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 Q4 2012. Joining me today, I have Michael Hallacher, Head of Relations Lars Hoglund, Head of Deft IR and Ullander, Group Head of Accounting. The slides used for my presentation are, as usual, available at hamstersbanken.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 6th home market where we will again be applying our Handelsbanken organic growth model. And 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 2. And again, in the 4th 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, 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 3, 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, Norway and in Handelsbanken International, including the Netherlands. In the U. K, operating profit reached a level above SEK 1,000,000,000 for the first time. Cost efficiency continued to improve and the costincome ratio was 46 0.3%, 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 4th quarter. In the 4th quarter, the Swedish Parliament also decided to lower corporate tax to 22% from 26.3%, effective on 1st January 2013. The bank has therefore recalculated the deferred tax liabilities and tax assets, which gave a positive one off impact of SEK 1,000,000,000 682,000,000 in the 4th quarter.
In spite of this, our total contribution to the Swedish state, namely taxes, fees to the stabilization fund, etcetera, amounted net to over SEK 7,000,000,000. Return on equity improved to 14.7 percent for the full year, up from 13.5% a year ago. This is despite the fact that the bank has generated SEK12.4 billion in new equity in 2012. Core Tier 1 ratio according to Basel II increased to 18.4 percent 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 DKK10.75 an increase by DKK1 from 2011.
And this means that we continue our trend with a stable dividend growth. The bank also continues to keep very high liquidity reserves of above SEK 750,000,000,000 and all bonds maturing up until February 2014 were already prefunded at year end. On Slide number 4, we show the profit and loss account for the full year and for the Q4. And here you can see that 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 Q4, 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 4th quarter. Most lines of commission improved in the 4th 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 higher client activity in the fixed income and foreign currency exchange business. And 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 and highly driven by staff costs being up by 8%. Here, 3 percentage points of the increase in staff costs are related Oktogonen and to increased costs related to the corridor effect of pensions.
Other administrative expenses were unchanged year on year. The 4th quarter total costs include non recurring costs of SEK168,000,000, €91,000,000 of this was due to rental contracts that we are terminating in order to achieve a more efficient use of our premises. The remaining $77,000,000 were mainly related to non recurring pension costs. The contribution to Oktogonen increased by €104,000,000 And all in all, total expenses increased by 17% quarter on quarter. But 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 Q4 2011 was 2.5%. Credit quality remained solid. The loan loss ratio was 9 basis points for the 4th quarter and 8 basis points for the full year, up slightly from 5 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 Q4. You can see here that deposit margins in Sweden decreased by SEK 153,000,000 due to that the average cyber rate was 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 Improved lending margins in Sweden contributed SEK 85,000,000 and higher lending and deposit volumes in Sweden, another SEK 27,000,000 dollars Expansion and improved margins in our Roche office operations outside Sweden added $120,000,000 to the net interest income before FX effects, which in turn added another €33,000,000 Higher state fees, a larger negative benchmark effect and some other factors had a combined negative impact on net interest income of CHF90 1,000,000 Back to slide number 6. You can see the bank's capital and liquidity position. And as can be seen here, the financial position is still further improving.
In 2012, the equity of the bank increased by SEK12.4 billion to SEK 106 point 9 billion. The Basel II Tier 1 ratio was 21%, an increase of 2.6 percentage points compared to 1 year ago and 0.5 percentage point compared to the 3rd 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 point 9% in the 3rd quarter. Quarter 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 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 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 0.5%. And in addition, from 2013, the old transitional rule under which Swedish banks could deduct 100 percent of insurance investments from the total capital base has expired. And instead, now half of the investment should now be deducted from Tier 1 capital and half from Tier 2 capital.
This will lower our quarter 1 ratio with another 0.4 percentage points from Q1. And then as you know, the CRD 4 rules or the Basel III implementation in Europe is still not finalized. But 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 CID4 is expected to be 2 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 CID 4, the additional effect amounts to 1.1 percentage points. So all in all, we are expecting a 0.9 percentage point reduction in quarter 1 in Q1 and an additional 1.1 percentage point reduction when CID IV finally comes into force.
The total effect after all changes is consequently still expected to be a reduction in the quarter 1 ratio of 2 percentage points, bringing our Basel III quarter 1 ratio to 16.4%, all other things being equal. The bank has also maintained unused liquidity reserves of more than SEK 7 50,000,000,000 and out of this, SEK 246,000,000,000 was placed with central banks overnight. Also in the Q4, the bank has seen very substantial inflow of short term U. S. Dollar funding that we placed with the Federal Reserve and we had to react more such funding from time to time also in Q4.
Then going to slide number 7. This summarizes our activity in the bond markets. As you know, we were quite active during the 1st 3 quarters of the year. And as a consequence, we chose to ease the issuance pace a bit in Q4. Still with issuance done, all bonds maturing up until February 2014 were already prefunded at year end.
Total issued volume in 20 12 was SEK 231 1,000,000,000 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 300,000,000 at tighter price levels than any other bank in the sterling market. In the beginning of January, the bank was issued a 3 year senior unsecured bond in the Chinese currency yuan. The volume here was KRW 400,000,000 and the bond was 7x oversubscribed with the price level on par with the tightest bank in the region.
The reason for these issues 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 8 and encumbrance. Here we show our NIA 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. And 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 NIA. And all of these, of course, protect the unsecured lenders. When discussing asset encumbrance, the NIA 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. And 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 9, we show the development in the Swedish branch office operations.
And here, as you can see, operating profit increased by 2% to SEK 13,000,000,000 in the year. And compared to the Q3, 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 4th quarter, deposit margins fell by SEK 100 and million, but lending margins improved by SEK 85,000,000. Dollars Increased lending and deposit volumes also contributed positively.
Lending to household 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. And in the 4th quarter, fees increased by 3%, driven by most lines of business. For the 3rd 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.
Points for the full year. We also continue to open up more meeting points for our customers in Sweden. And 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 grow only by 4%. Currency effects were negligible. All home markets increased their profits with the most profound improvements in the U.
K, Norway and in Handelsbanken International, including the Netherlands. In the 4th quarter, net interest income improved by 7% compared to the 3rd quarter due to higher business volumes and lending margins. Net commissions and fees grew by 13%, but this was however offset by seasonally higher costs and higher loan losses and operating profit declined by 3%. Cost efficiency continued to improve and the costincome ratio fell to 48% in 2012 compared to 50 5% 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, Hartford Wealth Group, and you will find some more information on Slide 14. As you know, our aim is to be a full service bank. And 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. And 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 and of course also in the opportunity to attract new customers. Hartford 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 wealth management volume of some £1,500,000,000 and the company has shown strong and consistent growth over the last 10 years with an average annual growth rate of 21%.
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 Q2 after fulfillment of normal acquisition conditions and after 15 and more on the U. 7% and exceeded SEK 1,000,000,000. 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 and another 12 branch managers have been appointed so far for further openings in 2013. As of January 2013, the 4th 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 2nd 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 1,000,000 related to small number of exposures and 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 4 years. As you can see, the healthy cost income gap continued to further improve in the 4th quarter. And since the beginning of 2,009, 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 18, you can see that we have now decided to start a regional bank also in the Dutch market, making the Netherlands the 6th home market in the group. As you may know, we have tested the Dutch market now for several years, and 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. And we currently have 13 branches in the Netherlands with 2 new branch offices already underway. And from the Q1 2013, the Dutch business will be reported separately. That brings me to the conclusion. And so to summarize the full year and the 4th 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 SEK12.4 billion or 13% in 2012. Cost income ratio improved to 46.3%, down 0.8 percentage points. The cost in the 4th quarter contains some one off items and the underlying cost increase against Q4 2011 was 2.5%. In the U.
K, costincome ratio was below 50% in the last two quarters of 2012. Furthermore, the bank continued to build capital in 2012. The core Tier 1 ratio according to Basel 2 increased to 18.4% compared to 15.6% a year ago. And 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 750,000,000,000 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. And our operations in the Dutch market continue to develop favorably. And against this background, we have this morning announced the decision to start a new regional bank and make the Netherlands into our 6th 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 DKK 1 to DKK10.75. And with that, I conclude my presentation and open up for questions. Thank you.
The first question comes from Mr. Omar Kinan of 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 3 basis points, but I believe that your message in the past has been that it's difficult to see further margin increases. So I was hoping you could give us a flavor of what drove this.
Was it an increase on the variable margin or repricing of the fixed rate back And has your outlook for the coming quarters changed on mortgage margin development? And then 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? And 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 in, to some extent, in Finland. We have seen it in a small way in Sweden. As you mentioned, 2.5 rounded, it's 3 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. But I think it's true to say that in the other Nordic countries, it certainly has been a theme and an ongoing theme. And that has to do with the fact that, for instance, in Norway, the competitors to some extent are still relying on cheap Central Bank money from the Central Bank. And now they have to replace that with market finance.
And then to offset that, they increase the price towards the clients. We have never taken any central bank money, as you know, and then we get 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 then an extra 2% in 2015.
Having said that, this is not yet a regulation and the jury is still out how this is going to be technically done. And that has to do with the CRD4 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. But 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 Daniel Janelmeeting of renewed authority to buy back up to 40,000,000 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 Ijaklou, MadBank of Bank of America. Please go ahead.
Thank you. Just coming back I guess to the just want to talk a bit about costs. And we saw a bigger than usual quarter on quarter impact this quarter and part of that is clearly the increased Oktogonen allocation. But 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 forecast? And then maybe secondly just on asset quality. I mean we saw a tick up in provisioning. You're saying that there's nothing to suggest any trend here. But we're back to sort of the tail of the financial crisis in terms of loan loss levels and we saw quite big increase in the U.
K, for example. So 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?
Yes. Thank you. First of all on costs, as you say when you look at the Q4 numbers and compared to the Q3, you of course got a combination of the seasonal effects and also the one offs that we speak about the SEK168,000,000 in one offs. And in addition to that, the fact that since the Board has proposed an increased dividends, also the allocation to Oktogonen went up with €104,000,000 But if you look at Q4 and in relation to Q4 2011, the increase the total cost increase is 2.5% and that's in spite of the expansion and growth we have. And that is underlying.
And I think going forward, I mean, we expand, as you know, outside Sweden and we also put in money in the savings area, which is now going 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. And we will invest around SEK 1.5 1,000,000,000 in totally new IT systems.
And that is the pace that we have been doing in the last couple of years. So we don't see any big changes in that item. Asset quality, since we 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. And 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. But when you look at the credit losses, there is it's impossible to draw any conclusions from that. So 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 point 3 on the capital ratios. But offsetting that is a positive mix effect of 1 point 1 in core capital terms. And 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. But I think it's also fair to say, as you say, that the business cycle wise, of course, Sweden is has not been improving.
It's a little bit as an economy deteriorating. And then the euro is out whether this will change in the bottom or not.
Thank you very much.
We have a question from Mr. Jeff Doals, SocGen. Please go ahead.
Yeah. Hi, there. Good morning, everyone. Jeff Doles here from SocGen. A couple of questions for myself.
First of all, going back to the capital issues, Obviously you've been 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? The second question would be on the international operations.
Again going back to this morning's announcements, the focus is on the UK 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. So in spite of the fact that we are creating value on an annualized basis growing by 15 percent per year, we have been able to build capital and in spite of having a payout ratio of 50%.
So we have a very good starting position to the capital decision so to say. But 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've got capital.
We are doing this organically. And as you know, we have done this small add on small acquisitions, but that's really complementary to the organic model.
Yeah.
Then you talk about international expansion. You're absolutely right. I mean, 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. So we use the cash flow to expand internationally or outside Sweden instead in our home markets.
But 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 seen in mortgages or corporate lending. Outside Sweden, we are definitely see growth opportunities in all the other Nordic countries for sure. And of course in the U. K. And of course in the Netherlands.
In the other, interesting now to see that the margins in the other Nordic countries is larger than Sweden. In U. K, it's much larger. But it's also true to say that Norway and Denmark is coming closer and closer to the British level. And also margins in Holland is very good.
So the bulk of our business has been in Handelsbanken as you know in Sweden. That is the most difficult really market in terms of margin. So 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 sort of the back book, the Swedish back book. So that is also helpful when it comes to the growth model and capital efficiency and creating value.
Yeah. 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 UK, 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. But in terms of number and branches and so on, we about 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. So it's more bringing on new clients and doing more business.
And as you can see from the figures, we are doing that. And 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. So and 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. So don't misunderstand us.
We, of course, have ambitions in all these countries. But 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 David, UBS. Please go ahead.
Yes. Good morning, everyone. Nick David 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 weights. I just wondered really what you know already as far as what other ratios matter to you, whether you look at all at Basel 1 or transitional rule capital ratios, there's 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 2 total capital requirement and you're pushing the equity out into the business in anticipation? And 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. So I just wondered, 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? And the third question, if I can, is on encumbrance and this new disclosure you gave us on Slide 8.
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 €700,000,000,000 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, it's and what we will look at and when we form our new capital goal is, of course, a combination of what you mentioned. And 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 store and takes the key from the shareholders. That's a pretty powerful regulation.
And 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 Balian. So 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. Allocation internal allocation of capital, as you know, we have much more capital than is needed from a purely Pillar 1 regulatory framework. And we then allocate this out to our different business units and both in allocated to the different business units. But 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.
And I think that was the core of your questions. And 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, we I think one has to be very, 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.
But 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. And that is what slide number 8 is showing. All the non encumbered, the NIA assets of Handelsbanken versus sheltering the unsecured bondholders, certificate holders and also credit institutions. When it comes to deposits, of course, these assets the 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. And so if I could just briefly push my luck and ask a follow-up. On this NEA then, is this 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, but I'm happy to say that when the regulators have seen how we do this, I have got a lot of sympathy of that this is the way to do it. But you have to ask them really, this is the way we have been steering the banks because we have done it for our own reasons. And we understand the concern that many have about this using banks also in the Nordic environment, which have excessively used only covered bonds, for instance, and that is not a very good thing. And I have heard concerns, for instance, in the United States, where this has been a general ongoing discussion for quite some time. But 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. But this is obvious for anyone running a bank that if you pledge all your assets, of course, you're not in a very good position. So but this is the way we look at it.
Okay. Very clear. Thank you very much.
We have a question from Pavel Wyszynski at Nordea. Please go ahead.
Yes, hello. Two questions just. How should one think about your funding strategy going forward? Will it continue to expand your funding? Are you will you issue more than what is expiring?
And also on asset quality again, you say that you have single events, but you also say that the economy in Sweden is deteriorating, but you also often remind us that you normally do not have loan losses in any single category, which is the case now. So how should we see the Q4 number going forward? I mean is this a start of higher loan losses going forward?
If you take the last question, what you say is that we don't see when we look at our portfolio, as you know, we've got credit ratings, internal credit ratings on all in 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. So 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 has 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. So that'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 sort of quarter, if you look at the spreads and so on. So the situation where many banks could not fund themselves in the market, that's not there anymore.
Most banks, of course, can nowadays. But we also think that it's too early to call the say that it's all over. You've got all the problems in Italy and Spain and so on. But of course, at some stage, will of course take down the liquidity reserves. It's far, far above a normal situation.
And also the prefunding, we are prefunding now until February 2014. That is not a normal situation, of of course. So and then there will be tactical considerations from quarter to quarter, how the markets are and so on. As the annual observation, we've got €163,000,000,000 that is maturing during the year and we did last year €231,000,000,000
Is it possible maybe just to ask you then how much is maturing during 2014?
EUR 150,000,000,000 euros in 2014.
Perfect. Thank you.
We have a question from Ms. Sofia Bettenc at JPMorgan. Please go ahead.
Yeah. Hi. Here is Sofia Bettenc from JPMorgan. I had three questions. So in your report you talk about that if you had adopted IAS 19, your costs would have been SEK456 1,000,000 higher in 2012.
For 2013 and going forward, should we assume a cost base where we have costs around €500,000,000 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?
And then lastly, your U. S. LCR ratio is coming down from 6 20% a year ago to 174%. Are you seeing an outflow of USTP deposits? Thanks.
Thank you for those questions. First of all, the IS questions. Yes, you're right. The pension costs will in 2013 be just above SEK 400,000,000 more into the profit and loss statement. And we will restate, of course, early years figures to get comparability when you see or were in the launch 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. And we then in the old system you used the anticipated return and that was 7% and that is what we have generated. So 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 OCI, the total result of the bank going directly into equity.
So from a value creation point, of course, nothing has happened whatsoever. But from a technical point, you're absolutely right. When you look at profit and loss statement as such, you will find €400,000,000 a little bit more than €400,000,000 in increased pension costs. But 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%. So we're very, very selective. And 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. So although we are not, of course, dependent on that the country's banking system is not performing. It certainly helps when it comes to expansion.
And you can look at the U. K. Example, I think as an excellent example of how this mechanic works. The LCR. 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 are 29 days, it's worthless. It's you got 31 days, it's worth 100%. So you can never manage a bank on that. The only thing you should do, of course, is that 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. So this is a very technical measure. So you shouldn't redeem 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.
So we said no to a lot of U. S. Deposits at in December year end.
Okay. Thank you very much. That was very clear.
Thank you very much for this. And as usual, don't hesitate to call us if you got more questions. Thank you.