Gentlemen, welcome to the Handelsbanken Year End Report 2012. I now hand over to Mr. Ulf Riese, CFO. Please go ahead.
Welcome to this conference call for the fourth quarter 2012. Joining me today, I have Mikael Hallåker, Head of Investor Relations, Lars Höglund, Head of Dept HR, and Jörgen Olander, Group Head of Accounting. The slides used for my presentation are, as usual, available at handelsbanken.com. As you probably have seen, we have released several press releases this morning. One is about our acquisition of the U.K. wealth manager, Heartwood Wealth Group, creating a new platform for us in wealth and asset management and enhancing further growth in the U.K. We have also this morning announced our decision to start a regional bank in the Netherlands, a market with similar characteristics as the U.K. The Netherlands will now be our sixth home market where we will again be applying our Handelsbanken organic growth model.
Finally, of course, the earnings release where you can see that our net profit increased by 18% year-on-year. First, I would like to start with slide number two. Again, in the fourth quarter, as you can see, the value creation in the bank, equity and dividends, has a very stable growth with an annual growth rate exceeding 15%. Unlike what we hear from most other banks, we continue to see very strong and profitable growth prospects for our organic business model, simply being more Handelsbanken in more places. First and foremost in the U.K., but now also in the Netherlands, where we now take an important step to grow further, and of course, also in the Nordic countries outside Sweden.
This, I think is well illustrated by our earnings growth in branch office operations outside Sweden, which in 2012 increased by 47%, now contributing 26% to the group's total operating profit. On slide number three, we summarize the results achieved during 2012. The operating profit rose by 6% compared to 2011, with revenues being up 7% and costs 5%. All home markets improved their operating profits and in branch office operations outside Sweden, operating profit rose by 47%. The largest increases here were in the U.K., in Norway, and in Handelsbanken International, including the Netherlands. In the U.K., operating profit reached a level above SEK 1 billion for the first time. Cost efficiency continued to improve and the cost-income ratio was 46.3%, down from 47.1% last year. In the Swedish branch office operations, this ratio was 34.1% for the full year versus 34.8% last year.
The U.K. operation had a cost-income ratio of 50% for the full year and 48.5% in the fourth quarter. In the fourth quarter, the Swedish Parliament also decided to lower corporate tax to 22% from 26.3%, effective on 1st of January 2013. The bank has therefore recalculated the deferred tax liabilities and tax assets, which gave a positive one-off impact of SEK 1,682,000,000 in the fourth quarter. In spite of this, our total contribution to the Swedish state, namely taxes, fees to the stabilization fund, et cetera, amounted net to over SEK 7 billion. Return on equity improved to 14.7% for the full year, up from 13.5% a year ago. This is despite the fact that the bank has generated SEK 12.4 billion in new equity in 2012.
Quarter one ratio, according to Basel II, increased to 18.4%, and with new rules in Basel III terms as we know them, and also including the IAS 19 and the new rules for insurance deduction, the ratio was 16.4%. The board proposes a dividend of SEK 10.75, an increase by SEK 1 from 2011. This means that we continue our trend with a stable dividend growth. The bank also continues to keep very high liquidity reserves of about SEK 750 billion. All bonds maturing up until February 2014 were already pre-funded at year-end. On slide number four, we show the profit and loss account for the full year and for the fourth quarter. Here you can see that the net interest income increased by 10% year-on-year. Here, higher business volumes explain most of the increase.
Average lending volumes increased by 4% and deposit volumes by 7%. In the fourth quarter, net interest income increased slightly, driven by the branch office operations outside Sweden. Net commission income fell by 4% year-on-year, but increased 10% in the fourth quarter. Most lines of commission improved in the fourth quarter. Net gains and losses on financial items increased by 10% year-on-year and 92% quarter-on-quarter. Here, the improvement mainly came from a higher client activity in the fixed income and foreign currency exchange business. This line in the profit and loss account, as you may remember, only represents some 3% of total revenues, and you can expect it to be a small item also going forward, since we have minimum market risks and refrain from proprietary trading. Looking at expenses, they rose by 5% year-on-year, entirely driven by staff costs being up by 8%.
Here, three percentage points of the increase in staff costs are related to higher contribution to Oktogonen and to increased costs related to the corridor effect of pensions. Other administrative expenses were unchanged year-on-year. The fourth quarter total costs include non-recurring costs of SEK 168 million. SEK 91 million of this was due to rental contracts that we are terminating in order to achieve a more efficient use of our premises. The remaining SEK 77 million were mainly related to non-recurring pension costs. The contribution to Oktogonen increased by SEK 104 million, and all in all, total expenses increased by 17% quarter-on-quarter. Excluding one-off costs, currency effects, and higher variable salaries, the increase was 9%. Costs, as you know, are always seasonally higher in Q4 than in Q3, and the underlying adjusted cost increase compared to the fourth quarter 2011 was 2.5%. Credit quality remains solid.
The loan loss ratio was nine basis points for the fourth quarter and eight basis points for the full year, up slightly from five basis points in 2011. There's no particular trend in the loan losses, and they continue to be related to a small number of engagements. Moving on to slide number 25, which shows the development of net interest income during the fourth quarter. You can see here that deposit margins in Sweden decreased by SEK 153 million due to the average STIBOR rate falling 49 basis points in the quarter. Some of these negative effects was mitigated by the fact that the bank lowered deposit rates to customers both in late September and early in the fourth quarter. Improved lending margins in Sweden contributed SEK 85 million and higher lending and deposit volumes in Sweden, another SEK 27 million.
Expansion and improved margins in our branch office operations outside Sweden added SEK 120 million to the net interest income before FX effects, which in turn added another SEK 33 million. Higher state fees, a larger negative benchmark effect, and some other factors had a combined negative impact on net interest income of SEK 90 million. Back to slide number six, you can see the bank's capital and liquidity position. As can be seen here, the financial position is still further improving. In 2012, the equity of the bank increased by SEK 12.4 billion to SEK 106.9 billion. The Basel II Tier 1 ratio was 21%, an increase of 2.6 percentage points compared to one year ago and half a percentage point compared to the third quarter. Total capital adequacy ratio was 20.9%.
The Core Tier 1 ratio in Basel II was 18.4%, up from 15.6% a year ago and from 17.9% in the third quarter. Core Tier 1 capital now constitutes 88% of our capital base and Tier 1 hybrids the remaining 12. The high degree of core capital, of course, provides a large flexibility, and we will at some point look at ways to optimize the capital structure once the new rules are finalized. From the 1st of January 2013, there will be new adjusted accounting rules for pensions, the so-called IAS 19 rules. This will, all things being equal, lower the Core Tier 1 ratio with half a percent. In addition, from 2013, the old transitional rule under which Swedish banks could deduct 100% of insurance investments from the total capital base has expired.
Instead, now half of the investment should now be deducted from Tier 1 capital and half from Tier 2 capital. This will lower our Core Tier 1 ratio with another 0.4 percentage points from Q1. Then, as you know, the CRD IV rules or the Basel III implementation in Europe is still not finalized. When CRD IV, as we know it, comes into force, the additional effect of this will be further reduction in our Core Tier 1 ratio of 1.1 percentage points. The isolated total effect of CRD IV is expected to be two percentage point reduction, but since most of the impact from the changes in IAS 19 and from the expired transitional rules regarding the treatment of insurance investments is also included in CRD IV, the additional effect amounts to 1.1 percentage points.
All in all, we are expecting a 0.9 percentage point reduction in Core Tier 1 in Q1 and an additional 1.1 percentage point reduction when CRD IV finally comes into force. The total effect after all changes is consequently still expected to be a reduction in the Core Tier 1 ratio of two percentage points, bringing our Basel III Core Tier 1 ratio to 16.4%, all other things being equal. The bank has also maintained unused liquidity reserves of more than SEK 750 billion, and out of this, SEK 246 billion was placed with central banks overnight. Also in the fourth quarter, the bank has seen a very substantial inflow of short-term US dollar funding that we placed with the Federal Reserve, and we had to reallocate more such funding from time to time also in Q4. We're going to slide number seven.
This summarizes our activity in the bond markets. As you know, we were quite active during the first three quarters of the year, and as a consequence, we choose to ease the issuance pace a bit in Q4. Still with issuance done, all bonds maturing up until February 2014 were already pre-funded at year-end. Total issued volume in 2012 was SEK 231 billion where 36% was done in the senior unsecured market. We have, as one of very few European banks, had excellent access to the senior market throughout all of 2012. In Q4, apart from domestic covered bonds, we issued a 10-year sterling senior unsecured bond of GBP 300 million at tighter price levels than any other bank in the sterling market. In the beginning of January, the bank also issued a three-year senior unsecured bond in the Chinese currency CNY.
The volume here was CNY 400 million, and the bond was seven times oversubscribed with a price level on par with the tightest bank in the region. The reason for this issuance was our long-term interest in the Asian funding market and also, of course, to support our Nordic and U.K. customers in the region. Moving on to slide number eight, and encumbrance. Here we show our NEA ratios or Non-Encumbered Asset Ratios. As you know, Handelsbanken has a strategy of balancing covered bond funding with senior unsecured funding in order to minimize subordination of unsecured bondholders. Since we have never participated in any central bank funding, we have no assets pledged for that purpose. In this table, we show the amount and quality of our non-encumbered assets or NEA, and all of these, of course, protect the unsecured lenders.
When discussing asset encumbrance, the NEA is, of course, the only relevant way of looking at the balance sheet. Cash balances with central banks and liquid bonds in our portfolio, together with mortgage loans that are not encumbered, they together already cover more than 80% of our unsecured funding. That is all unsecured certificates, bonds, and liabilities to credit institutions. On top of that is, of course, the solid protection by the rest of our high-quality credit portfolio in low-risk classes. All in all, we cover more than twice our total unsecured funding with assets of high quality that are not encumbered. On slide number nine, we show the development in the Swedish branch office operations. Here, as you can see, operating profit increased by 2% to SEK 13 billion in the year.
Compared to the third quarter, operating profit fell by 8% due to seasonally higher expenses and slightly increased loan losses. Net interest income rose 6% year-on-year and was down 1% quarter-on-quarter. In the fourth quarter, deposit margins fell by SEK 153 million, but lending margins improved by SEK 85 million. Increased lending and deposit volumes also contributed positively. Lending to households continued to grow while corporate lending only grew marginally. Net fees and commissions decreased 7% year-on-year, mainly due to lower equity market-related fees. In the fourth quarter, fees increased by 3%, driven by most lines of business. For the third consecutive year, the bank had the largest share, 28%, of new savings in the mutual fund market in Sweden. Total expenses increased 1% year-on-year, and the cost-income ratio improved to 34.1% from 34.8% in 2011.
Loan loss ratio increased to six basis points for the fourth quarter and four basis points for the full year. We also continued to open up more meeting points for our customers in Sweden. In 2012, our branches opened up 10 new meeting points where the bank, at a very low cost, can serve customers in the very local area. More such meeting points are also planned for 2013. On slide number 13, we show the performance of our branch office operations outside Sweden. Here, operating profit rose by 47% year-on-year. Revenues grew by 20%, driven by net interest income being up 25%. At the same time, costs grew only by 4%. Currency effects were negligible. All home markets increased their profits with the most profound improvements in the U.K., in Norway, and in Handelsbanken International, including the Netherlands.
In the fourth quarter, net interest income improved by 7% compared to the third quarter due to higher business volumes and lending margins. Net commissions and fees grew by 13%. This was, however, offset by seasonally higher costs and higher loan losses. Operating profit declined by 3%. Cost efficiency continued to improve, and the cost-income ratio fell to 48% in 2012 compared to 55% in 2011. Loan loss level was 19 basis points for the full year, up from 18 basis points in 2011. Earlier this morning, we announced that we have agreed to acquire the British wealth manager, Heartwood Wealth Group. You will find some more information on slide number 14. As you know, our aim is to be a full service bank. So far, we have not had private banking, wealth, and savings products in the U.K. apart from savings accounts.
With the acquisition, we now get a complete product range, including discretionary and advisory wealth management services. Consequently, this platform is an important step for us to be a full service bank in the U.K. market. Considering that we are not a mass market bank and that we only target the 15% most affluent customers at the top of the market, Asset management services is an area in the U.K. business where we see significant growth potential within our existing customer base. Of course, also in the opportunity to attract new customers. Heartwood is, like Handelsbanken, focusing on long-term organic growth, and we see a good fit between the two companies, both when it comes to corporate culture and business model.
Looking at the slide, you can see that Heartwood, as a starting point, has a wealth management volume of some GBP 1.5 billion, and the company has shown strong and consistent growth over the last 10 years with an average annual growth rate of 21%. Heartwood's clients are very satisfied and investment performance has exceeded client expectations and comparable indices. The acquisition will only have a marginal initial impact on the financial position of the bank, and the transaction is expected to close in the second quarter after fulfillment of normal acquisition conditions and after receiving a regulatory approval. Moving on to slide number 15 and more on the U.K. You can see here that the full year operating profit increased by 57% and exceeded SEK 1 billion. Revenues grew by 38% and costs by 29%.
Net interest income was up 39% and net commission income 16% due to higher business volumes and increased number of payment transactions. Costs increased due to the continued expansion of the branch network. The bank opened 29 new branches in 2012, taking the total to 133 at the end of the year. Another 12 branch managers have been appointed so far for further openings in 2013. As of January 2013, the fourth regional bank started its operation in Bristol, which is an important step in further enhancing our growth capabilities in the U.K. market, which we in turn consider to be significant. For the second year in a row, deposits grew faster than lending. In 2012, deposits rose by 53% and lending by 27%.
Loan losses in 2012 amounted to SEK 151 million related to a small number of exposures. The underlying quality of the credit portfolio remains solid. On slide number 16, we show the compounded growth of revenues and costs in the U.K. over the past four years. As you can see, the healthy cost-income gap continued to further improve in the fourth quarter. Since the beginning of 2009, income has grown on average 42% per year and costs only 21%. In this period, the bank has opened 77 of the 133 branches now in operation in the U.K. On slide number 18, you can see that we have now decided to start a regional bank also in the Dutch market, making the Netherlands the sixth home market in the group.
As you may know, we have tested the Dutch market now for several years. We see large potential for growing the Handelsbanken business model also here. In fact, we see many similarities to the U.K. market. We find a large number of high-quality customers. Margins are sound and customer satisfaction is generally poor for the other banks. We currently have 13 branches in the Netherlands with two new branch offices already underway. From the first quarter 2013, the Dutch business will be reported separately. That brings me to the conclusion to summarize the full year and the fourth quarter, net profit improved by 18% and operating profit by 6% year-on-year. In the branch office operations outside Sweden, the operating profit increased by 47% in 2012 and all home markets improved their results.
Return on equity improved to 14.7% and equity grew by SEK 12.4 billion or 13% in 2012. The cost-income ratio improved to 46.3% down 0.8 percentage points. The cost in the fourth quarter contains some one-off items and the underlying cost increase against fourth quarter 2011 was 2.5%. In the U.K., cost-income ratio was below 50% in the last two quarters of 2012. The bank continued to build capital in 2012. The Core Tier 1 ratio according to Basel II increased to 18.4% compared to 15.6% a year ago. According to the CRD IV as we know it, together with new rules in IAS 19 and regarding deduction of insurance investments, the Core Tier 1 ratio was 16.4%, all other things being equal.
The liquidity reserve remains above SEK 750 billion, and the bank at year-end had already pre-funded all bonds maturing up until February 2014. We have also announced this morning that we have agreed to acquire the U.K. wealth manager, Heartwood Wealth Group, providing a new platform for us. Adding wealth management services in the U.K. is an important step to a full service bank in the U.K. market. We are still very optimistic about our growth model in the U.K., now with 145 branches, including appointed branch managers. Our operations in the Dutch market continue to develop favorably. Against this background, we have this morning announced the decision to start a new regional bank and make the Netherlands into our sixth home market. We are very optimistic about our business opportunities also here, which in many respects resembles the U.K. market for us.
The board proposes to increase the dividend by SEK 1 to SEK 10.75. 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 and you enter a queue. The first question comes from Mr. Omar Keenan at Nomura. Please go ahead.
Good morning. Thanks very much for taking the questions. Firstly, I just wanted to ask you about lending margins in Sweden. Mortgage margins increased by three basis points, I believe that your message in the past has been that it's difficult to see further margin increases. I was hoping you could just give us a flavor of what drove this. Was it an increase on the variable margin or repricing of the fixed rate back book? Has your outlook for the coming quarters changed on mortgage margin development? The second question, we saw last week that policymakers made comments that the Swedish banks have good buffers and while clearly regulation is not fixed yet, I think in light of those comments, what do you see as your go-to Core Tier 1 ratio?
Could you give us some light on how best you see the capital base is made efficient? Is it buybacks or special dividends, bearing in mind that you have organic growth ambitions? Okay. Thank you.
Thank you very much for that. First on lending margins, in general, I would like to say that we see increased lending margins very much so in Norway, in Denmark, and also to some extent in Finland. We haven't seen it in a small way in Sweden. As you mentioned two and a half rounded, it's three basis points on Swedish mortgages. We have also in the quarter seen a slight increase in corporate lending margins. The outlook going forward, as you know, we don't do any budgeting or forecasting, I think it's true to say that in the other Nordic countries, it certainly has been a theme and an ongoing theme. That has to do with the fact that, for instance, in Norway the competitors to some extent are still relying on cheap money from the central bank.
Now they have to replace that with market finance. In order to offset that they increase the price towards the clients. We have never taken any central bank money, as you know, we get a better margin because we get the full effect of the price increase. When it comes to capital we have communicated that we want to wait what the regulation will bring. You have heard different voices, as you say, from the Swedish regulator. Basically, it's 10% Core Tier 1 excluding the countercyclical buffer and an extra 2% in 2015. Having said that, this is not yet the regulation and the jury is still out how this is going to be technically done. That has to do with the CRD 4 negotiations where the latest news is that we understand that politicians will try to fix something in April.
We will have to see about that. We quite simply think it's too early to actually fix our capital goals at this stage. When we have the new regulation, we will of course address this. Technically speaking, as you say, if one finds that you have too much capital, you would then either use buybacks or dividends or both. We are going to ask the annual meeting of a renewed authority to buy back up to 40 million shares. It's the same authorization that we have had so far. Yes.
Okay, thanks very much. That's very clear. Thank you.
We have a question from Mr. Johan Ekblom at Bank of America. Please go ahead.
Thank you. Just going back, I guess, just want to talk a little bit about costs. We saw a bigger than usual quarter-on-quarter impact this quarter, and part of that is clearly the increased Oktogonen allocation. Can you talk a little bit about the investments you plan to make in 2013? What should we expect in terms of cost growth going forward, or, I guess, what are the planned investments, given you don't give forecasts? Then maybe secondly, just on asset quality. We saw a tick-up in provisioning. You're saying that there's nothing to suggest any trend here. We're back to the tail of the financial crisis in terms of loan loss levels, and we saw quite a big increase in the U.K., for example.
Maybe you can elaborate a little bit about whether there are differences between your markets and where, if anywhere, you see more risk in your books.
Yeah. Thank you. First of all, on costs, as you say, when you look at the Q4 numbers and compare it with Q3, you of course got a combination of the seasonal effects and also the one-offs that we speak about, the SEK 168 million in one-offs. In addition to that, the fact that since the board has proposed increased dividends, also the allocation to Oktogonen went up with SEK 104 million. If you look at Q4 and in relation to Q4 2011, the total cost increase is 2.5%, and that's in spite of the expansion and growth we have. That is underlying it. I think going forward, we expand, as you know, outside Sweden, and we also put in money in the savings area, which is now getting good effects. Our cost-income ratio is improving, but we don't have any cost target as such.
We always see it in relation to the income that it's generating. In terms of IT systems, you have maybe seen that other administrative costs year-on-year was totally flat, and the largest item there is, of course, IT. We will invest around SEK 1.5 billion in totally new IT systems, and that is the pace that we have been doing the last couple of years. I don't see any big changes in that item. Asset quality, since the credit losses that we have experienced have been what I would refer to as single events, it's not clustered in any industry or product or geography. They tend to turn up in one country, one quarter and another country in another quarter. As you say, in this quarter, it happened to be U.K.
When you look at the credit losses, it's impossible to draw any conclusions from that. We don't see any trend. There is a slight negative migration in Sweden. You can see that if you look at when we take our capital numbers into details, it was a 0.3 on the capital ratios. Offsetting that is a positive mix effect of 1.1 in Core Tier 1 terms. That has to do with the fact that the quality of credits entering the balance sheet is much better than the quality that is leaving the balance sheet. It's the ongoing work that our branch offices do. I think it's also fair to say, as you say, that the business cycle-wise, of course, Sweden has not been improving. It's a little bit, as an economy, deteriorating, and then the jury's out whether this will change in the autumn or not.
Thank you very much.
We have a question from Mr. Geoff Dawes at Société Générale. Please go ahead.
Yeah. Hi there. Good morning, everyone. Geoff Dawes here from Société Générale. A couple of questions from myself. First of all, going back to the capital issues. Obviously, you've had a couple of announcements about acquisitions and organic growth this morning. Is that a deliberate statement? Is that your preferred use of some of the excess capital, or is it a continued conservative approach? Second question would be on the international operations. Again, going back to this morning's announcements, the focus is on the U.K. and Netherlands. But if I look at some of the trends, you've actually got very strong trends in countries like Norway. Why would you not be a little bit more ambitious on those markets? Thank you very much.
Thank you for that. When it comes to the capital question, you're absolutely right. The starting point in the capital discussion is of course, that we always want to have enough capital to cater for all the needs that we have for our growth. The good thing here is, of course, that as you've seen from the figures, that we have increased both capital efficiency and cost efficiency over the year. In spite of the fact that we are creating value on an annualized basis growing by 15% per year, we have been able to build capital and in spite of having a payout ratio of 50%. We have very good starting position to the capital decision, so to say.
You're absolutely right, with the kind of return that we are getting, we are absolutely sure that from a shareholder perspective, of course, it's very good that we have all the capital that is needed for the expansion. Having said that, it doesn't work vice versa. We will never invest in anything because we got capital. We are doing this organically and as you know, we have done this small add-ons, small acquisitions, but that's really as complementary to the organic model.
Yeah.
You talk about international expansion. You're absolutely right. When you look at Handelsbanken, we don't anticipate any lending growth over a business cycle in Sweden. We are at about the market share that we want to have, because if we expand that very much, it will mean deterioration in quality. We use the cash flow to expand internationally or outside Sweden instead in our home markets. Growth in Sweden, of course, will come and we're working on that, as you see in the savings area where we've got about half the market share than we have, for instance, in mortgages or corporate lending. Outside Sweden, we are definitely seeing growth opportunities in all the other Nordic countries for sure, and of course in the U.K., and of course in the Netherlands.
It's interesting now to see that the margins in the other Nordic countries is larger than Sweden. In the U.K. it's much larger. It's also true to say that Norway and Denmark is coming closer and closer to the British level. Also margins in Holland is very good. The bulk of our business has been in Handelsbanken, as you know, in Sweden. That is the most difficult market in terms of margin. When we are growing, of course it's a good thing that the profitability on the volume that is coming into the balance sheet is much, much higher, of course, than the Swedish back book. That is also helpful when it comes to the growth model and capital efficiency and creating value.
Perhaps just to clarify that second question. What I mean is the trends in Norway that you've reported, and I'm using Norway as an example, are extremely strong, and I haven't really heard you speak about the Norwegian operations for quite some quarters now. All the attention has been on the U.K., which suggests there isn't a huge amount of ambition to grow the business in Norway. Could you just perhaps clarify on that and why that's the case?
It's definitely an ambition to grow in all the markets outside Sweden. In terms of number and branches and so on, we have about the right number of branches in Norway. We can add a couple of ones or so on, but we have a very good geographical distribution and so on. It's more bringing on new clients and doing more business, and as you can see from the figures, we are doing that. The good news here is that we have become very much more competitive since the subsidizing that has been going on from the central bank to other banks is now ceasing or being turned down. This is a gradual effect, but you can see the increase in net interest income quarter-on-quarter in Norway, for instance, which is very impressive.
Don't misunderstand us, we of course have ambitions in all these countries. When it comes to the growth pace, when it comes to number of new branch offices, and when you look at the sheer size of the market, of course U.K. is so much bigger in that respect.
Great. That's clear. I'll stop there then. Thank you very much.
We have a question from Mr. Nick Davey at UBS. Please go ahead.
Yes, good morning everyone. Nick Davey from UBS. Three quick questions if I can. The first one on, just going briefly back on capital. Obviously you talk a lot about waiting for clarity on regulation. I guess most of the regulation that's still under discussion is around Basel III and mortgage risk weight. I just wondered really what you know already as far as what other ratios matter to you? Whether you look at all at Basel I or transitional rule capital ratios, is there any kind of a relevant steering metric on the capitalization of your bank, irrespective of what regulators tell you to do? The second question will be briefly on allocated capital in Swedish retail. In the last year or so, I think your allocated equity in Swedish retail is up 14% in a period when loans have grown 1%.
I just wondered if you could talk me through the dynamic there. Is this you're anticipating mortgage risk rate changes and you think that's going to be an equity requirement rather than a pillar to total capital requirement, and you're pushing the equity out into the business in anticipation? Maybe any comment you can make also on margins there, because obviously your Swedish branch managers are going to their branch manager conventions with their ROEs on the decline. I know margin dynamics are often up to your competitors, but I also just wondered whether you could make an observation about whether you think your branch managers in Sweden might reprice up as a result of that action. The third question, if I can, is on encumbrance and this new disclosure you give us on slide eight.
Briefly, could you just make any comments on which of these numbers you think is the most relevant for how you steer your funding plans? Is it this 207% coverage ratio of unsecured funding? Is it the SEK 700 billion encumbered assets relative to your total balance sheet? Just give us please a flavor of how you might steer the balance sheet, the encumbrance of the balance sheet going forward. What sort of constraints do you put on yourself? Thank you.
Thank you very much for those good questions. On capital, what we will look at when we form our new capital goal is, of course, a combination of what you mentioned. I think maybe you have not mentioned maybe the most important part, and that is the recovery and resolution regime. The whole idea that it will be at a certain level that a man from the national debt office comes and knocks on the bank's door and takes the key from the shareholders. That's a pretty powerful regulation. Of course, where the levels will be set and how this will be formed is of course a very fundamental question to shareholders and, of course, bondholders when it comes to bail-in.
When it comes to all of these measures, I think that will be a core thing for any responsible board of a bank to really look into before you set your capital goal. Internal allocation of capital, as you know, we have much more capital than is needed from a purely Pillar 1 regulatory framework. We then allocate this out to our different business units, both in relationship to the capital they need and then also the capital that is extra that is allocated to the different business units. It's important to say that the capital cost that we charge to our branch offices only contain the legal minimum requirement because that is the self-cost, so to say. I think that was the core of your questions.
Of course, it goes without saying that if risk weights goes up, it means that the larger part of the extra capital, the extra buffers of the bank is more specifically allocated to, for instance, in Sweden, mortgages. Encumbrance, your third question. Here, I think one has to be very clear. The only interesting measurement here is, of course, the NEA, the non-encumbered assets. I have seen different investment banks coming with different slides on the most peculiar measurements dividing this with that and so on. This is not rocket science. What the question is, if you are an unsecured bondholder or whatever, and you don't have any pledges for what the bank is owing you, what non-encumbered assets is sheltering your position? That is what slide number eight is showing.
All the non-encumbered, the NEA assets of Handelsbanken that is sheltering the unsecured bondholders, certificate holders, and also, of course, credit institutions. When it comes to deposits, of course, these assets that are non-encumbered is also sheltering, but there, of course, you also got the deposit guarantee scheme as the first stop.
Okay. That's very helpful. If I could just briefly push my luck and ask a follow-up on this NEA then. I know there was some regulatory focus about improving banking disclosure around encumbrance levels in Sweden. Is this your own drive? Is this something the regulators ask you to disclose? Is this what you are lobbying the regulator to have each bank disclose, or is this just a picture you think is interesting for Q4?
We have run the bank in this way, I'm happy to say that when the regulators have seen how we do this, I have got a lot of sympathy that this is the way to do it. You have to ask them, really. This is the way we have been steering the bank because we have done it for our own reasons. We understand the concern that many have about this. You've seen banks also in the Nordic environment which have excessively used only covered bonds, for instance, and that is not a very good thing. I have heard concerns, for instance, in the U.S. where this has been a general ongoing discussion for quite some time. The whole encumbrance discussion in Europe and especially in Nordic countries is of a rather late date, so to say.
There have been papers out from the Norwegian regulators and so on. This is obvious for anyone running a bank that if you pledge all your assets, of course you are not in a very good position. This is the way we look at it.
Okay, very clear. Thank you very much.
We have a question from Mr. Pawel Brzezinski at Nordea. Please go ahead.
Yes, hello. Two questions, just. How should one think about your funding strategy going forward? Will you continue to expand your funding? Will you issue more than what is expiring? On asset quality again, you say that you have single events, but you also say that the economy in Sweden is deteriorating. You also often remind us that you normally do not have loan losses in any single category, which is the case now. How should we see the Q4 number going forward? Is this a start of higher loan losses going forward?
If you take the last question, what we say is that when we look at our portfolio, and as you know we've got internal credit ratings on all and each of our lending contracts, and we look at them each and every quarter, dynamic rating system. We don't see any sort of pattern in terms of industry, counterparty, or otherwise. What we have seen in terms of credit losses being single events, there is no evidence in the portfolio, the statistics that we have, that is changing. Having said that, in general terms, it's a fact we think that the Swedish economy is slowly deteriorating and the business cycle is slightly turning down. There have been positive signs or predictions talking about that this will change in the autumn, but it's early days and credit losses tend to come rather late in the cycle and so on.
It's hard to say anything more than that because that is what we see in the environment and in the figures. On the funding side, we have no immediate plans to change our general strategy, which is cautious. Having said that, I think there have been definitely positive signs in the funding markets in general in the last quarter, if you look at the spreads and so on. The situation where many banks could not fund themselves in the market, that's not there anymore. Most banks, of course, can nowadays. We also think that it's too early to say that it's all over. You've got all the problems in Italy and Spain and so on. At some stage we will take down the liquidity reserves. It's far above a normal situation. The pre-funding. We are pre-funding now until February 2014.
That is not the normal situation, of course. There will be tactical considerations from quarter to quarter how the markets are and so on. As the annual observation, we've got SEK 163 billion that is maturing during the year, and we did last year SEK 231 billion.
Is it possible maybe just to ask you then how much is maturing during 2014?
SEK 150 billion.
All right, perfect.
in 2014.
Perfect. Thank you.
We have a question from Sofie Peterzens at J.P. Morgan. Please go ahead.
Hi, here is Sofie Peterzens from J.P. Morgan. I had three questions. In your report you talk about that if you had adopted IAS 19, your costs would have been 456 million higher in 2012. For 2013 and going forward, should we assume a cost base where we have costs around 500 million higher than the actually reported number? That's my first question. My second question is around the Netherlands. We had one bank last week being nationalized and bailed out by the government. House prices are down 10% year-on-year. Are you not worried that the Netherlands is maybe not the most rosy market to expand to? Lastly, your U.S. LCR ratio is coming down from 620% a year ago to 174%. Are you seeing an outflow of USD deposits? Thanks.
Thank you for those questions. First of all, the IAS questions. Yes, you're right. The pension costs will in 2013 be just above SEK 400 million more into the profit and loss statement. We will restate, of course, early years figures to get comparability when you see or well in advance for the Q1 report. Having said that, what is happening, of course, in reality is nothing, because this comes from the fact that you use the discount rate. It's now 3%, also when you look at the development of the pension assets. In the old system, you used the anticipate return, and that was 7%, and that is what we have generated.
All things being equal, if our pension system, the assets there, keep on generating 7%, it means that the difference will come through what's called the OCI, the total result of the bank going directly into equity. From a value creation point, of course, nothing has happened whatsoever. From a technical point, you're absolutely right. When you look at profit and loss statement as such, you will find a little bit more than SEK 400 million in increased pension costs. Having restated that, of course, there will not be a great difference between the years. When it comes to your second question about Netherlands, we see this as a very good market for us. As you may recall, we are very selective working at the top of the triangle, people with better cash flow, companies with better standing, the top 15%. We're very selective.
The fact that other banks have problems means often that these very good clients are not always as good treated from a service perspective and other perspective from their current bank. Although we are not, of course, dependent on that the country banking system is not performing, it certainly helps when it comes to expansion. You can look at the U.K. example, I think, as an excellent example of how this mechanic works. The LCR, of course, is nothing that you can run a bank on. It's like taking a photo at 30 days. If you got funding that or 29 days, it's worthless. If you got 31 days, it's worth 100%. You can never manage a bank on that. The only thing you should do, of course, is make sure that you are above 100.
For instance, when we increase the placing that we got with central banks and so on, it might have a decremental effect on the LCR. This is a very technical measure, you shouldn't read in anything on the dollar inflow. As a matter of fact, we took down the dollar deposits quite a lot at year-end, actually, and you can see that from our balance sheet simply because we don't want to have too large balance sheets. We said no to a lot of U.S. deposits in December and year-end.
Okay, thanks very much. That was very clear.
Thank you very much for this. As usual, don't hesitate to call us if you got more questions. Thank you.