Welcome to this conference call for the Q3 2012. Joining me today, I have Michael Hallacher, Head of Investor Relations and Lars Hoglund, Head of Debt IR and Jorgen Olander, Group Head of Accounting. And the slides used for my presentation are as usual available at handersbanken.com. First of all, I would like to start with the slide that I think best summarizes the quarter, namely slide number 2, the growth in equity per share including dividends. Here you can see that the bank continues to perform also in the Q3 in the same stable way as has been the case throughout the financial crisis with 15% annualized value growth and with very little volatility.
On Slide number 3, we summarize the results during the 1st 9 months of 2012. And here you can see that the operating profit rose by 9% compared to the same period last year with revenues being up 7% and costs 3%. In fact, the result in the 3rd quarter was the best 3rd quarter result achieved so far by the bank ever. And the branch office operations outside Sweden had also its best quarterly result ever. And for the 9 months period, operating profit here rose by 50%.
In the U. K, the profit improvement was 87% and operating profit also improved in all other home markets. The return on equity was more or less unchanged at 13.7% in spite of the fact that the equity of the bank grew by 10%. Cost efficiency continued to improve and the costincome ratio was 45.1 percent down from 46.8% last year. In the Swedish branch office operations, the cost income ratio was 33.4 percent for the period and 32.9% in the 3rd quarter.
Whittier Bank has now opened 6 new meeting points in Sweden this year so far. And in the U. K, 20 new branches were opened with another 13 being in the process of opening. In the quarter, the bank chose to extend the prefund spending further and now all bonds maturing up until the end of 2013 are already prefunded. The liquidity reserve remains above SEK 750,000,000,000 And as you probably remember here, we decided to increase the liquidity reserve during the 2nd quarter by more than SEK 50,000,000,000 And during the Q3, the bank also continued to build capital.
Core Tier 1 ratio in Basel II terms increased to 17.9% and in Basel III terms as we know them to 15.9%. On Slide number 4, we show the profit and loss accounts for the 1st 9 months and for the Q3. And here you can see that net interest income rose by 14% year on year, driven by higher lending volumes and also higher lending margins. Fees for the Swedish Stability Fund and other state fees affecting net interest income were more or less unchanged at SEK 811,000,000. In the 3rd quarter, net interest income dropped by 2% and here lower state fees did not compensate for negative currency effects and lower deposit margins in the Swedish branch office operations.
Net commission income fell 6% year on year, mainly driven by lower equity market related commissions. And in the 3rd quarter, the decline here was 5%. Client activity in the financial markets continue to be low also due to normal seasonality in Q3 and net gains and losses on financial items fell by 21% to SEK 754,000,000 for the 1st 9 months. This represented just around 3% of our total revenues. And as you probably know, our business model means that we minimize market risks.
And therefore, this revenue line should be expected to be a small item in our profit and loss statement. Operating expenses increased by 3% year on year, entirely driven by staff costs being up 6% and almost half of the staff cost increase here is explained by the higher contribution to Oktogonen and by increased costs related to the corridor effect of pension costs effect. The other half relates to the increase in number of employees and also the annual salary adjustment. Other administrative costs fell by 2% and the decrease was seen in most types of expenses. If we look at 3rd quarter, operating expenses fell by 6% and here other operating expenses fell by 10% to some extent explained by currency effects, but also due to seasonally lower costs in all expense lines.
Credit quality remained solid and the loan loss ratio was 7 basis points both for the 1st 9 months as well as for the 3rd quarter. Then moving on to Slide number 5. This shows the development of the Itraks New Financials Index and our own CDS Spread since 2,007. And in Q3, as you probably know, tensions in the funding market eased somewhat in light of the massive measures taken by central banks. But the ITRS index is however, as you can see, still above the level of the fall of 2,008 after the Lehman failure.
And the underlying euro situation is currently being still very challenging. Handelsbanken enjoys the lowest funding costs of all European banks and the spread between the ITREX and our 5 year CDS spread was almost 1% at the end of the quarter. The bond issues the bank has done during the Q3 was also again done at tighter levels than those of our peers. If we then go to slide number 6, this shows the bank's capital and liquidity position. And as I said, the bank has continued to build capital.
Equity grew by 10% or SEK 9,000,000,000 compared to 1 year ago. Quarter one ratio in Basel II terms was 17 point 9%, up from 14.7 percent 1 year ago and 16.8% in the 2nd quarter. Basel to Tier 1 ratio was 20.5%, an increase of 3.1 percentage points compared to 1 year ago and up 1.1 percentage points compared to the 2nd quarter. The profit in the 3rd quarter contributed here with 0.4 percentage points and a continued positive mix change in the lending portfolio added another 0.3 percentage points. The rest is to the largest extent explained by currency effects and smaller lending volumes.
Total capital adequacy ratio in Basel II terms amounted to 21%. And if you want to look to the core Tier 1 ratio according to the current Basel III or CID IV proposal. So that measure rose to 15.9%, up from 15% in the Q2. The bank has maintained unused liquidity reserves of more than SEK750,000,000,000 and out of this SEK377,000,000,000 is placement overnight with Central Banks. On Slide number 7, I would like to comment briefly on the Liqenen report that was released 3 weeks ago.
As you know, an EU advisory group chaired by Erki Liqenen has proposed some structural changes for EU banks. One of them relates to the so called ring fencing issue targeting deposit taking banks with a high share of trading assets in their balance sheet. According to the proposal, these banks will have to separate the risky trading business into separate entity with separate capital and funding required. The U. K.
Report from the Independent Commission on Banking shared by Sir John Vickers also has a proposal along similar routes. The slide from the Likkenen report shows that Handelsbanken is one of very few banks that is well below even the lower 15% hurdle for when so called trading assets may need to be separated. These are assets classified as held for trading or available for sale. So the work the bank has done over the last years to further minimize market risks is thus clearly benefiting us also from this perspective. Moving on to Slide number 8.
We here show how our capital base has improved since 2,008. Our core Tier 1 capital today constitutes 85% of our total capital base versus 56% in 2,008, which in turn implies room for enhancing the capital efficiency in the future by the use of subordinated debt once the new capital rules are now known. Over the same period, our total capital ratio has increased from 16% to 21%. The equity in the bank has grown by SEK 26,000,000,000 or 35% since 2,008. And as you know, this equity has been generated entirely by the bank itself without asking the shareholders to spend any new money and in spite of the 50% payout rate.
Slide 9 summarizes our activity in the bond markets. In light of the euro situation, which we perceive as still very challenging, we decided to be more active than normally in the funding market in the Q3. Of course, as we have stressed during some years now, we think it is important for a bank to have a good mix between senior and CALA bonds and to issue a fair amount of senior bonds even if these are more expensive to the bank in order to not encumber the senior bondholders. Naturally, the important thing for a senior bondholder is how much of the assets that are unencumbered and the quality of those assets. In Handelsbanken, we have currently more than SEK 300,000,000,000 worth of mortgage loans unencumbered that offers protection for senior debt providers.
And in addition to this, all our other assets are also, as you know, of very high quality depositors. And the fact that we have never taken any Central Bank aid funding means that none of our assets have been pledged for this reason. In the 3rd quarter loan, the bank issued SEK 79,000,000,000 out of which 43% was done in the senior unsecured market. Total issuance was SEK 203,000,000,000 in the first 9 months of the year. We have throughout the financial crisis consistently diversified our funding sources and we have continued to see strong demand for our bonds in all different markets.
As the first Swedish bank, we in Q3 issued cover bonds in Australia where a significant part of the demand also came out of Asia. We also issued the first 7 year covered bond in U. S. Dollar by any bank since 2,008, which means that we have opened up a new part of that yield curve in that market with new investors looking for AAA bonds with loan maturity. The 10 year euro senior bond we did early in the quarter was also issued at the tightest price level of any European bank in 2 years' time alongside a private placement of USD 1 1,000,000,000 we did in Japan.
In the beginning of October, we also issued a private placement SEK 3,000,000,000 Tier 2 subordinated loan with a structure to comply with future regulatory demands. Jumping to Slide 18. You can see here in more detail how the net interest income has been developing during the Q3. As can be seen, deposit margins in Sweden decreased in the quarter due to lower nominal interest rates. Since we do not pay less than 0 interest on transaction accounts.
And during the quarter, the STIBOR rate fell by 21 basis points. And this in turn explains €87,000,000 out of the the EUR113,000,000 decline in net interest income in the quarter. Currency effects explain a further €81,000,000 of the decline and the benchmark effect in Stutt Supertik another €21,000,000 Offsetting factors were increased margins on lending, business growth outside Sweden and lower As we have talked about earlier, the prefunding is an investment in the balance sheet with an immediate but temporary negative impact on net interest income. In my view, it is therefore impossible to compare net interest income development between banks if you do not take the respective bank's funding position into account. In Handelsbanken, we have now further extended the pre funding in the 3rd quarter and all bonds maturing during 2013 are already prefunded.
Going back to Slide number 10, we show here the summary of the Swedish branch office operations for the 1st 9 months of 2012. Operating profit here increased by 6%. And compared to the Q2, the increase was 3%. Net interest income rose by 8% year on year. Higher business volumes explains almost 4 percentage points, while higher margins on lending explain 2 percentage points.
Higher lending margins more than offset the negative deposit margin development. And the rest is mainly explained by high return on allocated capital. The fees for the Swedish Stabilization Fund and Deposit guarantee rose by €34,000,000 year on year. Total expenses were basically unchanged, which means that the costincome ratio improved to 33.4% for the entire period and to 32.9% for the 3rd quarter alone. Loan loss ratio was 3 basis points, down 1 basis points from the 2nd quarter.
And so far this year, 6 new locations for meeting the customers have been opened by Swedish branch offices, and we will continue to even further increase our local presence in order to be close to our customers. We also continue to keep cash in all our branches since we know that our customers appreciate that. This is, however, different from how other banks works in Sweden. And today, in fact, we have more branches handling cash than all the other large Swedish banks taken together. As you probably know, one cornerstone in our strategy is to always have more satisfied customers than our peers.
And in October, this was once again proven by the latest independent SKI survey and among Swedish household and corporate customers, where Handelsbanken continues to be on top with a broad margin to the peers. For household customers, Handels Banking scored an index value of EUR 75,000,000. This is to be compared with the 3 other major banks, all of which scored between 60 668. On Slide number 11, you can see the performance of our branch office operations outside Sweden. Here operating profit rose by 50% year on year to SEK 3,400,000,000.
Revenues grew by 21%, but costs only by 5%. Compared to the 2nd quarter, the profit improvement was 8% in local currencies and 5% converted into Swedish kroner, being the best quarter ever in this part of the bank. Earnings grew in all home markets, both quarter on quarter and year on year. Apart from the U. K, earnings grew also strongly in Norway with operating profit up 72% compared with the 1st 9 months of 2011.
Furthermore, branch office operations outside Sweden showed a net interest income increase of 28% year on year, driven by higher business volumes and improved margins. Cost to income ratio fell to 47.8% compared to 50 5.1 percent 1 year ago. And in the Q3, the cost income ratio was 45.4%. Our Norwegian branch office operations, in fact, now have a costincome ratio close to the Swedish level, 33.4 percent for the Q3 in Norway compared to 32.9% in Sweden. Loan loss level outside Sweden was 18 basis points for the period and the quarter.
And in Denmark, loan losses in the 3rd quarter fell to SEK 23,000,000 compared to SEK 114,000,000 in the Q2. Then moving on Slide number 12 and an update on U. K. Here, the operating profit increased by 87% year on year to SEK 7 76,000,000. Net interest income grew by 41%, driven by higher business volume and net commission income in turn was up 24%.
In the Q3, costincome ratio was 48.5%, and this was the first time that the U. K. Business managed to get below 50%. And this is, of course, in spite of the investments that we have made in new branches. The trend where deposit volumes grew faster than lending volumes has continued.
Average lending volumes were up 28%, while average deposit volumes grew by 56%. Credit quality remained solid with loan losses for the 1st 9 months amounting to SEK 50,000,000. The bank now has opened 20 new branches so far this year and 13 more branch managers are in the process of opening up. This means that the number of branches now amounts to 137 including appointed branch managers. And on Slide number 13, you can see the development over the time of revenues and expenses in the whole of U.
K. And as can be seen here, the costincome gap has continued to widen also in this quarter. Costs were flat compared to the 2nd quarter in spite of the fact that we have opened up 7 new branches in the quarter. Since the beginning of 2,009, income has grown on average 42% per year, while costs only have grown 20% annually. So to summarize the 3rd quarter, for the whole group, the operating profit improved by 9% year on year with this Q3 being the best Q3 profit ever.
Return on equity was 13.7% in spite of the fact that the bank's equity grew by 10% compared to 1 year ago. Cost efficiency continues to improve and costincome ratio decreased to 44.7% in the 3rd quarter. We have now opened up 6 new meeting points for customers in Sweden so far this year and the new annual independent SKI survey in Sweden again showed that the bank has more satisfied customers than peers. The bank has, as I mentioned, also further extended the prefunding and all bonds maturing up until the end of 2013 are now already prefunded. Liquid reserve remains above SEK 750,000,000,000.
The bank has also continued to build capital with a core Tier 1 ratio in Basel II terms increasing to 17.9% compared to 14.7% 1 year ago. In Basel III terms, as we know them, the same ratio was 15.9% versus 15% in the 2nd quarter. We also continue to be optimistic about our U. K. Operations where we now have 137 branches including newly appointed branch managers and with operating profit growing by 87% year on year.
And with that, I conclude my presentation and invite you all for questions. Thank you.
We have a question from Mr. Omar Kinan at Nomura. Please go ahead.
Hi, good morning. Many thanks for taking the questions. I just wanted to ask your view on the outlook for net interest income for the next couple of quarters. I guess if I look about what the short term rates have done on Stabil, It looks on average to be down about 4.40 basis points in Q4. So I was hoping if you could help us think about NII progression for the next couple of quarters.
And if possible perhaps give us a rate a rough rate sensitivity as to how we should be thinking about that? And then just secondly, just wanted to really get some of your views on the economic outlook for Sweden. How do you think that's developing? And whether you expect another rate cut? Thank you.
Sorry, I think there was something wrong with the voice here. I think I hope that you can hear me clearly now. Yes, NII outlook. If you look at Slide number 20 in the package, you will find that there is rather close relationship between the stybor and the margins that we have on the deposit side. And I think that if you look at that relation in the graph, I think that still holds.
And of course, the effect becomes greater and greater as you come to close to a 0 interest rate nominal level. And then of course you got the NII coming from the lending side. As you see from the figures here and also from the statistics from the Swedish Statistical Central Bureau, you will find that the demand on the lending side is rather sluggish in Sweden. And I can't really see any tendencies of that trend changing. On the contrary, if you look at the Q3 from a macro perspective in Sweden, I think it's true to say that people are a little bit more hesitant.
Also that if you look at the performance in general in the corporate business in Sweden, it's a little bit more cautious and so on. So I think it's fair to say that the Swedish economy is slowly going down a bit in the Q3. When it comes to credit quality, as we said on the press conference, we don't see anything of that deterioration in our credit portfolio. In fact, we had a very, very slight positive migration in Q3. It's very, very small, but it's certainly no deterioration.
And the growth you see in terms of volume for Handelsbank and as you see from the figures, it's coming outside Sweden.
Okay. If I just have a quick look at, I guess, NII consensus numbers, it's implying 5% growth for 2013 on Q3. Should we expect in the near term for that trend to be more negative, at least lower quarter on quarter until rates stabilize?
As you know, we don't do any forecasting and we abolished our own budget in 1972. So I don't have any firm view on 2013. But I think the trends I mentioned that our growth in terms of lending volumes is coming outside Sweden where we are taking market share. I think that's the most immediate trend that I can see. And then we talked about deposit margins, and that's a very mechanical thing.
If nominal interest rates goes down, so goes the margin on deposit.
Okay. Thank you very much.
The next question comes from Mr. Johan Ergloom at Bank of America. Please go ahead.
Thank you very much. Just two questions from my side. Firstly, on capital, I mean, we've seen another very strong quarter in terms of capital generation. And think irrespective of what you throw at it, whether it's IAS 2019 or higher mortgage risk rates, you still come out as one of the better capitalized banks in Europe. I mean, when can we expect to see some communication about what do you think is the right level?
I mean, how
much uncertainty do you still see around CRD4?
And what's stopping you from saying that? Either going to invest that capital or pay it out to shareholders. Either going to invest that capital or pay it out to shareholders. So that's the first question. And then secondly, if you can just comment on the if you have any updated numbers on the tax impact, I guess, in terms of one off gains to expect
in Q4?
Yes. Thank you. Certainly. When it comes to capital, as I know that you are very aware, the CRD 4 has been postponed in the way that there's not still any agreement on the final wording of the CRD 4. So that's obviously something that one has to wait for.
Secondly, it's the implementation in Sweden. And on that, I think, although it's rather unclear how it's going to be done when it comes to the legal form, and that depends on the CRD4. To our opinion, it's the Swedish Finnish is very clear and a clear intention from the Swedish authorities on how to do it or what they want to do. Then as you know, the latest saying there is that it's postponed to first half year twenty thirteen. But then you have, as you say, other bits and pieces here.
You got the whole concept of bailing, you got the resolution regimes and you got the Swedish risk rates on mortgages. And we have to wait for that. And also, which we have been very clear of communicating, we also want to know the funding market traction because obviously, as you say, I mean, we don't need this level of capital because of risk reasons. But having said that, from a shareholder perspective to be above what you need for risk purposes might be a good investment because it may have a good effect on the funding costs. And we firmly believe that in the years coming, the difference between funding costs in different banks will continue to be large.
Having said that, as you know, we have a company goal of having higher ROE than the average RFPs. That's our company goal. That's the only goal we've got. And we've achieved that now for 40 years in a row. And of course, it goes without saying that we don't want to keep too much capital.
And if we cannot put the capital into good use, of course, we don't want to have it. And I think we have clearly demonstrated in the past that at such instances like when we sold SPP, we are very eager to divide that extra capital. But it's the capital goal is a long term thing for us, and we don't want to change it. We see have seen examples of other banks sort of changing this quarterly, buying back shares and then stop buying back and say that they need more capital. We think that's a long term decision.
And therefore, we want to have all the facts before we take that. The taxes, yes, as you know, we have the principle of not taking in the effects in the quarterly report till we know that the legislation is actually passed by parliament. And this proposal is not yet passed. It's likely to be passed in November, I believe. And it will start from year end.
But of course, there is a direct effect in that we got untaxed reserves in our balance sheet. And of course, the tax on that will be less going down from today's number to 22%. And therefore, you will then have a gain that will come on the tax row in the profit and loss statement. And that's really you have to reduce tax on the unpack reserves. And if you look in the balance sheet, you will immediately find that we're talking about SEK 1.5 in the ballpark of SEK 1,500,000,000 that will come down to the profit and loss statement.
If the proposal is passed. And then of course going forward from next year, you will have a lower tax rate going forward on the profit and loss numbers.
Thank you very much.
The next question comes from Nick Davy at UBS. Please go ahead.
Yes, good morning everyone. I have two questions please from my side. The first, I'm going to take you to the Capital Markets business. It looks like there was a small loss in the Investment Bank this quarter. Perhaps you could just make a quick comment on that, but also perhaps to talk a little bit around which P and L lines has come through and maybe we can talk around this €98,000,000 net interest income.
Is this do you think a new normal quarter for Capital Markets NII? Or is there something particular in Q3 that's bringing that number down? The second question then please on funding and this discussion around pre funding. And I think you explicitly said that this is a temporary weight on your earnings. I'm just interested to invite you to speak a little bit more around the theme really because pre funding I guess is a bit of an opaque concept for us sitting on the outside in because depending on when you start the time of prefunding can reach various different levels for different banks and tell us different things.
Now if we look at how the Riksbank thinks about funding, for example, their stable funding ratios, All of the banks are somewhat short of where they need to be which would imply prefunding remains with us as a theme for a few more years. So can I just ask you to think to elaborate a little bit more on your thoughts there and just really can we expect some sort of benefit coming back to the P and L in the future? Can we really expect you to watch wholesale funding mature and not replace it? Thank you.
Thank you for that. Well, 1st of all, Investment Banking. As you know, we have in the quarterly report, we have 2 pages. 1 is talking about the investment banking activities in the whole group regardless of where the result of these activities will come. As you know, we've got the principle that our branch offices are client responsible, and therefore, we put out the whole result, the risk free result to the client responsible branch office.
But then also you have got the rest of Investment Banking. And then there, as you say, we for the quarter post a loss there. And that has to do with the fact that the markets have been very, very low in activity. That goes both for fixed income activities, currency trading and not least, equity trading business. Having said that, of course, we are not happy with showing a loss regardless of the state of the market.
And therefore, we are working on the cost side. You see some effects already in this quarter, but more need to be done there. We have also, as we talked about in the press conference earlier today, you can see from the figures, we are taking down market risk to minimal levels. And that, of course, also affects the figures since we are concerned about the state of the European Financial Markets going forward. When it comes to the prefunding, what we mean with prefunding is, of course, that maturing bonds that mature in the future, we have already issued new bonds in order to replace them.
You totally touched a bit on when will that come back. And of course, the normal situation is not that you prefund. You fund as you go along. When you make loans, you fund yourself for those loans on the maturities that you are giving out. And you talked a little bit about I will ask about the relation to the NSFR and the question of and it even sounds that if you thought we were concerned about our NSFR.
For us in our funding activity, the only important thing when we ourselves look at the bank, that is the whole funding curve regardless of maturity. And you can see that in our in the notes in the quarterly report. You have a slide on Page 41 where we stress test the cash flow curve. And that cash flow curve goes out to eternity, so to say, While NSFR, as you know, is a very sort of artificial measure to try to grasp what's happening at 1 year. If it was funding that is 367 days, it's perfect.
It's worth 100. If it's 363 days, it's worthless. And it goes without saying, you could never run a bank like that. So the only reason to pay any sort of attention to the MSFR, that would be if that would be a lower legal requirement, but that special measurement should be, let's say, above SEK 100,000,000. That might come.
But as you know, in the CRD IV discussions, it seems rather that there's less emphasis on the NSFR, more emphasis also from a Swedish perspective on the LCR, the 30 day measurement. So we won't work with the NSFR ratio until we get some sort of indication that this artificial measurement has any sort of meaning because the real meaning you will see on our Page 41, that's the whole cash flow curve every day and not only every day but also intraday of course.
That's very clear. Can I just ask a quick follow-up question on the net interest income then in the Capital Markets business, which €98,000,000 is historical lows? Could you make some comment please about the sustainability of that number?
Well, again, we don't do any forecasting. But I think it's fair to say that as you see in a lot of investment banking activity nowadays, I think that there is less likelihood that the markets will come back in the way they have been. And there is a huge need for many, many banks, not our bank, but for other banks, for instance, to take down their volumes when it comes to derivatives. I think we are, if I'm correctly understood, one of the very few banks that have 0 derivatives in the Level 3 model evaluation, for instance. And you could see the Liq and I report and so on.
So there's a lot of pressure now for this in the markets clients do very, very little transactions. So I don't have high hopes on any sort of trading income going forward. As you know, if you look at net gains and finance and then also some financial items, we're talking now very small amounts for the group. And that's very intentional. I know that you asked about net interest income in the Investment Bank.
But I think you should I mean, it's our intention not to increase the risk considerably in these kind of activities. And therefore, of course, income here are on comparably lower levels.
Very clear. Thank you.
The next question comes from Mr. Rami Wren of Kit Brand. Please go ahead.
Yes. Good morning, gentlemen. Thanks for taking the time. A few questions, maybe a little bit repetitive in terms of the themes. In terms of the capital return, could you share a little bit maybe the views of the shareholders when you meet them on the road?
What would be their preference in terms of returning capital? That's the first question. The second question on the NII trends in Sweden. You have had a SEK 28,000,000 positive contribution from lending margins, which more or less can be explained, I think, with the mortgage margins. How is the repricing looking for the sort of the non mortgage lending in Sweden?
Any scope for improvements there? And then lastly, just on the NPL coverage trend, you've been running this around 6% to 80% coverage for well, ever since 2011. You now dropped out to 57%. Could you give us a little bit of comment on that item? Thank you.
Yes. Thank you very much. When it comes to the shareholders and the capital goals, and if you talk about all our large shareholders and also the people that I meet when I travel around, which I and the Perd and us after every quarter report, we don't feel any pressure from shareholders regarding this. But we have, of course, high pressure on ourselves because, as I said, the ROE is our goal. So we take the math very, very seriously.
But it would be a shame if the pressure would have to come from outside because that we don't like. We don't we want to manage and be quicker than that. So I don't see this as a problem. It's a bit of a luxury problem actually because what we have put all our effort in, and that's the first slide you see in the package, that's value creation, the CAGR. And that's the important thing because then you have something to discuss and maybe pay out.
We already have a payout ratio of 50%. So and we're building capital. So the discussion starts from a good position. But I can assure you, we will come back as soon as we can when we got the facts on the table. Net interest income, Sweden.
Yes, we have 1 basis points in debt mortgage margin. And of course, margin, as you know, is also a function of the funding cost. And we have, as you know, superior funding costs. So I don't think it's true to say that we see a margin increase in Sweden, the end, lower the price towards the client, I would say it's rather flattish. In Norway, yes, prices towards clients has gone up.
In Denmark, yes, lending prices towards clients has gone up. And in Finland, as you can see, prices towards the clients has gone up. But Sweden, now very flattish. Also, as you know, rather low demand in Sweden. Corporate demand actually not showing any growth and mortgages.
NPL and coverage ratio. Well, here you have an odd thing going around, and that is that when you look at impaired loans, net impaired loans, you do not take into the consideration in that accounting measurement the securities you got. So if you got a loan of SEK 100,000,000 and you got, what should I take gold as collateral for €95,000,000 and you take a hit on €5,000,000 as a credit loss, then you will have the 95 as impaired. But of course, it's not something you have to be afraid of. So when you look at what you call the reserve or the coverage rate, it is what it is because it has to do with what kind of things that comes in.
We always take credit losses as soon as we can. And of course, there are accounting rules. And of course, you have to really show that there is some sort of risk before you can take a credit loss. But you should not look at the reserve rate because it doesn't say anything of the likelihood of actually losing money going forward.
So basically you had a higher share of inflows from higher collateralized loans?
Exactly.
Right.
In terms of regions, where did the inflows come from? Can you give us a detail there?
The inflows from net impaired loans, well, I can as you see, we are talking about levels that in comparison with our whole credit book is, everybody must say, very, very small, 18 basis points. We hate all impaired loans and credit losses, but it's in absolute terms, we're talking small numbers. And that means that they're coming from the same about the same pattern as you can see from our credit losses. So there's no there's nothing systematic in the impaired loans. It's not that it's a product or a special geography or so on.
It varies from quarter to quarter and as does the credit losses. But of course, when we are talking so much so low numbers, you don't need very large things to go in there before they are a large portion of that number, if you see what I mean.
Yes. Clear, clear, clear. Okay. And just quickly, Bill, you mentioned there was a bit of more caution in the economy in the 3rd quarter. Ulf, which sectors do you see most exposed when you look into year end to the slowdown?
Yes. We it's let me be very clear here. It's not when we look at our own portfolio that we see any pattern. We are in fact a migration in the quarter, very, very small but still positive. So there is no sign in our portfolio in that way.
But it's also true, I think, when you talk to clients and read newspapers and so on, that consumer confidence and confidence in general for corporates are has weakened during the quarter. So it's early signs. What would one expect in terms of credit losses? Well, if you look in the at the home market, not our banks but the home market, I would say that if you've got shopping malls in what I would call 3 locations, small cities that have just built overbuilt big shopping mall because they want to impress to the next closest town that has got a big shopping mall. That's classical.
That's always something that comes very immediately as consumer confidence goes down. Then there are, of course, private equity deals that are not structured in the right way. So when the cash flow weakens, they cannot service the loans. Of course, we are not in that niche. We are not, as you know, in shifting, which, of course, has problems because of the world trade and so on.
But and in business downturns, we're talking credit losses on corporates, not on private individuals, as you know. If you look at through history, that has always been the case in Sweden.
Okay. Thank you so much.
The next question comes from Mr. Andreas Horkansson at Exane. Please go ahead.
Yes. Hi, thanks. It's just really a follow-up from the meeting we had in Stockholm. I'm just looking at the Swedish retail NII or the Swedish NII and I see it's up by roughly €30,000,000 in the quarter. Then I'm looking at your NII bridge and I had the impact from margins and volumes and it looks to be minus 54%.
Could you tell us what's the difference there? What's driving the remaining, I guess, swing of 84% there? Thank you.
I'm not totally I did not totally follow that. Could you take a look at the end, please?
Yes. I was looking at NII in the retail division Sweden on Page 8 in your report. Yes. And then I looked at the NII bridge on Page 18 in your presentation material. And I only look at lending and deposits volumes and margins in the bridge and that's minus €54,000,000 while there's a €30,000,000 growth in NII in the division.
Could you just tell us what are the difference and then what other is it that's impacting so significantly?
There are different things here. I mean, what we do on Page number 18, that's a quarter to quarter comparison on first, we take out, as you know, the lending and deposit products and take margins and volumes. Then, of course, you have got the benchmark effect that will also be included in the retail branch office operation in Sweden. That comes as a separate line. Part of the other on Page 18 is the prefunding, and that you will find both in what is not a segment, but what is called other in the report.
And that's on Page 19 in the report. But in the to the extent that the branch offices are giving out lending, they'll start using the funding and then that will creep into Page 8 again. But so that's the general answer. If you want to pinpoint all details in the numbers, I suggest that you call Michael Hallacher after and Yes. Sounds
Yes. Sounds good. Thank you.
The next question comes from Sophie Petren at JPMorgan. Please go ahead. Yes, hi. Thanks very much for taking the questions. Most of them have already been asked.
But very quickly, on your funding, you have you were mentioning that you did the bond in Australia and you're expanding. Can you maybe just talk very quickly about your investor base and split among the investors for your funding products and also how that has changed over the past year? And then could you also please talk about asset quality, both in the UK, where losses were up a bit quarter on quarter? And in Denmark, where we saw losses down quarter on quarter, how you see asset quality in those two markets? Thank you very much.
Yes. Thank you for those questions. Let me start with the second question. And as you can see, if you take the whole year in Great Britain, we have 7 basis points accumulated credit loss. And so we have small credit losses, and we don't see any deterioration or so on in our British portfolio.
On the contrary, we are very happy with the solid structure that we have also in that portfolio. Denmark, as you know, we have had a lot less credit losses than anyone else in Denmark. Now in this quarter, it, as you say, went down a little bit as well. So there's not when we look at the numbers that we see any in any of our markets or partial our portfolio deterioration. So we are happy with the credit quality that we have.
On the first question, I would like to address this to the expert, Mr. Hoeghglund. But yes, let's say that when I came in office 5.5 years ago as CFO, we started up a program to diversify all our funding sources, And we have worked very intensively all over the world actually to accomplish that. But Lars, just some brief words from the Head of Debt IR. Yes.
Thank you. Yes, hello, Sophie. I mean, the Australian bond you mentioned, we have been to Australia seeing all the big Australian investors, and they clearly also appreciate and like Handelsbanken a lot. So we had a good opportunity in September to issue the 1st covered bond there. And interestingly, we in fact, we had 1 third of the demand in the Australian bond in fact, we had 1 third of the demand in the Australian bond coming from central banks and other fund managers in Asia as well.
So it's a further broadening of our investor base clearly.
And do you think it will continue to trend that way that more of your issuance will go the Asian investors?
Yes. I mean this is something we have seen over the last years, more and more demand coming in from Asia. And this is, of course, a long term job. We started a couple of years ago. And yes, I think that region is likely to even further increase in importance for us going forward.
It's Olpher again. I asked if I may add, say that the only problem we got in our liquidity management and the funding exercise is that we see a huge, huge demand for our paper. And that means that even though we only have the book open for a very short period, we get very severely oversubscribed every time. So we have to scale down. I mean that scale down exercise, of course, we prioritize those investors that take interest in the bank and wants to follow the bank and then do credit analysis of the bank and so on.
And I might add to your question that, yes, Asian investors, I think, have shown an incredibly large interest in our bank. It seems like the conservative nature of the bank is something that really is very much appreciated. We have seen a road show in Japan road for instance. And it seems like being in the long term and very conservative is something that these kind of investors really, really enjoy.
But you're not concerned that if there is increased risk appetite in Europe that some of these investors will not be there instead invest in slightly higher risk paper that could potentially cause that your funding costs go up?
I think that there will there is a very huge natural demand for our paper from different kind of investors in different parts of the world. And I think the consistency is really key here. And as you know, we've got now a 40 year track record of that consistency. And I think that is really a key thing for these kind of investors that I'm talking about.
Okay. Thank you very much. That was very clear. The next question comes from Mr. Jakob Krusert of Autonomous.
Please go ahead.
Hi. Thanks. It's Jakob from Autonomous. Just two questions, I guess. Firstly, on your weighted assets, you have still quite a big book on the foundation approach.
Do you have any plans or do you have any applications in for moving that corporate book to advanced models? And could you say anything about where your loss given default actually would be on that book? And then secondly just on encumbrance, if you could comment at all on where you see Norwegian or Swedish regulators going with respect to encumbrance levels and if you see any hard limits on how encumbered your balance sheet could be? Thank you.
Yes. Yes. On the first question, as you know, when you go into the advanced method, you have to move all your volumes to advanced. So this is a gradual process. And so yes, we got applications in.
But don't over make it too overdramatic. It will have only, in my view, minor effects really on the risk weighted asset. And also to that end, I mean, it's not that we are immediately releasing that capital. So don't over exaggerate the effect. It's more technical work that has to be done and it's gradual over time.
If you're interested in LPDs and PDs and so on, I would want to refer to our Pillar 3 report. And also Michael Hallock would be very happy to redirect you to some of the doctoral people who have to go out in this department. There's a lot of interesting things to be discussed when it comes to statistics. And then you had the second question about encumbrance. And yes, I think this is something that has now come into, as you know, Norwegian legislator and also the Scandinavian regulators.
And it took quite a long time. Many countries have already started this discussion in the U. S. We have met it during 3 years and so on. We have, as you know, worked a long since a long time with issuing both senior and covered bonds.
And I think it's a real matter. If you're a senior bondholder, of course, it's a lot of difference if you are dealing with a bank that have already taken out all the pledges. And of course, as you know, some banks have also taken money from central banks, the ECB. Some of our peers are still getting money out of the Norwegian Central Bank and Danish Central Bank. And of course, for that, they have to pledge.
And of course, then you take away pledges that makes the senior bondholders have not got the same rights. And of course, that means that you should demand more as a senior bondholder for buying that kind of instrument. And for a bank that takes a lot away, of course, there might not be so easy to issue senior bonds at all. And I think that's a structural problem that actually has crept into the European banking system and that has to be addressed. I don't necessarily see legislation as the best way of addressing it.
It's better that the banks do it themselves, but it is a real issue.
And other jurisdictions on covered bonds have limited it to about 10% of assets, I guess, between 4% 10%.
Yes. Do you
hear anything similar from either Norway or Swedish regulators?
No, not at all. And are you referring to Australia and New Zealand? And you should also remember that, that market and the legislation surrounding covered bonds is very different from the Swedish system. So we have in Sweden, we have a very, very good system because of the legislation and the supervision of the FSA in the different cover pools and so on. So you cannot draw mathematical conclusions.
And of course, you also have to take into consideration, as I said in my presentation, what is unencumbered. That is the important thing for the senior bondholder. If you've got a bank that have a lot of good assets and a lot of mortgages and so on and a lot of things that is not encumbered, of course, then you can use still big numbers issuing covered bonds, if you see what that means. You have to look at the whole balance sheet. I saw an article, for instance, in Swedish newspaper that completely missed that aspect.
It's the unencumbered part that is the important part for a senior bondholder perspective. Okay. Thank you.
The next question comes from Ms. Claire Kane at RBC. Please go ahead. Hi, there. Many questions have already been answered, but maybe just one follow-up.
Can you talk us through what your funding plans will be for next year or how we should think about that? And bear in mind your comments on ROE and that's your kind of hard target for the group. Is it really worth issuing more debt? Is it just going to build up more liquidity reserves? And should we just think about funding just to fund new lending to growth over the coming year?
Thanks.
Thank you for that question. Well, I think we are very well prepared at the moment with the situation we've created with reserve and so on. So there is, of course, no need to be even more prudent if you see what I mean. And the rest, I think, will be tactical considerations. But we have created now a very good maturing profile for the coming years.
So that is a very good thing to have. Some banks, they have built it sort of mountains of maturity. And then you get into problems when you have to replace all that. We have now created a very nice pattern with a very smooth, maturing profile. And of course, that's something that I think is very good to have and to keep.
Then on the prefunding, when will markets be normalized and so on? I don't know. But of course, it's not a bad thing in maybe in a longer perspective to prefund as we do now in a very low nominal interest rate environment. And if you then go back to normal in a more high interest rate development, That, of course, then you will get a net very good effect of it. I have seen some of our peers doing the opposite, taking away senior funding in this kind of environment.
And that I have a very hard time to understand.
Okay. And in terms of funding plans for the coming year and amounts, can you give us any guidance on that?
Well, we will be happy to talk you talk about our maturing profile, and that's a financial and we are right now running out of time. But I suspect that I would like you to contact Mr. Lars Hoglund after this, and he can walk you through the numbers.
Okay. Thank you very much.
Thank you. And I think this one last question
The last question comes from Mr. Jan Wolter, Deutsche Bank. Please go ahead.
Yes. Hi Jan Wolter, Deutsche. Just a quick follow-up then from your presentation in Stockholm this morning. The fee business was somewhat weaker than expected across the board and also down year on year. Is this another reflection of lower than normal flight activity?
Or is this something else? And then if you just could confirm the liquidity buffer is reduced by SEK 40,000,000,000 sequentially and the composition changed somewhat. Did that have any positive effect on the NII in the quarter? Thanks. The second question is very easy to answer.
No, it had not any effect at all. It was short term deposits taken in institutional and then placed immediately at Central Bank. So no effect whatsoever on NII. And the first question was yes, the commission. And when you look at fees and commission, what has happened is that it's foremost equity related.
As you know, when you talk about the Equity Business, it has been both very slow in volume, but also the fee structure has come down very, very much. On the other hand, you see that our mutual fund business is going in the right direction. We are taking market shares, and it's doing very nicely on a market where not very much is happening, but still we have a huge portion of the net new inflow in the market. And also debit card, credit cards, we are increasing and more and more of our own clients is now having our credit cards. So I would say that the structure things that are they are going in the right direction, But then you got the equity markets related thing that has, of course, deteriorated in this kind of environment.
Okay. Very clear. Thanks a lot for that also. Okay. And then thank you very much for participating.
And as usual, should you have any more questions, we would be very happy to answer them. And please don't hesitate to give ourselves a call, and we would be happy to provide any more information. Thank you very much for joining in here today.