Welcome everyone to this Conference Call for the Handelsbanken Result of the First Quarter 2012. My name is Ulf Riese, CFO of Handelsbanken, and joining me today, as usual, I have Mikael Hallåker, Head of Investor Relations, and Jörgen Olander, Group Head of Accounting. The slides for my presentation are available at handelsbanken.com, as usual. Starting with Slide number 2 , where we show the development in equity per share, including accumulated dividends, you can see that the stable value and equity generation continued in the first quarter 2012. From a shareholder perspective, the bank has delivered an annual growth in value exceeding 15% per year over the last five years. As can be seen in the graph, the performance has shown very little volatility. And as you know, keeping volatility low has a very high priority in the bank.
I also think that these 15% that you can see in the graph compare favorably both to our peers and to most other stock-listed companies. On Slide number 3, we summarize the results achieved in the first quarter. You can see here that the operating profit rose by 16% compared to Q4 2011 and was up 11% sequentially from the fourth quarter. It is worth noting that the branch office operation outside Sweden contributed almost 2/3 of the increase year- over- year. Compared to the first quarter last year, we saw a widening cost revenue gap, with revenues increasing 12% and costs being up 6%. Profit after tax, as well as earnings per share, grew by 14%, with earnings per share rising to SEK 5.36, and the return on equity increasing to 13.8%, up from 13.2% one year ago and from 13% in the fourth quarter.
Cost efficiency improved and the cost-to-income ratio of 45.2%, which means it fell by 2.2 percentage points compared to Q1 2011 and was down 2.8 percentage points from the previous quarter. In the Swedish branch office operation, the cost-to-income ratio fell to 33%. The U.K. operation continues to grow, and in the first quarter, operating profit in the U.K. more than doubled to SEK 248 million compared to Q1 2011 and was up 11% on the fourth quarter. We have now also decided to start a fourth regional bank in the U.K., with the regional head office in Bristol. We also continue to be pre-funded one year ahead, and we have kept the ba.nk's liquidity reserve over SEK 700 billion.
As you may know, in a scenario without any access to any new market funding and assuming stress outflow of deposits, the bank can still continue its operations in a normal way for well over two years. Looking at the profit and loss account year- on- year, line by line on Slide number 5, you can see here that the 12% growth in revenues was due to net interest income being up 19%, driven here by both high business volumes and improved margins. Net interest income was up 29% in branch office operations outside Sweden and increased by 14% in the Swedish operation. Exchange rate changes only had a very limited impact on the numbers here. Fees for the Swedish stability fund and other state fees that affect net interest income increased by 14% to SEK 278 million due to the higher business volumes.
Net commission income fell by 3%, with the decline here being entirely explained by lower equity-related commission on the back of lower turnover and the poor performance in the equity markets. Brokerage fees were down 14%, and mutual fund fees fell 13%. The total decline in net commissions was, however, partly offset by improvements in all other commission income sources. Net gains and losses on financial items were down SEK 7 million -SEK 344 million, and customer activity was similar to what we saw one year ago but showed a clear improvement from the weak fourth quarter. Operating expenses rose by 6%, with other administrative costs being up 2% and staff costs increasing 9% compared to the first quarter 2011.
Adjusted for increased costs related to the corridor effect when calculating pension costs and other actuarial effects and to a higher contribution to Oktogonen, if you adjust for that, personnel expenses were up by 5%. Credit quality remained solid, and the loan loss ratio amounted to 7 basis points. Going on to Slide number 7, we show the bank's capital and liquidity position here. As you may know, in the first quarter, the bank called subordinated loans to a value of SEK 9 billion according to plan. This, in turn, explains why the total capital adequacy ratio fell half a percentage point to 19.9%. Tier 1 ratio in Basel II terms increased to 19.1% compared to 17.2% at the end of March last year. The profit in the period and the continued positive trend in asset quality more than offset the negative effects of higher lending volumes.
The main driver of asset quality is that new loans entering the portfolio are of higher credit quality than exposures leaving the loan book. As you know, this has indeed been a trend throughout the financial crisis, with the average credit quality in the bank actually improving even further. The core tier 1 ratio in Basel II terms amounted to 16.4%, and that's up 1.9 percentage points year- over- year and 0.8 points compared to Q4. At the end of March, the core tier 1 ratio calculated according to the current Basel III CRD4 proposal, as we know them now, we estimate at 14.6%. The estimated effect of the proposed new IS19 rules, if implemented at the end of March, would have resulted in an additional negative impact of around 15 basis points.
Total liquidity reserve remained over SEK 700 billion, of which SEK 341 billion were invested overnight with central banks, and SEK 98 billion were high-quality bonds in the liquidity portfolio. The liquidity caters for the bank's total funding needs for well over two years under stressed assumptions without any new market funding. On Slide number 8, we show the bond funding done by the bank in the first quarter, and we continue to have full access to the funding markets. As you probably know, the bank continues to have the lowest funding costs and tightest five-year CDS spread among European banks. In total, we issued SEK 71 billion in bond funding in the first quarter, including SEK 21 billion in unsecured bonds and SEK 50 billion in covered bonds. With additions done, we remain pre-funded one year ahead.
Turning to what should now probably be a familiar graph on Slide number 9, we here show net interest income adjusted for loan losses, or what we internally call the risk-adjusted net interest income. As you can see from the slide, the average annual growth over the last five years here is 10%. If you compare Handelsbanken to our peers, I think you'll find that we have a much more stable and positive trend than any of our peers. It is our belief that the main reason behind our performance is the bank's credit policy and the resulting asset quality with the ability to keep credit losses at low levels.
Turning then to the performance in the Swedish branch office operation, which you can see on Slide number 10, here you will find that the operating profit amounted to SEK 3.4 billion, being up 13% year- over- year and 2% from the fourth quarter. Loan loss ratio was 3 basis points, and the return on allocated capital increased from 18.8% in Q1 2011- 19.2% in the first quarter this year. Net interest income rose by 14% year- over- year , and here higher business volumes and an increased return on allocated capital explain 9 percentage points of the increase, and higher margins contributed with 5 percentage points to the improvement. The fee to the Swedish stabilization fund and deposit guarantee rose by SEK 37 million year- on- year, and the benchmark effect in Stadshypotek amounted to -SEK 11 million.
Cost-to-income ratio declined to 33%, compared to 36.3% in Q1 2011 and 34.1% in the fourth quarter. The bank continues to invest to improve efficiency in the branch offices. The bank also continues to gain market share in the mutual fund market. In the first quarter, Handelsbanken saw a net inflow of SEK 5.6 billion compared to a total inflow in the Swedish market of SEK 6.7 billion. On Slide number 11, we show a map of Sweden pointing out the location of all our branch offices. With these 461 branches, we have, in fact, the largest branch network covering the entire country, and we are today the only bank in over 40 towns and villages in Sweden. Unlike most of our peers, we do not close down branches. On the contrary, we expect to open even more branches in the future, also in Sweden.
There seems to be a general view in the market and among peers that banking operations through branches should be an expensive way to conduct banking. Our experience is that branches are by far the most efficient way to conduct banking. Some of our most profitable branches in Sweden are indeed small, with just a few employees and in quite remote rural areas. Most customers also expect to be able to visit a local branch and speak to real people face- to- face, even if this need may only occur, let's say, once or twice a year. Customers also still expect to be able to get cash services from the branch, although many of our peers in Sweden have significantly reduced their cash services in recent years. In Handelsbanken, we have decided that all Swedish branches will offer cash.
We have also decided that all branches will keep and offer bills denominated in the most common travel currencies. Now, let's turn to Slide number 12 and branch office operations outside Sweden. Here you can see that year- over- year , operating profit increased by 63% to SEK 1.015 billion, and that is for the first time it exceeded SEK 1 billion in a quarter. Revenues grew by 23%, or almost twice the pace of the 12% growth in costs, and quarter- on- quarter, the operating profit rose by 19%. Net interest income grew by 29% year- over- year and was 3% higher than in the previous quarter. Adjusting for exchange rate effects of -SEK 24 million, net interest income rose by 5% quarter- on- quarter.
Year- over- year , loan losses decreased by 21% to -SEK 260 million, and the loan loss ratio fell to 19 basis points compared to 26 basis points in the first quarter 2011. Moving then on to Slide 13 and the U.K. operation, you can see here that the operating profit more than doubled to GBP 23 million, and this was due to higher revenues and lower credit losses. Net interest income was up 42%, driven by both higher lending and deposit volumes, as well as widening in margins. At the end of the quarter, the number of branches had increased to 124, and then I include branch managers that are in the process of opening branches, and eight new branches were added in the quarter. Quarter- on- quarter, the operating profit in local currency rose by 10%, and that's of course explained by continued expansion of the business.
Asset quality remains strong with no net loan losses in the quarter. Whilst keeping expanding through opening new branches, I think it's also important to note the expansion and improved market penetration that takes place within existing branches. At a startup, there are normally three or four persons working at the branch. Within three, four, or five years, when the branch has established itself in the local market and when the basic business platform has been built, the branch is ready to take the next step and also increase the staffing. By adding two persons, the capacity to do business is actually raised by 50%. That creates so-called capacity both to target new customers and also to get a so-called higher share of wallets of existing customers.
The costs associated with this 50% capacity increase is of course a lot less because all the fixed costs, central costs, premises, etc., are largely totally unaffected. I think this process should really be seen in the context of the bank's market share in the U.K., that, as you may know, is well below 0.5%. Despite working at the top segment of the U.K. customer base, we should be able to expand the branch network for at least another 15 - 20 years. In addition, we have ample opportunities to increase the market penetration in existing branches without, of course, running out of prospects in our targeted customer segment. Turning to Slide number 14, here we show how it looks for the average branch. We show how the average income and costs have developed as the branch grows older.
After five or six years, you can see from the graph that there is a clear hockey stick effect in the revenue curve. This is to a large extent a result of the increased market penetration in existing branches that I have talked about. That comes once the branch has established itself and created the initial foothold in the local market. As more than 60% of the branches are younger than four years old, they are consequently still in the first phase of building the high-quality book of business and establishing the Handelsbanken way in the local market. For these branches, the second phase is still to come. We now have a fair amount of branches moving into the right-hand section of the graph. Therefore, we remain very optimistic on the prospects for continued strong growth in the U.K. market.
Moving from the branch level that I just talked about to the aggregated U.K. numbers, you will find that on Slide number 15. You can see here that the operating leverage is quite healthy at the current state of operations. Since the beginning of 2009, revenues have grown at an average annual pace of 45%. That is more than twice the 22% growth in costs. Even if there can be quarterly variations in performance, we currently see no reason why the trend should change in the medium term. Needless to say, against this background, we remain positive to our prospects in the U.K. market. Our branch-driven decentralized business model is very different from how the big U.K. clearing banks are running their operations. There is a large number of potential customers within the high-end market niche that we are targeting.
With this favorable position as a general background, the bank has decided to establish a fourth regional bank, which will be headquartered in Bristol. To sum up the first quarter of 2012, operating profit grew by 16% year- over- year and was up 11% on the previous quarter. The return on equity rose to 13.8%. Revenues grew faster than costs, both year- on- year as well as sequentially. In terms of capital, the Basel II core tier 1 ratio amounted to 16.4% and increased by 0.8 points from the fourth quarter and was up 1.9 percentage points year- over- year . Calculated on Basel III terms, as we know them, we estimate the core tier 1 ratio to 14.6%. The liquidity reserve remains in excess of SEK 700 billion, and the bank has stayed pre-funded one year ahead.
The U.K. operation continues to perform with the operating profit in local currency being up 141% year- over- year and 10% quarter- on- quarter. Eight new branches were added in the quarter, and as I just said, we have decided to now establish a fourth regional bank in Bristol. With that, I conclude my presentation and would like to invite you all for questions. Thank you.
Ladies and gentlemen, if you have a question for the speaker, please press zero one on your telephone keypad. Our first question comes from Mr. Nick Davey from UBS. Please go ahead.
Yes, good morning everyone, I'm Nick Davey from UBS. Three quick questions, if I may. The first, please, on margins domestically in Sweden. Clearly, we've been talking about margin progression on the household side for some quarters now. Some of your peers are now beginning to talk about the need for wider margins on SME and large corporate business as well to take into account the cost of new regulation and higher costs of funding. I wonder whether you had a view on the matter. The second, please, on Denmark. It seems that when I want to look at the Danish division, that's really where the highest amount of provisions are coming through from a group perspective, but also where the fastest growth is coming through as well from a loan book perspective. Could you please just marry the two themes together?
Tell us a little bit more about what sort of business you're seeing on the front book, exactly what the risk appetite you have for new business in Denmark. Thirdly, and finally, please, I noticed in your report the creation of the new division or the new unit, a large corporate, to manage your biggest international corporate exposures. Can you just talk us through exactly the implications of that operationally, how you maintain the incentives for your individual branch managers to manage relationships, whether they lose that relationship when it moves into this new unit? Just a bit more color there, please. Thank you.
Thank you very much for those questions. First, on the margins, you can see that on mortgages in the quarter, we have an increase, small increase of two basis points. We also touched upon this at the press conference this morning, and we also pointed to the fact that the demand for lending in Sweden, on the corporate side, is rather sluggish. You are seeing the growth rates in volumes in mortgages in Sweden going down. It is still growing, but at a slower pace. Normally, when you see that kind of market evolvement, there is a tendency to get pressure on the margins.
I hear what you say about the steering systems in the other banks, and it is true that in Handelsbanken, since the steering system is very important, it was a very long time ago we implemented all sorts of liquidity costs and capital costs and so on. You really have to talk to others. We always charge the client the market price, and of course, there is a competitive environment out there. In Denmark, we have seven basis points credit losses in the group in the quarter, and of course, we are not proud of that. The only thing we target is zero credit losses, but we have seven basis points in terms of lending. When you look at the credit losses and also going back, you will find that we are talking few in numbers.
Sometimes it has been in Sweden, it has been some quarter in Norway, and this quarter, it is in Denmark. We are not talking about, we do not see any trends in the portfolio and so on. We have the same credit culture in all countries. The risk appetite does not differ from market to market. It is the same kind of thinking. Of course, when an economy like the Danish is behaving very sluggishly and in a downturn over low activity, you have to be very careful. The growth you see, we are a small player in Denmark, as you know, but there are quite a few very good clients that for different reasons like to change bank. We have worked very hard in Denmark to pinpoint those kinds of clients, and therefore you see the volumes going up in Denmark. It is a day-to-day usual bank work.
We have pinpointed this top segment of clients in Denmark. Large corporates, we are pooling the resources when it comes to the kind of needs that really the largest international companies, which are headquartered in our Nordic home markets, the needs that they have. It could be cash management, it could be currency operations, and so on. Of course, combined with the credit facilities that we provide to them. By forming a unit which has all of this capacity, we think that we can better serve these kinds of companies' needs. They're not very, very large in numbers, but their needs are rather special. Sometimes, as you know, it's not only the lending, you can gain a lot of interest in business by giving advice, by doing the swaps, etc., etc., etc. It is not a new division or new segment, as you've probably seen from the report.
Okay, that's very clear. Thank you.
Our next question comes from Mr. Omar Keenan from Nomura. Please go ahead.
Hi, good morning. Thanks for taking the questions. Just two questions, if I may. Firstly, on the rate sensitivity, if I look at the impact on deposit margins in Sweden of SEK 121 million, it does seem like a high number if I convert it into a sensitivity for rate moves. Are there any other effects there apart from the impact of lower rates? Could you perhaps guide us to rate sensitivity for Handelsbanken? Secondly, following on the discussion on mortgage margins, could you give us a kind of a steer of what mix of your book you think is still on the old pricing and is yet to reprice on the higher margins? Thank you.
I think on the first question, margins on deposits going down SEK 121 million, it's both a reflection of that the interest rates have gone down, but it's also a reflection of competition and changes in the mixes between different kinds of accounts. It's a combination. It's not only the nominal interest rates, but in general, you're right. When interest rates go down, you tend to lose margins on deposits, and that has happened in the quarter. It's also, to some extent, a mixed effect. You asked about mortgage margins.
Yes, I just wanted to inquire or for you to give us a steer on what mix of the book you think is still on the old pricing. Also, following on the rate sensitivity question, I guess leaving the impact of the changing mix of deposits aside, what proportion of that SEK 121 million do you think was just from lower rates? Thank you.
On the mortgage margins, I think in repricing, for all practical purposes, I would not count on any sort of automatic effect of all old mortgages being repriced. I would say that that is a very small effect nowadays in the book. It has more to do with how margins are evolving in the new production, so to say. You asked me to divide the SEK 121 million into what comes from the automatic effect and what comes from the mixed effect. It's a very theoretical question in the way that you have to make some assumptions on the behavioral aspect of the client. We are happy to discuss that, but I would refer that to, you could call Mikael Hallåker afterwards because it's rather complicated.
You have to know how you would like to calculate it according to your model because you have to make quite a lot of assumptions when dividing the figure into those two elements.
Okay, thank you very much. That's very clear.
Our next question comes from Mr. Geoff Dawes from Société Générale.
Hi, good morning. Geoff Dawes here from Soc- Gen. Two questions, if I may. One on net interest income, one on the quarter one position. First of all, on net interest income, you give us very good disclosure in the report about the steps you take to run a conservative liability structure. Can you just give us an indication of the 2012 cost of running that conservative structure? Particularly if it's gone up as the reinvestment yield has gone down with lower short rates. Second question on the quarter one capital. If I look at the quarter one with transition rules in place, it's 8.2%, which isn't a number you really refer to. Does that number have any relevance at all to you, either in discussions with regulators or with the market, or do you just disregard it? Thank you very much.
Thank you very much. On the net interest income, I understand your question that we have pre-funded 12 months ahead. Of course, there is a cost associated with that pre-funding and what has happened with that cost. Since we are staying pre-funded now 12 months ahead, the answer is that the effect QoQ is zero. There's no incremental effect. As you may know, when we built up this pre-funding, we have reported how much it costs to build up this pre-funding. It's, of course, an investment in prudence in our balance sheet. You can find that if you go back, how that built up. To answer your question, no incremental effect between Q4 and Q1 on that.
Yeah, there's no other answer to that, I think.
On transitional rules. As you know, in Sweden, the Swedish Finance Ministry, the Swedish FSA, and the Swedish Central Bank have confirmed that in Sweden, the transitional rule will go away January 1, 2013. Instead, the Basel III rules will apply to the Swedish banks. Your question, what does it matter? It only matters in that, of course, you will have to fulfill the minimum capital requirements also according to transitional rules before that goes away. That's the only practical implementation. We have no discussion with the authorities or any problem with that. We obviously have a very safe margin to that. If that would ever be a problem, there are measures you can take to counteract that. For all practical purposes, when you run a bank, you look at core, you look at total tier 1, and you look at total capitalization.
Those are the metrics running the bank for practical purposes.
Yeah, that's clear. What I expected, but good to have it confirmed. Thank you.
Our next question comes from Mr. Jacob Kruse from Autonomous Research . Please go ahead.
Hi, this is Jacob from Autonomous Research. Just three quick questions. Firstly, on the branches, especially the Nordic branches, would you consider expanding your networks in the other Nordic countries? When it comes to Denmark, would you be open to further add-on acquisitions in the Danish market to scale up the network? On risk weights, I just wanted to see if you had anything that you could communicate with regards to the process for mortgage risk weights. What is the Swedish FSA and Riksbank, if there's any discussions going on between you and what they are thinking? Lastly, just on the positive margin effect, I just wanted to know how much of that mixed change and how much of the fall in rates would you say is reflected in the Q1 numbers? Should we expect that to basically be a timing effect coming through also in the second quarter? Thank you.
Right. On the first question, obviously, as I talked about, we are expanding the number of branches in the U.K. We have also in Holland, which is a test market for us. We're going up to 15 branches in that market. It's not a home market as of yet, but we have high hopes it will become a home market if the development continues. Holland develops in a very good way. The other Nordic countries, yes, we could add a couple of branches here and there, but the existing branch network is also in terms of numbers sufficient. There might be add-ons. You talked more specifically about Denmark and the acquisition possibilities. Our main and our basic growth philosophy, as you know, is organic, both through existing branches and by opening new branches. We look at acquisitions all the time. There have been a lot of proposals in Denmark.
The problem is that when we look at the bank, we often end up with the conclusion that it's maybe only 10% or 20% of the portfolio and the client that would fit our risk preference and our client preference. Of course, it makes no sense to acquire something and convert it into Handelsbanken because it's just such small, small parts left. We always look actively and get a lot of proposals from investment banks and so on. In order for it to be a transaction, we have very, very clear criteria for that. You should not look at Handelsbanken as a bank that is growing by acquisitions. It might happen if it's absolutely right and we can find the right quality to the right price, but it's only an add-on.
Hey, any more questions?
Our next question comes from Ms. Sofie Peterzens from JP Morgan. Please go ahead.
Yeah, hi. Thanks very much for taking my question. I just had a couple of questions. One is around the capital to your subsidiaries. A lot of your competitors have been allocating more capital to their subsidiaries to comply with the new capital rules in Sweden. Are you looking through a similar move later this year? Secondly, I was wondering about your NII. It was up 3% quarter- on- quarter. As you mentioned earlier in this call, you were facing higher funding costs on the deposit side. Still, the main comment in the interim report is that NII was strong due to healthy funding position. Can you just elaborate a bit more on which part of funding you see lower costs that kind of helped NII? My final question is on IS19. You mentioned it was a 15 basis point impact on your Basel III equity tier one.
Could you also let me know what the actual number is in SEK ? Thank you very much.
Yes. You talked about capital in subsidiaries. Of course, we have, as you may know, our structure is mostly by working as a branch, talking from a legal perspective. That means that our operation in the U.K., for instance, is part of the mother company. It's from a legal perspective, branch operation of the legal company. We have a Stadshypotek , which you've probably seen is very, very well capitalized. The way we run the whole group is of course on business lines. The allocation to different legal entities is more of a technical thing. The rules are such that it's very easy to allocate capital between the units. I don't see any such need. For a practical purpose, what's important to follow, I think, is the total capitalization of the bank. We have very free possibilities when it comes to doing formal allocation to different entities.
The steering system is such that we allocate the total group capital to our business lines, and that's how we arrive to the ROE. You talked about the NII and the net interest income and the fact that we have lower funding costs than our peers. You can easily see if you look at the CDS spread or you can look at the secondary market. For instance, you can look at the 10-year transaction we did in the last fall and compare that with our peers, and you will find that we have an advantage. It differs between different markets and so on. We're talking maybe 25, 30 basis points to the second best of all our peers, and of course, that makes an impact. The impact does not come overnight. It comes, of course, as time goes by.
Keeping that kind of distance, it filters through in an advantage, of course, which you will see in NII because the price towards the client is always the same. Banking is so competitive, unlike what you can sometimes hear politicians say. Competition is so fierce that you can never charge anything different to the clients than what your peers are doing. You're talking about the IS19 and that kind of effect. There, as you know, ISFBS proposed this rule. It has not been decided yet in EU. I think I'm guessing, but I think it's probably it will come. It's a bit uncertain whether it will affect the capital or not. We have calculated, when I say 15 basis points, that it has. What IS19 is doing is that it's taking away the so-called corridor effect.
If you want to convert the 15 basis points to any numbers, of course, you can easily see how much capital we have and so on. I think the point here is that it's a low number, and it's calculated at the situation of end of March. I also just saw here that I did not answer a question we had on if we had any news on the risk weights concerning mortgages in Sweden. I forgot to answer that question. Let me say that no, we have no news. We know that the FSA is working with this. They say that they should come out before end of June with a proposal. My guessing would be that a proposal will be done in such a way that a very good mortgage will have a lower risk weight than a not so good mortgage.
That means that there is some sort of difference, although maybe the whole sort of mortgage scale is going up. That is my best guess. Thank you.
Our next question comes from Ms. Claire Kane from RBC. Please go ahead.
Oh, hello everyone. I just want to follow up on the funding dynamic and your outlook going forward. Would it be fair to say that you're seeing your funding costs remain low where they are versus peers, yet the market is still repricing up credit to the customer? Therefore, that's why your NII is moving rather than kind of splitting it out into all the components. Would you expect that to continue going forward? That would be my first question. Secondly, on volumes in Sweden, you're kind of averaging flat quarter- on- quarter. I guess is there a sense that your competitors are being more aggressive perhaps, or do you feel like you're losing market share? What are the dynamics in terms of demands there? Thanks.
Thank you. On the first question, as you've probably seen, the difference between ourselves and the peers in funding costs has increased during this quarter. I think that has to do with the fact that at the start of the quarter, of course, with the ECB putting out a lot of money in the market and so on, the funding market is. At the end of the quarter and the last couple of weeks, as you have seen, if you look at iTraxx Financials, it certainly has gone back and the market has become more difficult. Against this general background, the quality aspects of Handelsbanken have meant that we have a larger differentiation now than when we started the year when it comes to the difference between our funding costs and the peers. The second part of your question, what's happening at the other banks, you should really ask them.
As I said, as a general comment, I see some of our peers saying now that they are implementing steering systems whereby liquidity costs and capital costs in a more clear and stringent way is going out to the people doing the business decisions. That should speak for higher margins. On the other hand, as we talked about, the counteracting effect is that demand, and that is really your second question, demand on the corporate side is going down. The growth level in mortgages has also gone down and is continuing to go down. In that kind of market situation, it's often so that competition gets fiercer. In terms of market share for Handelsbanken, I'll ask about that as well. We have no market share goals. We are hunting good clients and we do not lose good clients. We are not targeting a certain market share. T hat's not how we work.
Okay, thank you.
Our next question comes from Mr. Ronny Rin from KBW. Please go ahead.
Good morning. Thank you for taking the time. A few questions from my end. First, I just want to go through the trading gains and losses. There was a big swing quarter- on- quarter from +SEK 400 million to -SEK 460 million for instruments at fair value. I just want to understand what's behind this and what's driving it. And then, how does this correlate with the trading and other, which has increased from a SEK 300 million loss last quarter to SEK 760+ million this time? That's the first question. The second question on the NPLs, I see them going up in the segment of passenger goods and transport by sea. Is it safe to assume there was some shipping exposure behind this? That's the second question. The third question is on Finland.
I was quite positively surprised that your margin didn't drop, quite the opposite of what we have seen in Nordea. You have obviously a much higher loan-to-deposit ratio there. Still, I just want to get a feeling as to the outlook there for margins and how much you had to reprice assets to offset the lower liability spreads or deposit spreads. That's it. Thank you.
Thank you very much. When looking at your first question, it's really something that you, when addressing that note, you will have to look at more than one item. You have to combine items because this is what's called hedge accounting. What's happening in the bank is that we are, of course, sometimes funding ourselves in foreign currencies, then converting it into SEK or NOK or whatever. When we are funding ourselves, we typically do that at fixed interest rates. The lending is often in variable rates. That means that we use swaps because we don't like risks. We package the whole package, funding and lending in a package together with swaps so that they don't get interest rate risk or currency risk.
The accounting rules, however, are such that funding is typically done at cost and also our lending historical cost, while the swaps should be valued at market rates. If you don't package it according to the hedge accounting rules, proving that you have an efficient package that you can treat as a total package, you will have variations which are not reflecting the real situation. We package that. That is what you see in this note. We have to put these items together. I will be happy to go through that if you want to get into more detail on the accounting rules here. We have a lot of experts on this. From a business point of view, what has happened is that the net is showing that in the Handelsbanken capital market, the fixed income business activity, client activity has gone up a little bit.
It was very low activity, as you know, in Q4, which combined with the cost situation meant that we had a minus there, while the client activity in Q1 has improved. That's the net effect you'll see in net gains and also in financial items. I'm happy to have a call with you. It's rather complicated hedge accounting, but it's interesting.
I get the noise here. I just want to maybe ask a very little follow-up question on this. If you look at just the last quarter, what was the biggest moving item? Was it the basis swaps that were driving it, or was it just the fixed floating swap rate that was behind the move that we've seen QoQ ? Do you know this on top of your head? It varies, I guess, every quarter, no?
Yeah, I think it's important to say that the net you see, yeah, that the net has improved. That is not position taking, it's client activity. If you look at different lines in the note, you will see a big shift from different lines that are the components of the total item net gains and also on financial items. That shift, where the results to detailed shift, has to do with variations in both currencies and interest rates because that's all the components of the ingoing hedge packaging. If you decompose them, of course, you will get variations. The whole thing is that from a risk perspective, group perspective, it's hedged. Okay, once again, I would be very happy because this is, if you like, accounting, very interesting to get into the details. We will be happy to have a phone call and decompose the different parts.
Okay, let's do that.
For practical purposes, from a business point of view, we are hedged funding lending. The difference you've seen in this item, net gains and losses on financial items, has to do with the client activity in the fixed income services that we provide through our investment banking services.
Understood. Okay. The second question on the shipping. Is that a fair assumption?
Oh, shipping. You see the note, and I have nothing more to add. The figures you see here is a description of the different classes have evolved and so on.
Okay. Good. The last question on Finland, that's probably the most interesting part.
In Finland, as you know, going back, the return on equity has not been up to the same figures that we have had in Sweden or on group level and so on. There has been a lot of work put into the daily work in terms of which client to address, which products to address, and how you should work with the client. This is something you also see in net interest income. The changes you see here are not only effects on what's happening generally in the market. It is a very deliberate and hard work when it comes to the structure of the business, the clients, and so on, the daily work. There has been a program going on for some time to improve that situation. The result of that hard work, you can see in the figures.
Yeah, it's a record.
I think we are, as all Finnish banks, sensitive to or have to some degree sensitive to what's happening on the deposit side. You hear that you are very informed about the competitiveness in that segment and so on. On top of that is the structural work that we have done.
Okay, because it's a record pre-provision profit in this quarter, at least from what I can see. It is something we should put down to your work, and it's probably a lot more sustainable than I first thought. Fantastic. No, thanks a lot for your answers.
Our last question comes from Mr. Ulrik Christensen from Citigroup Inc. Please go ahead.
Good morning. Ulrik Christensen from Citigroup .. Just one question left, please. On your subordinated liabilities and your call you did in the quarter, did that have any material positive impact to NII? If so, could you quantify that? Also, will there be further effects rolling into the next quarter if that's the case? Thanks.
Thank you. The answer to the first question, any effects in the quarter, the answer is no. We're talking a very short timeframe. The second, going forward, it will be a rather limited effect because the rates on those subordinated loans were quite low and so on. You shouldn't overexaggerate that effect, but yes, you have a slight positive effect going forward.
Alright, thanks.
There are no further questions on the telephone.
Okay, I thank you very much for attending this. As usual, we would be very happy to be in contact with you should you have any more questions. Please don't hesitate to contact us.