Welcome to this conference call for Q3 2012. Joining me today, I have Mikael Hallåker, Head of Investor Relations, Lars Höglund, Head of Debt IR, Jörgen Olander, Group Head of Accounting. The slides used for my presentation are, as usual, available at handelsbanken.com. First of all, I would like to start with the slide that I think best summarizes the quarter, namely slide two, the growth in equity per share, including dividends. Here you can see that the bank continues to perform also in 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 three, we summarize the results achieved during the first nine months of 2012. 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 Q3 was the best Q3 result achieved so far by the bank ever. The branch office operations outside Sweden had also its best quarterly result ever. For the nine-month period, operating profit here rose by 50%. In the U.K., the profit improvement was 87%. 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. The cost-income ratio was 45.1%, down from 46.8% last year.
In the Swedish branch office operations, the cost-income ratio was 33.4% for the period and 32.9% in Q3. The bank has now opened six new meeting points in Sweden this year so far. 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 pre-funding further. Now all bonds maturing up until the end of 2013 are already pre-funded. The liquidity reserve remains above SEK 750 billion. As you probably remember here, we decided to increase the liquidity reserve during the second quarter by more than SEK 50 billion. During Q3, the bank also continued to build capital. Core Tier 1 ratio in Basel II terms increased to 17.9%. In Basel III terms, as we know them, to 15.9%.
On slide four, we show the profit and loss account for the first nine months and for Q3. 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 million. In Q3, net interest income dropped by 2%. 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. In Q3, the decline here was 5%.
Client activity in the financial markets continued to be low, also due to normal seasonality in the third quarter, and net gains and losses on financial items fell by 21% to SEK 754 million for the first nine 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 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. 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 third 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 remains solid, and the loan loss ratio was seven basis points both for the first nine months as well as for the third quarter. Moving on to slide number five. This shows the development of the iTraxx senior financials index and our own CDS spread since 2007. In Q3, as you probably know, tensions in the funding market eased somewhat in light of the massive measures taken by central banks.
The iTraxx index is, however, as you can see, still above the level of the fall of 2008 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 iTraxx and our five-year CDS spread was almost 1% at the end of the quarter. The bond issues the bank has done during the third quarter was also again done at tighter levels than those of our peers. If we then go to slide number six, this shows the bank's capital and liquidity position. As I said, the bank has continued to build capital. Equity grew by 10% or SEK 9 billion compared to one year ago. Core Tier 1 ratio in Basel II terms was 17.9%, up from 14.7% one year ago and 16.8% in the second quarter.
Basel II Tier 1 ratio was 20.5%, an increase of 3.1 percentage points compared to one year ago and up 1.1 percentage points compared to the second quarter. The profit in the third 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%. If you want to look to the Core Tier 1 ratio according to the current Basel III or CRD IV proposal, that measure rose to 15.9%, up from 15% in the second quarter. The bank has maintained unused liquidity reserves of more than SEK 750 billion, and out of these, SEK 377 billion is placed overnight with central banks.
On slide seven, I would like to comment briefly on the Liikanen report that was released three weeks ago. As you know, an EU advisory group chaired by Erkki Liikanen 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 sheets. 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, chaired by Sir John Vickers, also has a proposal along a similar route. The slide from the Liikanen 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. 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 eight, we here show how our capital base has improved since 2008. Our Core Tier 1 capital today constitutes 85% of our total capital base versus 56% in 2008, 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 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 billion or 35% since 2008.
As you know, this equity has been generated entirely by the bank itself without asking the shareholders for any new money, and in spite of the 50% payout rate. Slide nine 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 third quarter. As we have stressed during some years now, we think it is important for a bank to have a good mix between senior and covered 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 billion worth of mortgage loans unencumbered that offers protection for senior debt providers. In addition to this, all our other assets are also, as you know, of very high quality to the benefit of our senior bondholders and depositors. 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 third quarter alone, the bank issued SEK 79 billion, out of which 43% was done in the senior unsecured market. Total issuance was SEK 203 billion in the first nine months of the year. 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 covered bonds in Australia, where a significant part of the demand also came out of Asia. We also issued the first seven-year covered bond in US dollar by any bank since 2008, 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 long maturity. The 10-year EUR senior bond we did early in the quarter was also issued at the tightest price level of any European bank in two years' time, alongside a private placement of $1 billion we did in Japan. In the beginning of October, we also issued a private placement, SEK 3 billion 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 third quarter. 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 zero interest on transaction accounts. During the quarter, the STIBOR rate fell by 21 basis points, and this in turn explains SEK 87 million out of the SEK 113 million decline in net interest income in the quarter. Currency effects explain a further SEK 81 million of the decline and the benchmark effect in Stadshypotek another SEK 21 million. Offsetting factors were increased margins on lending, business growth outside Sweden, and lower spend. As we have talked about earlier, the pre-funding 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 third quarter, and all bonds maturing during 2013 are already pre-funded. Going back to slide number 10, we show here the summary of the Swedish branch office operations for the first nine months of 2012. Operating profit here increased by 6%, and compared to the second quarter, the increase was 3%. Net interest income rose by 8% year-over-year. Higher business volumes explains almost four percentage points, while higher margins on lending explain two percentage points. Higher lending margins more than offset the negative deposit margin development. The rest is mainly explained by higher return on allocated capital.
The fees to the Swedish Stability Fund and deposit guarantee rose by SEK 34 million year-over-year. Total expenses were basically unchanged, which means that the cost-income ratio improved to 33.4% for the entire period and to 32.9% for the third quarter alone. Loan loss ratio was three basis points down one basis point from the second quarter. So far this year, six 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 work in Sweden. 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. In October, this was once again proven by the latest independent SKI survey among Swedish household and corporate customers, where Handelsbanken continues to be on top with a broad margin to the peers. For household customers, Handelsbanken scored an index value of 75. This is to be compared with the three other major banks, all of which scored between 66 and 68. 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 3.4 billion. Revenues grew by 21%, but costs only by 5%.
Compared to the second quarter, the profit improvement was 8% in local currencies and 5% converted into SEK, 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 first nine 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-income ratio fell to 47.8% compared to 55.1% one year ago. In the third quarter, the cost-income ratio was 45.4%. Our Norwegian branch office operations, in fact, now have a cost-income ratio close to the Swedish level, 33.4% for the third quarter 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 third quarter fell to SEK 23 million compared to SEK 114 million in the second quarter. Moving on, slide number 12 and an update on U.K. Here, the operating profit increased by 87% year-on-year to SEK 776 million. Net interest income grew by 41%, driven by higher business volume, and net commission income, in turn, was up 24%. In the third quarter, cost-income ratio was 48.5%, and this was the first time that the U.K. business managed to get below 50%. This is, of course, in spite of the investments that were made in new branches. The trend where deposit volumes grow faster than lending volumes has continued. Average lending volumes were up 28%, while average deposit volumes grew by 56%.
Credit quality remains solid, with loan losses for the first nine months amounting to SEK 50 million. 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. On slide number 13, you can see the development over time of revenues and expenses in the whole of U.K. As can be seen here, the cost-income gap has continued to widen also in this quarter. Costs were flat compared to the second quarter, in spite of the fact that we have opened up seven new branches in the quarter. Since the beginning of 2009, income has grown on average 42% per year, while costs only have grown 20% annually.
To summarize the third quarter for the whole group, the operating profit improved by 9% year-on-year. With this third quarter being the best third-quarter profit ever. Return on equity was 13.7%, in spite of the fact that the bank's equity grew by 10% compared to one year ago. Cost efficiency continues to improve, cost-income ratio decreased to 44.7% in the third quarter. We have now opened up six new meeting points for customers in Sweden so far this year, 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 pre-funding, and all bonds maturing up until the end of 2013 are now already pre-funded. Liquid reserve remains above SEK 750 billion.
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% one year ago. In Basel III terms as we know them, the same ratio was 15.9% versus 15% in the second quarter. We also continue to be optimistic about our U.K. operations, where we now have 137 branches, including newly appointed branch managers, with operating profit growing by 87% year-on-year. With that, I conclude my presentation and invite you all for questions. Thank you.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad and you enter a queue. We have a question for Mr. Omar Keenan 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 STIBOR, it looks on average to be down about 40 basis points in Q4. I was hoping if you could help us think about NII progression for the next couple of quarters, if possible, perhaps give us a rough rate sensitivity as to how we should be thinking about that. 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 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 a rather close relationship between the STIBOR and the margins that we have on the deposit side. I think that if you look at that relation in the graph, I think that still holds. Of course, the effect becomes greater and greater as you come close to a zero interest rate nominal level. Then, of course, you got the NII coming in from the lending side. As you see from the figures here, and also from the statistics from Statistics Sweden, you will find that the demand on the lending side is rather sluggish in Sweden.
I can't really see any tendencies of that changing. On the contrary, if you look at the third quarter 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. I think it's fair to say that the Swedish economy is slowly going down a bit in the third quarter. 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 have a very, very slight positive migration in Q3. It's very, very small, but it's certainly no deterioration.
The growth that you see in terms of volume for Handelsbanken, as you see from the figures, is 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 be expecting 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. 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. 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 Ekblom at Bank of America. Please go ahead.
Thank you very much. Just two questions from my side. Firstly, on capital. We've seen another very strong quarter in terms of capital generation, and I think irrespective of what you throw at it, whether it's IAS 19 or higher mortgage risk rates, you still come out as one of the better capitalized banks in Europe. When can we expect to see some communication about what you think is the right level? How much uncertainty do you still see around CRD IV, and what's stopping you from saying that we're so far above where we expect the regulation to come out that we're either going to invest that capital or pay it out to shareholders? That's the first question. Secondly, if you can just comment on the, if you have any updated numbers on the tax impact 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. That's obviously something that one has to wait for. Secondly, it's the implementation in Sweden. 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 CRD 4, to our opinion, the Swedish Finansinspektionen 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 of 2013. But then you have, as you say, other bits and pieces here.
You got the whole concept of bail-in, you got the resolution regimes, and you got the Swedish risk rates on mortgages. We have to wait for that. Also, which we have been very clear of communicating, we also want to know the funding market reaction because obviously as you say, we don't need this level of capital because of risk reasons. 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. 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 of our peers. That's our company goal. That's the only goal we've got.
We've achieved that now for 40 years in a row. Of course, it goes without saying that we don't want to keep too much capital. If we cannot put the capital into good use, of course, we don't want to have it. 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. The capital goal is a long-term thing for us, and we don't want to change it. We have seen examples of other banks 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 until 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. It will start from year-end. Of course, there is a direct effect in that we got untaxed reserves in our balance sheet. Of course, the tax on that will be less going down from today's number to 22%. Therefore, you will then have a gain that will come on the tax row in the profit and loss statement. That's really just a reduced tax on the untaxed reserves.
If you look in the balance sheet, you will immediately find that we're talking about in the ballpark of SEK 1.5 billion that will come down to the profit and loss statement if the proposal is passed. 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 Davey at UBS. Please go ahead.
Yes. Good morning, everyone. Two questions please, from my side. The first, if I can 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&L line that's come through, and maybe we can talk around this SEK 98 million 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 prefunding. I think you explicitly said that this is a temporary weight on your earnings.
I'm just interested to invite you to just speak a little bit more around the theme, really, because prefunding, I guess, is a bit of an opaque concept for us sitting on the outside in, because depending on when you start the timer, prefunding can reach various different levels for different banks and tell us different things. 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. Can I just ask you 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&L in the future? Can we really expect you to watch wholesale funding mature and not replace it?
Thank you.
Thank you for that. First of all, investment banking. As you know, we have in the quarterly report we have two pages. One is talking about 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. Also you have got the rest of investment banking, and then there, as you say, we for the quarter post a loss there. That has to do with the fact that the markets have been very low in activity. That goes both for fixed income activities, currency trading, and not least the equity trading business.
Having said that, of course, we are not happy with showing a loss regardless of the state of the market, therefore we are working on the cost side. You see some effects already in this quarter, 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 have taken down market risk to very minimal levels. 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 talked a little bit on when will that come back, 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. You talked a little bit about or asked about the relation to the NSFR and the question of it even sounds then 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. You can see that 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 artificial measure to try to grasp what's happening at one year. If you got funding that is 367 days, it's perfect. It's worth 100. If it's 363 days, it's worthless. It goes without saying you could never run a bank like that. The only reason to pay any sort of attention to the NSFR, that would be if that would be a law, a legal requirement that that special measurement should be, let's say, above 100. That might come. 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. We won't work with the NSFR ratio until we get some sort of indication that this artificial measurement has any sort of meaning.
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 intra day 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 at SEK 98 million is at 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, there is less likelihood that the markets will come back in the way they have been. There is a huge need for 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 correctly understood, one of the very few banks that have zero derivatives in the Level 3 model evaluation, for instance. You could see the Liikanen report and so on. There's a lot of pressure now in the markets for these kind of activities, and it's not a very good market to make any money, and clients do very little transactions.
I don't have high hopes on any sort of trading income going forward. As you know, if you look at net gains and losses on 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 it's our intention not to increase the risk considerably in these kind of activities. Therefore, of course, income here are on comparably lower levels.
Very clear. Thank you.
The next question comes from Mr. Ronny Rehn at Keefe, Bruyette & Woods. Please go ahead.
Yeah. 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 28 million SEK 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 non-mortgage lending in Sweden? Any scope for improvements there? Lastly, just on the NPL coverage trend. You've been running this around 60% coverage ever since 2011. We now dropped down 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 Per Grundström does after every quarterly report, we don't feel any pressure from shareholders regarding this. We have of course high pressure on ourselves because as I said, the ROE is our goal. We take the matter very seriously. It would be a shame if the pressure would have to come from outside, because that we don't like. We want to manage and be quicker than that. 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 the value creation, the CAGR.
That's the important thing because then you have something to discuss and maybe payouts. We already have a payout ratio of 50%, so we're building capital. The discussion starts from a good position. 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 one basis point in better mortgage margins. Of course, margin as you know is also a function of the funding cost. We have, as you know, superior funding costs. I don't think it's true to say that you see a margin increase in Sweden general with 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.
In Finland, as you can see, prices towards the clients has gone up. Sweden, no, very flattish. Also as you know, rather low demand in Sweden. Corporate demand actually not showing any growth and weak demand when it comes to Swedish 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. If you got a loan of 100 and you got, what should I take? Gold as collateral for 95, and you take a hit on five as a credit loss Then you will have the 95 as impaired.
Of course, it's not something you have to be afraid of. 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. You have to really show that there is some sort of risk before you can take a credit loss. You should not look at the reserve rate because it doesn't say anything of the likelihood of actually losing money going forward.
Basically you had a higher share of inflows from higher collateralized loans.
Exactly.
Right.
Exactly.
In terms of regions, where did the inflows come from? Can you give us a detail there?
The inflows from net impaired loans?
As you see, we are talking about levels that in comparison with our whole credit book is, everybody must say, very small, 18 basis points. We hate all impaired loans and credit losses. It's in absolute terms, we're talking small numbers, and that means that they're coming from about the same pattern as you can see from our credit losses. 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. Of course, when we are talking 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. Okay, just quickly, you mentioned there was a bit of more caution in the economy in the third quarter.
Yes.
Which sectors do you see most exposed when you look into year-end with the slowdown?
Yes. Let me be very clear there. It's not when we look at our own portfolio that we see any pattern. We, in fact, have a migration in the quarter. Very small, but still positive. There is no sign in our portfolio in that way. 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 has weakened during the quarter. It's early signs. What would one expect in terms of credit losses? If you look at the whole market, not our bank, but the whole market, I would say that if you got shopping malls in what I would call C locations, small cities that have just built overbuilt a big shopping mall because they want to impress 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. There are, of course, private equity deals that are not structured in the right way. When the cash flow weakens, they cannot service the loans. Of course, we are not in that niche. We are not, as you also know, in shipping, which of course has problems because of the world trade and so on.
In business downturns, we're talking credit losses on corporates, not on private individuals, as you know. If you look through history, that has always been the case in Sweden.
Okay. Thank you so much.
The next question comes from Mr. Andreas Håkansson 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, the Swedish NII, and I see it's up by roughly SEK 30 million in the quarter. I'm looking at your NII bridge, and I add the impact from margins and volumes, and it looks to be SEK -54. Could you tell us what's the difference there? What's driving the remaining, I guess, swing of SEK 84 there? Thank you.
I did not totally follow you. Could you take that again, please?
Yes. I was looking at the NII in the retail division, Sweden-
Yeah
on page eight in your report.
Yeah.
I looked at the NII bridge on page 18 in your presentation material, and I only look at the lending and deposit volumes and margins in the bridge, and that's -SEK 54, while there's a SEK 30 million growth in NII in the division. Could you just tell us what are the difference and what other is it that's impacting so significantly?
There are different things here. What we do on page number 18, that's a quarter-to-quarter comparison on first we take out, as you know, all the lending and deposit products and take margins and volumes. Of course, you have got the benchmark effect. That will also be included in the retail, the branch office operation in Sweden. That comes as a separate line. Part of the other on page 18 is the pre-funding, and that you will find both in what is not a segment, but what is called other in the report. That's on page number 19 in the report. To the extent that the branch offices are giving out lending, they are start using the funding, and then that will creep into page eight again. That's the general answer.
If you want to pinpoint all details in the numbers, I suggest that you call Mikael Hallåker after and you can get the details to do the whole link if you like.
Yes. Sounds good. Thank you.
The next question comes from Miss Sofie Peterzens at JP Morgan. Please go ahead.
Yeah. Hi. Thanks very much for taking the questions. Very quickly, on your funding, you were mentioning that you did the bonding in Australia and you're expanding. Could 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? Then could you also please talk about the asset quality, both in the U.K. where losses were up a bit quarter-over-quarter, and in Denmark where we saw losses down quarter-over-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. As you can see, if you take the whole year in Great Britain, we have seven basis points accumulated credit loss. 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. There's not when we look at the numbers that we see in any of our markets or parts of our portfolio deterioration. We are happy with the credit quality that we have.
On the first question, I would like to address this to the expert, Mr. Höglund. Let me just say that when I came in office five and a half year ago as the CFO, we started up a program to diversify all our funding sources. We have worked very intensively all over the world actually to accomplish that. Lars, just some brief words from the head of debt IR.
Yes. Thank you. Yes. Hello, Sofie. 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. We had a good opportunity in September to issue the first covered bond there. Interestingly, we also saw a massive interest from Asian investors. As you know, we have spent a lot of time seeing also Asian investors and in fact, we had one third of the demand in the Australian bond coming from central banks and other fund managers in Asia as well. It is a further broadening of our investor base, really.
Do you think it will continue to trend that way, that more of your issuance is with Asian investors?
Yes. This is something we have seen over the last years, more and more demand coming in from Asia. This is of course a long-term job we started a couple of years ago. Yes, I think that region is likely to even further increase in importance for us going forward.
It is Ulf here again. 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 demand for our paper. That means that even though we only have the book open for a very short period, we get them very severely oversubscribed every time. We have to scale down. In 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. 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 just did a road show in Japan for instance, it seems like being very long-term and very conservative is something that these kind of investors really enjoy.
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 is a very huge natural demand for our paper from different kinds of investors in different parts of the world. I think the consistency is really key here. 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 kinds of investors that I'm talking about.
Okay, thank you very much. That was very clear.
The next question comes from Mr. Jacob Kruse at Autonomous. Please go ahead.
Hi. Thank you, Sarah. Jacob from Autonomous. Just two questions, I guess. Firstly, on your risk-weighted assets, you have still quite a big book on the Foundation IRB approach. Do you have any plans, or do you have any applications in for moving that corporate book to advanced models? Could you say anything about where your loss given default actually would be on that book? Secondly, just on encumbrance, if you could comment at all on where you see Norwegian and Swedish regulators going with respect to encumbrance levels. If you see any hard limits on how encumbered your balance sheet could be. Thank you.
On the first question, as you know, when you go into the advanced method, you have to move all your volumes to advanced. This is a gradual process. Yes, we got applications in, but don't make it too overdramatic. It will have only, in my view, minor effects really on the risk-weighted asset. Also to that end, it's not that we are immediately releasing that capital, don't over-exaggerate the effect. It's more a technical work that has to be done, and it's gradual over time. If you're interested in LGDs and PDs and so on, I would want to refer to our Pillar 3 report, and also Mikael Hallåker would be very happy to redirect you to some of the doctoral people that we got in this department. There's a lot of interesting things to be discussed when it comes to statistics.
Then you had the second-
Encumbrance
question about encumbrance. Yes, I think this is something that has now come into, as you know, Norwegian legislator and also the Scandinavian regulators. It took quite a long time. Many countries have already started this discussion. In the U.S., we have had it during three years and so on. We have, as you know, worked since a long time with issuing both senior and covered bonds. 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. 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. Of course, for that, they have to pledge.
Of course, when you take away pledges, that makes the senior bondholders have not got the same rights. Of course, that means that you should demand more as a senior bondholder for buying that kind of instrument. For a bank, that takes a lot away. Of course, this might not be so easy to issue senior bonds at all. I think that's a structural problem that actually has crept into the European banking system. 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.
Other jurisdictions on covered bonds have limited it to about 10% of assets, I guess between 4%-10%.
Yeah.
Do you hear anything similar from either Norway or Swedish regulators?
Are you referring to Australia, New Zealand? You should also remember that that market and the legislation surrounding covered bonds is very different from the Swedish system. 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. You cannot draw mathematical conclusions. Of course, you also have to take into consideration, as I said in my presentation, that 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 bigger numbers issuing covered bonds, if you see what I mean.
You have to look at the whole balance sheet. I saw an article, for instance, in Swedish newspapers that completely missed that aspect. It's the unencumbered part that is the important part from a senior bondholder perspective.
Okay. Thank you.
The next question comes from Miss 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, bearing in mind your comments on ROE, and that's your hard target for the group. Is it really worth issuing more debts if it's just going to build up more liquidity reserves? Should we just think about funding just to fund new lending volume 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 the liquidity reserve and so on. There is, of course, no need to be even more prudent, if you see what I mean. The rest, I think, will be the tactical considerations. We have created now a very good maturing profile for the coming years. That is a very good thing to have. Some banks, they have built 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. Of course, that's something that I think is very good to have and to keep. On the pre-funding, when will markets be normalized and so on? I don't know.
Of course, it's not a bad thing maybe in the longer perspective to pre-fund as we do now in a very low nominal interest rate environment. If you then go back to normal in a more high interest rate development, 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, in terms of funding plans for the coming year in amount, can you give us any guidance on that?
Well, we will be happy to talk about our maturing profile, that's official, we are right now running out of time. I would like you to contact Mr. Lars Höglund after this, he can walk you through the numbers.
Okay. Thank you very much.
Thank you. I think one last question is what we got time for now.
The last question comes from Mr. Jan Wolter at Deutsche Bank. Please go ahead.
Yes. Hi, Jan Wolter at Deutsche. Just a quick follow-up from the presentation in Stockholm this morning. The fee business was somewhat weaker than expected across the board and also down year-over-year. Is this another reflection of lower than normal client activity, or is this something else? If you just could confirm, the liquidity buffer is reduced by SEK 40 billion 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, placed immediately at central bank. No effect whatsoever on NII. The first question was the commission. 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, also the fee structure has come down 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. Still we have a huge portion of the net new inflow in the market.
Also debit card, credit cards, we are increasing, and more and more of our own clients is now having our credit cards. I would say that the structure things, they are going in the right direction. You've got the equity markets related thing that has of course deteriorated in this kind of environment.
Okay. Very clear. Thanks a lot for that, Ulf.
Okay. Thank you very much for participating. As usual, should you have any more questions, we would be very happy to answer them. Please don't hesitate to give ourselves a call, and we would be happy to provide any more information. Bye. Thank you very much for joining in here today