Welcome to the Handelsbanken First Quarter Presentation. I now hand over the word to Olof Edensert, CFO. Please go ahead.
Good morning, and welcome to this conference call for the Q1 2013. Joining me today, I have Michael Hallacher, Head of Investor Relations Lars Hoglund, Head of Debt IR and Olander, Group Head of Accounting. And as usual, the slides used for my presentation are available at handersbanken.com. First, let me start with slide number 2. And this slide here again shows the value creation in the bank, equity and dividends per share since the start of the financial crisis.
And as can be seen, the growth rate in value is 15%. But even more importantly, we think, is the very stable development that our business model continues to generate. And as you know, the model is the same that we now have used for more than 40 years. And 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 3, we summarize the results achieved during the Q1. And here you can see that operating profit increased 10% compared to the 4th quarter. Net interest income increased by 3% sequentially, excluding currency effects and adjusted for fewer number of days in the Q1, and this increase was achieved in spite of, again, lower deposit margins. Profit after tax increased by 6% compared to 1 year ago and 25% quarter on quarter adjusted for the one off tax effects in the Q4. The bank continues to build capital.
Here Basel 2 core Tier 1 capital ratio increased to 18%. And according to CRD 4, which has now been decided, it increased to 17.5%. Return on equity was 13.8%. Prefunding was extended further and all bonds maturing up until June 2014 were already pre funded at the end of the Q1 and Handelsbanken was the 1st Nordic bank to issue covered bonds in the U. K.
Market. In the quarter, Handelsbanken also was appointed 1 of the 10 most highly reputed of all companies in Sweden according to the reputation index provided by CIFU. On slide number 4, you can see the profit and loss accounts compared to the 4th quarter. And 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. And in Sweden, lower deposit margins reduced net interest income by SEK73 1,000,000, 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.
However, 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 Q4. The previous quarter also contained some non recurring items. Loan loss ratio fell to 6 basis points compared to 9 basis points in the 4th quarter.
Credit quality remains solid. And 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 73,000,000 since the average 3 months STIBOR rate fell by 24 basis points in the quarter. We lowered the 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 €32,000,000 and a slight improvement in the lending margins added another €8,000,000 Continued expansion and lending margin improvement outside Sweden contributed €50,000,000 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 given addition of SEK145,000,000. Currency effects reduced net interest income by SEK 72,000,000 and the fact that the first quarter had fewer days gave another reduction of SEK 36,000,000. The underlying increase in net interest income excluding these two items was 3% or SEK 165 1,000,000. On Slide number 9, we illustrate the development of net interest income in the Swedish branch office operation.
And here since the Q1 2012, the STIBOR rate has fallen some 100 and 23 basis points and quarterly net interest income on deposit margins have been negatively affected by SEK 50 6,000,000. In the same period though, quarterly net interest income on our lending in Sweden has improved by some SEK228 1,000,000. But at the same time outside Sweden, our net interest income has increased by SEK332,000,000, this being, of course, a reflection of the balancing effects of our Universal Bank business model. On slide number 7, you can see net interest income sequentially in all our home markets adjusted for currency together with effects of fewer number of days. And 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 continued to be very strong. Back then to slide number 5.
This shows the financial position of the bank, which strengthened further in the quarter. The equity in the bank compared to the Q1 2012 increased by SEK11 1,000,000,000 to SEK100 1,000,000,000. 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% 1 year ago. And as you probably are aware, on April 16, the European Parliament decided on the CID 4.
The final version contains some new details, which have an impact on our core Tier 1 ratio in Basel III terms. At the end of the Q1 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 adjustment risks are now calculated for financial counterparts. Also risk weights for lending to SMEs are lowered in the final definition. And these two changes together explain 0.6 percentage points of the increase and the remaining 0.5 percentage point is explained by the bank's development in the Q1.
The bank has kept its unused liquidity reserves at a level above SEK750 1,000,000,000. Out of this, SEK259,000,000,000 was placed with central banks overnight. And again in the Q1 the inflow of short term U. S. Dollar deposits which was placed in the U.
S. Federal Reserve Bank has been substantial. On slide number 6, 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 4 was as you know decided upon on April 16 in the European Parliament. However, there are still important regulatory issues that are not yet known nor decided. The directive regarding a resolution and recovery regimes and bail in of senior bondholders is still being negotiated and a decision here is yet to come. And 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. And in Handelsbanken, we want to have a 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, and 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 1 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. And once these boxes are ticked, we will decide our view on the capital position. On slide number 8 then, I would like to talk a little bit about our funding activities. The bank has been quite active in various markets during the Q1 and we choose to extend the prefunding a little bit further. And now all bonds maturing up until June 2014 are now already prefunded 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 SEK65 1,000,000,000 and 32% was done in the senior unsecured market. As the 1st Nordic bank, we developed a new source by issuing covered bonds in the sterling market and Handelsbanken is the only Nordic bank now that has capital bonds outstanding in euros, U. S.
Dollars, sterling and Australian dollars. On top of the ordinary bond funding, the bank also issued extendable notes in the U. S. Dollar market and the total volume of this issuance correspond to another 26,000,000,000 Swedish kronor. And 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 9 new branches in the quarter, 5 in the U. K, 2 in the Netherlands and 1 each in Sweden and Denmark. 14 branch managers have been appointed for coming branch openings in the UK. All home markets outside Sweden improved their operating profits in the Q1 compared to 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 Hartford Wealth Group that we announced in February has been very well received by customers both of Hartwood and of Handelsbanken, and we are very enthusiastic about the opportunities in the wealth management business that Hartwood will add to the bank. We expect to get regulatory approval and to finalize the acquisition during the Q2. The Netherlands, our 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.
Then if we go to slide number 13 that shows some more information about the development for our U. K. Branches. Including branch the UK 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 4 years. And after 4 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 8 or 9 years, we will spin off and start up a new branch nearby. And 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 8 to 9 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 2 years. And you can see that the cost income ratio for the average old branch is at 30% level.
So to summarize the Q1, profit after tax increased by 6% compared to the Q1 2012 and 25% sequentially adjusted for tax effect in the 4th quarter. Operating profit was up 10% sequentially. The Norwegian operation had its best quarterly result ever. Loan loss level fell and was 6 basis points in the 1st quarter compared to 7 basis points 1 year ago and 9 basis points in the 4th quarter. Return on equity was 13.8%.
The capital position of the bank has strengthened further. Basel to core Tier 1 capital ratio was 18%, up from 15.8% 1 year ago. And with the final definition of CRD 4, 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 4 definition as we then knew it. The bank has extended the prefunding and all bonds maturing up until June 2014 were prefunded at the end of the Q1. Liquid reserve were kept above SEK 750,000,000,000.
In the quarter, 9 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. And with that, I conclude my presentation and open up for questions. Thank you.
Our first question comes from Mr. Omar Kinan 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. 1 of your competitors made the comments that margins on the front book had moved about 5 to 7 basis points lower in relation to the stock.
Is that a trend that you recognize from the Q1? Could you perhaps make some comments on how the front versus back book dynamic evolved in the 1st 3 months of the year? And then just the second question. Net interest income seems to improve about EUR 160,000,000 coming from the group. I think you mentioned that EUR 145,000,000 of that was on cheaper funding costs, which seems like a big number for 1 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 with numbers we communicate is totally back book. But it is 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 1 basis points. Actually, it's also a round up thing.
So I mean, it's less than 1 basis point change. And 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. And 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, and you can also slice it into old deals that are rolling off and sort of getting new deals and so on. But 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. So 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 interest net interest income effect. So 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. But it's actually real net interest income. But of course, coming from the fact that we have a superior funding situation, and as you can see from the figures we have done, quite a lot of funding in the quarter.
I mean, I would just comment, euros 145,000,000 just seemed like a very large number. So I was just wondering kind of if you could give a bit more flavor as to what the back book cost of funding rolling off is. I mean, if I do a quick calculation then, you would have had basically all your SEK 65,000,000,000 that you funded would have had to roll off at 1% more expensive funding to get to the €145,000,000 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 see it into relation to the asset side, of course. So it's just a reflection of that the internal prices have not fully got out to the full effect to the branches. So usually the internal pricing is quicker of getting out these effects. But in this quarter, we have such an effect.
So it's not 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. And the way we operate the bank is that we look on both sides. So the old funding has been funding old deals and the new funding is funding actual new deals and incoming volumes. So I saw that one of our competitors, for instance, talked about 40 basis point decrease in their covered bond funding. The relevance figure for us would be 43 basis points.
But 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. And if you put those together then the margin is better?
The margins in total in the quarter is very, very flattish on the lending side. It's SEK8 1,000,000 altogether in Sweden.
Okay. Okay. Thanks very much.
Our next question comes from Mr. Johan Erik Klom 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 But can you just update us on what the expected timetable is? I guess, number 1, for getting 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?
And where are we in terms of the getting clarity on the resolution regime? And then just secondly, coming back to net interest income, clearly, you've been very successful in offsetting the deposit pressures we've seen. And I just want to try and get a feel for if there are any timing effect? I mean, we've had 2 quarters now of very significant short term interest rate declines and haven't really or there's been a very good timing in terms of offsetting it on the asset side. Are we at sort of an equilibrium now?
So if we assume stable rates, there shouldn't be any negative pressure coming through going forward? Or is there a chance that there is some time lag?
Thank you for those questions. On the first question, on the resolution 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 have noted that the meeting was postponed now a couple of weeks and so on. But 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.
But 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. And it might be that the question of what kind of capital you should have against Pillar 2 maybe even could be commented there. But also there, all in all, when you take bailing, you take Resolution Recovery Scheme, you take Tier Pillar 2 Capital requirements, all of these, the best guess is that before year end, we will have sufficient clarity on all these issues.
And 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 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 one and so on. But 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. So I'm hopeful on that ground. Deposit pressure, yes, you're right.
If nothing happens with the Steiber 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 you have to before you make any interest rate changes, you have to tell the clients before. It's called Varshall Frist in Norwegian. And there, it's official that DNB increased their prices by 30 basis points.
And it's also official that we have followed that. And 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 25 basis points increase recently as well.
Thank you.
Our next question comes from Mr. Nick Davy from UBS. Please go ahead.
Yes, good morning, everyone. Nick Davy 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. So just wanted to understand a little bit better about some of the dynamics there.
Firstly, if you could just comment on remind us at least a little bit around how the allocated somewhere near what's in the UK with a loan book that's around half. So just a bit of a reminder on that, please. And then maybe a comment on how it's changing over time because 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%. And obviously, the capital allocated to those groups seems to be going a lot faster than the loan book is. So some commentary around that would be helpful, please.
And then the second question on that theme, which is that when I look at the return on allocated capital 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. So 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?
Right. Yes. You're right. As you know, we have changed now the segments, reflecting our growth outside Sweden. And so we are much more granular now in the segments.
And we're also providing the capital allocation numbers. The capital allocation can, of course, be done in different ways, and it's, of course, has to do with the steering mechanics 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. And 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.
So 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. And 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. Also in Finland, you can see in the quarter that Finland is moving in the right direction.
There continuing. Also, 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. Sophie Peterson from JPMorgan. Please go ahead.
Yes. Hi. Here is Sophie from JPMorgan. I had one question around Norway. The regulator in Norway has said they want to go 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 the Hondas Banken? And then my second question is on your capital plans. You say that you are looking to kind of revisit your capital position end of the year once we have regulatory clarity. What are the options that you're considering?
Could you, yes, just remind us what it is?
Yes. Thank you for that. Norway, first, yes. Our business model, as you may have seen, is based on having more satisfied clients and a better cost position that our peers, including lower credit losses, better funding costs, lower administrative costs, higher efficiency. And 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 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 Stabilization Fund and that Norwegian or Norwegian based banks do not, for instance. So, there are different parts to the equation you mentioned. So, you have to take all of that into consideration. So, we actually have a disadvantage because of this stabilization fund fee in Sweden. When it comes to risk weights, we have to see and it's 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, well, it's pretty straightforward. When we know the rules, we will set our capital goal. And it could be done as we've done it now in a sort of 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.
And 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. And you can see, of course, from the figures that the value creation in Handelsbanken has been very, very stable quarter by quarter. Then there is a marginal question also on which kind of capital should you have. As you know, maybe know, we have positioned ourselves to a position where we have the most flexibility.
85 percent 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 and then maybe that's interesting. But let me stress that this 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. And 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 and some of our Nordic peers in certain instances have been, in my view, rather complicated in these instruments. And we want to be it should be simply to always understand Handelsbanken's capital base. But there is room for some fine tuning here probably.
Okay, great. Thank you. Could I just have one follow-up question? In terms of your dividend increasing the payout, what restrictions does Oktogonen put on the dividend? Or how the what's the link between Oktogonen and the dividend payout?
Well, there is no link in the sense that Oktogonen is 1. It's the largest shareholder besides Industry WAD and then of course but 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 a higher ROE than our peers. So, of course, we have the same interest as every shareholders from every angle to be capital efficient.
But there's nothing no special situation about Oktogonen apart from ordinary shareholders.
Okay, great. Thank you very much.
Our next question comes from Mr. Ricardo Rovere from Mediobanca. Please go ahead.
Good morning to everyone. I had just three questions. The first one is on the capital. Just want to try to understand what could be the potential downside. So my question is, is leverage ratio or, let's say, corporate risk weights, harmonization, matter of discussions with the regulators?
Or this is something that does not is not part of any kind of discussion with the Swedish FSA? The second question I have is on asset quality. Do you see any reason why what the asset quality that we have seen in Q1 should suddenly deteriorate in the foreseeable future? And 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, that is what the authorities want to have and want to implement and how they look on how to do this in a legal way. And 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. And no, none of these questions have is some none of this is a big question when it comes to putting out our capital goals. So that 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. And now one can say that the U. S. A.
Haven't not yet totally adopted Basel rules. And 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. And no, we have no discussions whatsoever with the Swedish authorities on the leverage ratio questions as of today. So 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. But if that would happen, it's very easily sold. I mean, 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.
So, of course, the obvious solution is to do like the United States, where you sell then 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 Q1, 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, I it's all things being equal.
We talked about what will happen if the interest rate level would come down or rather be stable. But of course, there are a lot of other things going on in NII. I mean, 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. So, I was only referring to what will happen if the all things being equal, if the interest rate is still at the same level.
Okay. If I could just clarify the final. So corporate risk weights, harmonization, no macro discussion. And 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 in the last at the end of the quarter, nothing happens. All things other things being equal, there is no timing effect when it comes to NII, except Norway as we talk about. 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 UK retail book? And any sensitivity on where we could expect that risk weight to go to and get the RWAs down? And then also, your ROE in U. K. Business is around 11.5%.
Are you able to give us an idea of that range, those branches that are kind of 8 to 9 years old, 30% cost income? What kind of ROE are they generating? And then finally, a number of schemes in the UK, such as the funding for lending scheme, have lowered the cost of funding for the UK banks. And we're now starting to see that have an impact on the asset yields. So given where your loan to deposit ratio is, the funding advances you've had from your group funding structure, would you then expect to see kind of 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, there is nothing going on in the immediate future. We are happy to go through the numbers from you.
But I think this is not a big effect when it comes to capital goals or anything else. But we would be happy to share the numbers with you. We can go through the Pillar 3 report here, but 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 costincome ratio, and that is after having charged them with the capital cost and also of course the true funding cost. And you will see from the slide here that if you look out 8, 9 years, you have costincome ratios that are lower than 30%.
You can also see, if you want to correspond that to RV, you can easily look at the numbers that we provide for, for instance, Sweden and you can compare the RV 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. But 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. So, we don't we haven't seen any sort of pressure so far. Whether it will come or not, I think it 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.
And I know that this is have 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 subsidiary from the state, and we are not participating in this scheme.
Okay. Thank you very much. That's already clear.