same level.
Okay. If I can just clarify finally. Corporate risk weights, harmonization, no matter discussion. From your wording, I understand if rates remain where they are today, no lagging effect from further deposit margin pressure. Correct?
If rates are exactly the same as they were at the end of the quarter, nothing happens. Other things being equal, there is no timing effect when it comes to NII, except Norway, as we talked about.
Except Norway. Okay. Thank you. Thanks.
Our next question comes from Ms. Claire King from RBC. Please go ahead.
Hi there. Thank you for all the detail on the U.K. operations. I just had a couple of questions relating to that business. Firstly, can you tell us how your application for IRB approval is going for the U.K. retail book, and any sensitivity on where we could expect that risk weight to go to and get the RWAs down? Then also, your ROE in the U.K. business is around 11.5%. Are you able to give us an idea of that range, those branches that are eight to nine years old, 30% cost-income, what kind of ROE are they generating? Then finally, a number of schemes in the U.K., such as the Funding for Lending Scheme, have lowered the cost of funding for the U.K. banks, and we're now starting to see that have an impact on the asset yield.
Given where your loan to deposit ratio is, the funding advantage you've had from your group funding structure, would you then expect to see a compression on your U.K. margins from that asset yield coming down going forward? What are your thoughts on that? Thank you.
Thank you very much. When it comes to our U.K. operation and changing methods there is nothing going on in the immediate future. We are happy to go through the numbers from you. I think this is not a big effect when it comes to capital goals or anything else. We will be happy to share the numbers with you, and we can go through the Pillar 3 report here. It's not a big effect from a group perspective. When you're talking about old branches, you can see from the picture here, as you may know, we measure our branches on cost-income ratio, and that is after having charged them with the capital cost, and also, of course, the true funding cost.
You will see from the slide here that if you look out eight, nine years, you have cost-income ratios that are lower than 30%. You can also see, if you want to correspond that to ROE, you can easily look at the numbers that we provide for instance, Sweden, and you can compare the ROE we got there and extrapolate if you want to have it in ROE terms. We never measure ROE on branch office level, and that has to do with our firm belief that it's much better to steer the branches in terms of cost-income ratio. It goes without saying that you will end up with a very good ROE. Lending to funding. Actually, I haven't seen the latest numbers, but the use of it, as you know, was rather sluggish from the beginning, although it has increased from a practical point of view.
This have not had any impact on us, actually. We haven't seen any sort of pressure so far. Whether it will come or not, I think has to do with how it's used. If I understand the regulation properly, it's supposed to be used for new deals, new clients, new investment, new ideas, and the cases that have popped up in the market seems to be more old cases that are renewed. I know that this has been some concern from the regulatory authorities. We are not, as you know, at all involved. We have never taken any state grants or any subsidy from the state, and we are not participating in this scheme.
Okay. Thank you very much. That's already clear.