Ladies and gentlemen, welcome to Handelsbanken Interim Report January to June 2012. Today, I am pleased to introduce Ulf Riese, CFO. For the first part of this call, all participants will be in listen-only mode, afterwards there will be a question and answer session. Mr. Riese, please begin.
Welcome to this conference call for the second quarter 2012. Joining me today I have Mikael Hallåker, Head of Investor Relations, Lars Höglund, Head of Debt IR, Jörgen Oljenfelt, Group Head of Accounting. The slides used for my presentation are, as usual, available at handelsbanken.com. On slide two, where we show the development in equity per share, including accumulated dividends, you can see that the stable value and equity generation continued throughout the first half of 2012. From a shareholder perspective, the bank has delivered an annual growth in value exceeding 15% per year. As you can see in the graph, the performance has shown very little volatility in spite of the high turbulence experienced in the financial sector during the last five years. On slide three, we summarize the results achieved in the first half of 2012.
Here you can see that the operating profit rose by 13% compared to the first half year of 2011, which make this the best first half year result ever achieved by the bank so far. In the branch office operations outside Sweden, operating profit rose by 64%, now contributing one quarter of the total group profit. Profit after tax, as well as earnings per share, grew by 11% and the return on equity increased to 14%, up from 13.6% one year ago. During the second quarter, net income rose 2% compared to Q1, and return on equity rose to 14.4% compared to 13.8% in the first quarter. Operating profit was up quarter-on-quarter in all home markets outside Sweden. Cost efficiency improved in the first half of the year, the cost income ratio of 45.3% fell by 2 percentage points compared to the first half of 2011.
Total costs in the bank were more or less unchanged now for the third quarter in a row. The U.K. operation continues to grow with profitability and operating profit more than doubled to 508 million SEK compared to the first half year of 2011. In light of the intensified euro crisis, the bank has increased the liquidity reserve even further and issued a larger proportion of senior debt and continued to build capital. If we look at the liquidity reserve, it was increased to over 750 billion SEK, the bank remains pre-funded one year ahead. The bank continues to build capital. Core Tier 1 ratio in Basel II terms increased to 16.8% and in Basel III terms, as we know them, to 15%. On slide five, we show the profit and loss accounts for the first six months.
Here you can see that net interest income rose by 17%, driven mainly by higher business volumes, but also by improved lending margins. Exchange rate changes improved net interest income by SEK 73 million and fees for the Swedish Stability Fund and other state fees affecting net interest income increased by 14% to SEK 569 million due to the higher business volumes. Net commission income decreased by 5%, entirely driven by lower equity market related commissions, and this decline was partly offset by increased commissions from most other fee income sources. Net gains and losses on financial items fell by 16%, mainly due to client activity being lower than last year. Operating expenses increased by 5%, entirely driven by staff costs being up 8%.
When adjusting for currency effects, higher contribution to Oktogonen, increased costs related to the corridor effect of pension costs and other actuarial effects, the underlying staff costs increased by 4%. This is mainly explained by the annual salary increase and the expansion we have outside Sweden. Other administrative costs were unchanged. Credit quality remains solid, and loan loss ratio amounted to seven basis points. Moving on to slide number seven. Here we can show the development of the iTraxx senior financials and our own CDS spread since 2007. In Q2 2012, the intensity of the Euro crisis was elevated once again, with further increased turbulence also in the funding markets. With our conservative risk profile, Handelsbanken continued to increase the funding cost advantage to other banks, and we continue to enjoy a very high confidence in the market.
This is shown by the near record high spread between iTraxx and our five-year CDS spread. The difference is now 167 basis points, close to the record high of 190 basis points in November 2011. Our position means not only that we have full access to the market, but also that our funding cost is among the very lowest of all European banks and clearly lower than all of our peers. Moving on to slide number eight. We show here the bank's capital and liquidity position. In light of the Euro situation, which we in fact think risks to be further elevated in the autumn, the bank has continued to even further improve the financial strength of the bank. The Basel II Tier 1 ratio increased to 19.4%, up from 17.4% last year and 19.1% in the first quarter.
The profit in the period and a continued positive volume migration in the credit portfolio more than offset the impact of higher lending volumes. Quarter 1 ratio in Basel II was 16.8%, up 2 percentage points year-over-year and up 0.4 percentage points compared to the first quarter. The Core Tier 1 ratio, according to the current Basel III CRD IV proposal, as we know them, rose to 15%, up from 14.6% in the first quarter. Total capital adequacy ratio amounted to 19.9%. On slide number nine, you can see how the quality in our capital base has improved over the last five years. As you can see from the graph, the share of Core Tier 1 capital has increased from 56% in 2008 to 85% today.
Due to the strong capital generation and improved capital efficiency, we have consistently called all our Tier 2 instruments as planned. Still, we have kept the total capital ratio at the 20% level. In spite of the continuous increase in equity and Core Tier 1 capital, the bank has been able to report a stable and even increasing profitability. In the last three years, the return on equity is up by 2 percentage points, up from 12.4% in Q2 2009 to 14.4% in the second quarter this year. Turning back to slide number eight and a few words about the bank's liquidity. The bank choose to raise the liquidity reserve to over SEK 750 billion in the second quarter. SEK 438 billion were invested overnight with central banks, and that's an increase by SEK 97 billion since the end of Q1.
The bank again saw a strong flight to quality inflow of short-term liquidity in the turbulent second quarter. Since it mainly consists of short-term deposits, we don't use this liquidity for financing lending, but instead place it overnight with central banks. The large demand from institutional investors to place liquidity with Handelsbanken also meant that we, from time to time, had to decline taking in more U.S. deposits in the quarter. The liquidity portfolio of high-quality bonds amounted to SEK 85 billion. With the current definition, the group's total liquidity coverage ratio amounted to 178%. In U.S. dollars, the ratio was 281%, and the number in EUR was 166%. Slide number 10 summarizes our activity in the bond markets. Here we can see that the total issuance was SEK 124 billion in the first half of the year.
As one of very few European banks, we have had full access to the senior unsecured bond market also throughout the second quarter. In light of the expected continued turbulence, the bank choose to increase the proportion of unsecured debt issuance in Q2. 40% of our issued bond volume was senior unsecured, and during the quarter, only five benchmark size senior unsecured issues were made by European banks, regardless of currency. Handelsbanken made two of those five, one in EUR and one in U.S. dollars. Our issuance means that we remain pre-funded 12 months ahead. On slide number 11, you will find a summary of the Swedish branch office operations in the first 6 months of 2012. Operating profit here increased by 7% to SEK 6.649 billion, and return on allocated capital improved to 19.3%. Net interest income rose by 11% year-on-year.
Here, higher business volumes and higher margins each explain four percentage points, and higher return on allocated capital explains another three percentage points. The fees to the Stability Fund and deposit guarantee rose by SEK 76 million year-on-year. Total expenses were up 1% year-on-year, and the cost-income ratio amounted to 33.7%, down from 35.4% one year ago. Loan loss ratio was three basis points. As you can see from the report, during the quarter, more locations for meeting the customers have been opened by several branches in order to further improve accessibility and customer service. We now turn to slide number 12 and branch office operations outside Sweden. Here, operating profit rose by 64% year-on-year to SEK 2.165 billion.
The cost to revenue gap was healthy, revenues increased almost three times faster than expenses, with revenues up 23%, while costs only being up 8%. Compared to the first quarter, operating profit rose by 13%, operating profit increased in all of our four home markets. Net interest income rose by 31% year-on-year, this is due to higher business volumes but also higher margins. Quarter-on-quarter, the improvement was 6% and 5% when adjusting for exchange rate effects. The cost-income ratio fell to 49% and was down 6.8 percentage points compared to the 55.8% reported one year ago. Loan loss level fell to 17 basis points in the first half year compared to 22 basis points in the first half of 2011. In the second quarter alone, the loan loss level was 16 basis points.
On slide 13, we provide some more information on the U.K. operation. Here, the operating profit more than doubled to SEK 508 million. Net interest income rose by 45% to SEK 996 million, driven by higher business volumes and improved lending margins. Credit quality remains solid, loan losses amounted to SEK 13 million compared to SEK 82 million in the corresponding period previous year. Taking a closer look at volume development, you can see that average lending volumes increased by 29%, while average deposit volumes rose by 59% in local currency. As you probably have seen in the last two years, deposit volumes have grown faster than lending volumes in the U.K. We continue to open new branches and increase the availability for our customers.
At the end of the quarter, the bank had 129 branches, that is when including branch managers that have been hired and are in the process of starting branches. We now employ more than 1,000 people in the U.K. The bank has now also received permission from the Bank of England to be part of the Sterling Monetary Framework, including access to the Discount Window Facility. This is, I think, an important step for the bank in further establishing ourselves as a domestic U.K. universal bank. Turning to slide number 14. I think this slide is familiar to you. It shows how the profitability in our U.K. branches develops over time as the branch office grows older.
As you can see, our branches can continue to penetrate the local markets for high-quality customers for a long time, with only a limited increase in costs once the branch is established, the infrastructure is in place. As you can see, a high proportion of our U.K. branches are still in their early days with their earnings capacity yet ahead of them. On slide 15, we show the similar numbers, but now aggregated for the entire U.K. operation. You can see that since the beginning of 2009. As can be seen here, the gap between revenue growth and cost growth is expanding, with revenues growing at an annual average rate of 43%, or almost twice the growth rate of costs at 22%. This positive development continued, as you can see, also in the second quarter.
Since the bank only has a U.K. market share well below half a percent, we can continue to expand and pick top-quality customers for a very long time without running out of potential clients. Of course, there can be variations between the quarters in our total performance. Even in the current U.K. economic environment, we are optimistic about opportunities for the bank to continue its organic expansion branch by branch and maybe even at a faster rate. Summing up, operating profit improved by 13% year-over-year, and the bank achieved the best first half-year profit ever, with return on equity for the second quarter amounting to 14.4%. Total expenses have been more or less unchanged for three quarters in a row, and the loan loss ratio was unchanged from the first quarter at seven basis points.
In light of the expected continued euro crisis, the bank continued to improve the financial strength. Core Tier 1 ratio in Basel II terms was 16.8% compared to 14.8% one year ago. In Basel III terms, as we know them, the same ratio was 15% versus 14.6% in the first quarter. The liquidity reserve was increased to over SEK 750 billion, and we have again had a very substantial liquidity inflow in the second quarter. From time to time, the bank had to restrict the amounts we are willing to take in U.S. deposits. In our U.K. operation, operating profit more than doubled compared to last year, and we continue to be optimistic on the future opportunities here. With that, I conclude my presentation and invite you all for questions now. Thank you.
Ladies and gentlemen, if you have a question for the speaker, please press 01 on your telephone keypad. Our first question comes from Mr. Omar Keenan from Nomura. Please go ahead.
Hi. Good morning. Thanks very much for taking the questions. Just two questions if I can. Firstly, you highlighted in the report that the back book mortgage margin improvement had increased by one basis point. How are you thinking about the potential for further repricing looking at the quarters going ahead? Secondly, I just had a question on your structural funding measure from the Riksbank, which put you on 84%. How are you thinking about this measure from the Riksbank, and what are your discussions with the regulator? I guess Handelsbanken is well-placed to do so, but should we expect some further terming out of funding for next year? Thank you very much.
For those questions. First of all, when it comes to mortgage margins, I think you may have heard some of our peers saying that margins would probably go up in the 2nd quarter, and you might recall that we put a question mark on that. I think that when you have seen now the Q, I think it's fair to say that that did not materialize. Mortgages. I think that has to do with the growth rate in mortgage production, of course, in the market, as you have seen from the figures from our bank Down, and that forward flat, so only small growth. When it comes to the 2nd question about the NSFR-like measurement that you could see in the stability report. As you know, the NSFR is something that is very much debated how the measure should look and when it should be implemented.
For us, it's very easy to take that measurement up. It's a very crude measurement. As you know, everything that is over one year is counted 100%, but if it's only 364 days, it's not worth anything. It's obviously, I think to anyone that you can never run a bank on that kind of measure. The only purpose of having a higher number there than we have today, that would be if there were imposed some sort of regulation, and we would be very easy to pick it up. I was a little bit surprised to see the numbers actually in the stability report, but I can assure you it does not pose any problem for us. What we do in practice, and we think one has to do, is to look at the whole curve, and you will find that in the report, the cash flow curve.
On top of that, we stress that with outflow of deposits and so on. That is how we deal with liquidity.
Okay. Should we take that to mean that you won't be looking to improve your net stable funding ratio next year?
We will not improve any measure unless it's imposed with some sort of regulatory framework. Of course, we will keep on having a very prudent liquidity position. In reality, you can see that from the numbers with our liquidity reserve over SEK 750 billion, our pre-funding one year ahead, the amount of senior unsecured proportion, and also, of course, the cash flow curve, where we also in a stress situation can cater for a situation where we continue our business without taking up any new funding for two years. That's how we run the bank. If there is a regulation, of course, we will always make sure that we are on top of that. I also think that the ongoing discussion on NSFR and those kind of measures, one has to do something that is much more elaborate.
For instance, when you look at deposits from companies, of course, everybody knows in practice that they are very volatile, and it's very easy to attract those if you pay up a little bit more. That is something that you cannot include when you, in practice, plan your liquidity in a prudent way. That is, for instance, included to quite a large extent in those kind of measures.
Okay, great. Thank you very much.
Our next question comes from Mr. Nicolas McBeath from UBS. Please go ahead.
Yes, good morning, everyone. Two quick questions from my side, please. The first on risk-weighted assets. There has been some marginal growth in Q2, around 2% quarter-on-quarter, but a slightly higher growth than the amount of loan growth in the same period. I wondered whether you'd be happy to just elaborate a little bit about that. I noticed that some of your average risk weightings under IRB have gone up on the household side and the corporate side. If you could just give us any more flavor about what's going on there, please. Secondly, I note in Q2 that you've had a SEK 2.5 billion capital contribution to your life business intragroup. If you could perhaps talk us through the rationale behind that, please. Thank you.
Yes. When you look at our RWA numbers, as you say, they have gone up with, I think SEK 8 billion quarter-on-quarter, and it is a little bit, as you say, more than the lending has gone up. It's a combination of yearly validation exercise and of course, the kind of volumes that have come into the book and so on. That's the explanation there. When it comes to the second question, we have actually taken away one of our support organization here at the headquarters. The Central Administration Department is no longer. It has been in the bank for many years. I don't know how many decades, 50 years or something like that. In order to increase efficiency, it's only a small step. We actually took away that department and instead put out what they did to other parts.
It's like, for instance, purchase function of the bank, and it's also the catering for premises. The premises part we moved to Handelsbanken Liv, which, as you may know, used to own quite a lot of premises when the traditional life portfolio was larger than it is now. They have the experience to actually move that to a subsidiary of Handelsbanken Liv, but it's only the internal premises, the premises that we own ourself. In order to do that, of course, you also have to fill out capital for Handelsbanken in order to do the acquisition of that internally.
Okay. Very clear. Thank you.
Our next question comes from Mr. Geoff Dawes from Societe Generale. Please go ahead.
Yeah. Good morning. Geoff Dawes here from Soc Gen. Two quick questions from me. First one on Swedish banking profitability, so the Swedish retail banking division. That's obviously fallen back a little bit in the second quarter, both through net interest income and loan losses. Given the current outlook, do you think that's a temporary decline for this quarter, or is that something that we need to see a structural improvement in the underlying banking conditions to get back to where we were in the first quarter? Second question very quickly. In the capital markets division, the allocated capital has fallen quite significantly. Is that just noise, or is that a change in your, well, not commitment to the division, but a change in your operational structure there? Thank you.
Thank you. The first question about development in the Swedish retail banking. As you say, NII has decreased slightly, that has to do with the fact that margins on deposits has gone down, that has to do with that the nominal interest rates has gone down. Also, I think it's fair to say that the competition on deposits generally has become larger. I saw in one report the other day, one bank saying that they don't earn anything on corporate deposits, for instance, now. It is true to say that the competition in deposits also has increased, but mainly it's that the nominal interest rates goes down. We always, of course, lose margin on deposits when interest rates goes down because we don't pay less than zero on deposits.
On loan losses, I don't see any trend at all, as you can see, we're talking very small numbers in Sweden. I don't think you can talk about any sort of deterioration, it's nothing that we can see in the portfolio as a whole and so on. As you see, in absolute numbers, we are talking very small numbers.
Yeah. That's clear.
Capital allocation for Handelsbanken Capital Markets. That has to do with the fact that we have for quite some time, as you know, been increasing the capital efficiency in the bank and also in Handelsbanken Capital Markets. We are trying to hold our positions as low as they can be. We only have position taking when it comes to doing deals for clients. We don't have any proprietary trading and so on. This is an ongoing work, and of course, that means that the capital allocation corresponding to those market risks has gone down. Also in the division, you have probably seen that Handelsbanken Liv has withdrawn from what's called traditional life insurance some time ago, and the volumes have constantly decreased, which of course means quite a lot when it comes to the capital need there. That's also an effect.
Okay. That's clear. Just to come back on your comments on net interest income, can I interpret that as meaning that in retail banking in Sweden, you're unlikely to see an increase in NII and actually a decrease until short rates increase or competition resides a little bit?
We stopped doing any sort of budgeting and forecasting in 1972, I will refrain from that. Let me say that there is not structurally a lag so that the decrease in interest rates is lagging into Q3. Having said that, I see continued competition on the deposit side. You have to filter those two factors into it. On the lending side, you may have heard that quite a lot of our competitors in Q1 talked generally about that margins should increase and would increase. We put a question mark on that, and we don't see that happening in Q2. I think it's a combination of that demand on lending in Sweden is not very great, neither from the corporate side nor household.
On the other hand, I think structurally, because of the new capital rules and so on, there is a need generally in the banking system to take up margins. Those two factors combined have actually produced rather flat margins at the moment.
That's great. Thank you very much.
Our next question comes from Mr. Johan Ekblom from Bank of America. Please go ahead.
Thank you. Just two questions, if I may. Firstly on net interest income, and I guess tying into funding. You've seen a very high year-on-year net interest income growth, in particular in Q1, but also in Q2. When we look at your funding, what's the average cost of funding today relative to the funding you're replacing? So what was issued in 2007, 2008, 2009 on average, and what impact does that have on your NII going forward? Then, secondly, on capital, we're getting closer to the full implementation of Basel III. We don't know the details yet, but clearly you're saying at 15%, you're well above even the levels that the Swedish FSA has suggested. When can we expect to see some more clear communication on how excess capital will be either deployed or returned to shareholders, or should we just expect you to continue to build further buffers?
Yes. Thank you. NII, if you look year-over-year and the increase you have there, it's a combination of better margins on the lending side and volumes. That are the main elements there. When it comes to the second question, the average cost of financing, it is actually not a relevant question because we have much funded our balance sheet. That means that when the average interest level goes down or up, that has no effect except on, as I said, on the deposit side, since we don't pay less than zero on the deposit side. There's no lagging of sort of Sometime I got one question saying that you are maybe replacing old funding with the new funding, and that will have an effect. It doesn't work that way if you are a prudent bank and that you match these kind of things.
The level has no effect. What has an effect, of course, is, and that's why we show the diagram, is the relative difference in funding cost between banks. The market price that you charge towards the client on the lending side, that is the same between the Swedish banks. We cannot charge anything different from our competitors. You don't get the business. It's a market price out there, and that is what you charge the client. The difference is in, of course, the funding costs. Going forward, if the kind of differences we see now that has actually increased in the quarter, as we say, when it comes to our having a lower funding cost than our peers, if that continues for a long time, of course, when the banking system replaces their funding, that could and will create an advantage.
We already have an advantage, but of course it will become bigger and bigger over time as the funding in the market is replaced. On the capital question, yes, what we are doing is that we are trying to put ourself in a, I think we have, in a superior position, both when it comes to the level of capitalization, but also when it comes to the quality of the capital. We have a graph in this report showing that we have increased indeed the proportion of core capital and actually repaid supplementary capital during the last five years in anticipation of the new rules that are coming. To your question, of course, the CRD IV regime is now negotiated under the Cyprus chairmanship, and we await the result.
On top of that, we expect the Swedish FSA to come out with the minimal risk weight, Swedish finish, during the autumn. When the rules are clear, and even more importantly, the funding market reactions to the new rules, then we will set our new goal. We are not under any sort of stress because we think that our superior capital position also is something that is benefiting the bank. It will be easy in the future to adopt. As you know, there are still quite a lot of uncertainty about capital rules, and therefore, of course, we want to make sure that we are compliant with whatever will happen.
Thank you.
Ladies and gentlemen, I remind you that if you'd like to ask a question, please press 01 on your telephone keypad. We have a question from Mr. Pawel Biskupski from Nordea. Please go ahead.
Yes. Hello, it's Pawel from Nordea. Just two questions. I was wondering if the new provisioning rules in Denmark had any negative effect on loan losses in this quarter. Also a second question, if it would just be possible to get an NII sensitivity from a change of 100 basis points in short-term rates. What kind of impact that would have on net interest income?
Yes, thank you for those questions. No, as far as I'm aware, there was no effect coming out from any of the new Danish rules on provisioning when it comes to the Danish provisioning. On NII, as I said, you might recall that we put out a graph. We haven't got it in this report, but we have had it during this financial crisis from time to time, where we have put out how the nominal interest rates is going up and down and what will happen with the earnings when it comes on the lending side and on the deposit side. The point here is that when you add it up, you get a very stable development. Even if we deduct the credit losses, you will see that our NII over time is showing a very stable development.
As I said, it's the combination of the factors that I talked about that you find on the lending side and on the deposit side. That is the general rule and that is the practical interest rate sensitivity when we run the bank. If you call Mikael Hallåker or Lars Höglund after this telephone call, we could easily dig out those kind of pictures, and nothing has happened structurally in the bank to suggest that those kind of relationship will not hold in the future.
All right. Thank you.
Our next question comes from Ms. Claire Kane from RBC. Please go ahead.
Hi there. I just have another couple of questions on the balance sheet structure. Firstly, should we consider now the liquidity reserve to be sufficient given where you are on LCR, and so any moves up or down will probably be related to inflows or outflows of short-term corporate deposits? Following on from that, can you talk us through what you're seeing in Sweden? Average volumes have been pretty much flat for the last two quarters, and yet you are continuing to issue long-term debt in the market. What are your expectations for growth in Sweden? Or is much of this issuance for operations outside? Just one further follow-on, if I may.
In the U.K., could you talk us through the plans perhaps to maybe take part in the Discount Window at the Bank of England and relatively what you think the different costs would be marginally for you on that business? Thank you.
Thank you. When it comes to the liquidity reserve, as you see, we have chosen to take it up to SEK 750 billion or over that amount, that has nothing to do whatsoever with LCR. We would be more than very compliant even if we hadn't done that. That is just a general feeling that the autumn in the funding markets and the European question is certainly not solved. We have seen a quarter, Q2, where only five European issues have been done. We had access to the market all the time. We did two, we kept our pre-funding and so on. As I said some time ago here in the conference, we saw a very strong flight to quality inflow of U.S. dollar short-term deposits, we don't use that in other ways than to put it in central banks.
From time to time in Q2, we actually had to say no to substantial amounts of U.S. deposits simply because we don't want to increase our balance sheet too much. Talking about Sweden and the lending, I think it's fair to say that the demand right now is rather flattish. Companies are in a good situation. They got good working capital. They look at the uncertainty in the world and are not prepared to already make big investments and so on. It's a bit flat demand. Also mortgages demand has come down, as you have seen from the figures in the market. There is a small growth, but it's only a very small one. I don't see anything changing this in the immediate future. It really has to do what you think, of course, about the world development.
In the U.K., being a participant in the Bank of England monetary framework is something that, of course, is a certificate that we now really are a U.K. domestic bank. It does not mean that we will use the possibility to borrow from Bank of England. As you know, we are the only bank that have not borrowed any money from any central bank during this or earlier financial crisis. It's just a matter of it's, of course, good to have in a catastrophe situation, but it's certainly nothing that we plan to use. It is important in order to be recognized as a full member of the Bank of England monetary framework and applying all the rules that are associated with that.
Okay. Thank you very much.
Our next question comes from Mr. Jacob Kruse from Autonomous Research. Please go ahead.
Hi, it's Jacob from Autonomous. Just a couple of questions. First, on the U.K. business, are you growing your deposit base there on purpose to close that gap between loans and deposits? Or do you think you can just continue to grow the loan book and fund that on a group level without any problems from the U.K. regulator or Swedish regulator? Just second on the life business, I hope this wasn't asked, the addition of capital that you made or the move of capital, the SEK 2.5 billion in this quarter, what was the purpose or the reason for that move? Thank you.
Yes. On the first question, we don't see any problems of continuing the way we do in the U.K. where we do not stare at all the branch offices on which product they should work with loans or deposits. We know that when you start a branch, you tend to start on the lending side, then as the branch office grows older, then comes the deposits. We can actually see from the figures that in terms of percentage growth, we are, since the last two years, growing deposits in the U.K. faster than the lending in the volume. We have absolutely no views from the U.K. authorities nor the Swedish authorities about this.
I interestingly enough, see more and more in the regulatory discussion nowadays recognizing that the best funding you can ever have, that is bonds that is already outstanding because that funding you know that you have if you don't buy it back while deposits, and certainly of course corporate deposits, they can leave. For technical reasons, I think that's also nowadays true, for instance, with household deposits. For instance, Swedish banks use the same technical solutions when it comes to internet banking. People are more and more aware. The concept that deposits is good and wholesale funding is bad is now changing. The thing is, of course, that you should not be dependent on wholesale funding. You must cater for a situation where you cannot access the markets, and that's why you have liquidity reserves, pre-funding, and all those kinds of things.
That is something that the regulators, of course, are very interested in and we are very interested in. When it comes to life business, I earlier already got a question, but let me repeat. The background is that we for efficiency reasons, stopped activities or stopped a support department. It's called the Central Administration Department, that we after, I think 50 years or something like that, closed. What they did was purchasing things, also maintenance of our premises and holding our premises, our own premises here at the headquarters. Since Handelsbanken Liv has that kind of skills, they took over that part of the responsibility and also the premises that we own ourselves. In order to finance that internal transaction, we of course from the mother company injected capital to the Handelsbanken Liv subsidiary.
Okay. Thank you.
Our next question comes from Ms. Sofie Peterzens from JP Morgan. Please go ahead.
Thanks very much for taking my question. Three very quick questions. First of all, you give LCR for EUR and USD. Could you also give us the LCR for GBP? My second question is, what kind of yields do you see on the SEK 750 billion liquidity buffer? My third question is, what level or where do you see the Solvency II ratio for your life insurance business? Thank you.
Thank you. Sorry, I didn't get that last question. Could you repeat that?
Sorry, the Solvency II ratio for your life insurance business. Where do you expect it to be?
Right. On the first question we show, as you see in this report LCR for total of the group USD and EUR. Why do we do that? That is because the Riksbank has asked the Swedish banks to produce this number. When we run the bank, this is of course not a ratio that has any sort of meaning. The only meaning it has is that from authority side it may be a rule. As you know, CRD IV it might come 2015, but the Swedish authorities have said that maybe they should impose it already at year-end. It should be over 100%. We are at 178%. More importantly, I think for the Riksbank is also what you hold in USD because there has been a lot of discussion about USD, and as you know we are there 281%.
That is the reason that we give out these numbers. On the increase of the liquidity reserve, the SEK 50 billion that we now have increased. Actually, since we don't pay very much for the money that we have taken in, my best estimate is actually that the incremental SEK 50 billion has not had any negative effect, nor positive. It is a neutral effect on the result in the second quarter. On the Solvency II, of course not all rules are clear here, but as I see the rules now, it will not be a big question for Handelsbanken. That has to do with the fact that our life insurance company is mainly unit-linked insurance. We have a very small portion of what is called traditional guaranteed insurances. The Solvency II regime won't be anything that has any material impact at all on the Handelsbanken group.
Sorry, just going back to the LCR. How would you expect, or where would you expect your British pound LCR to be?
I actually don't have the number, so I can't answer you because I haven't looked it out. What we do, and that's something that we look at each and every day, that is the whole cash flow curve. You have to remember that LCR as well as NSFR is very artificial numbers, looking at 30 days and NSFR one year. When you run a bank, you have to run the whole yield curve, and you have to do it in all currencies. We have a liquidity planning where we both, of course, make sure that for the whole group, we can cater for a situation where we cannot access the markets. You will see in the report that the timeframe here is that we can cater for a situation of two years without market access and keep on doing business.
Secondly, you have to plan each and every currency so that you both with the cash flows that you have guaranteed and, of course, the reserves in your liquidity portfolio and other means of making sure that you can access that currency. Because otherwise you are, of course, totally dependent on that the currency swaps between currencies are working, and you saw it from time to time during this financial crisis that that is not the case. Having said that, I think that if you look at the main currencies, in my view, U.S. dollars, euros, British pound sterling, it's hard to see a situation where you for more than, let's say, weeks or months or so on, would not be able to transfer or exchange these currencies against each other. The world has never seen that situation. Handelsbanken is prepared for such a situation.
That is giving you some sort of feel for how prudent we are. Is it likely to happen? In my opinion, no, of course not. That is how we plan the liquidity. That's why I say that the LCR is much too crude measurement to use when you run the bank.
Okay, great. That's very clear. Thank you very much.
There are no further questions on the telephone.
Okay, I thank you very much for participating. As usual, please do not hesitate to call us and our IR department if you have any further questions or want further details. I want to wish you a very good summer.