Welcome to the Handelsbanken Conference Call. I now give the word to Ulf Riese, Executive Vice President and Chief Financial Officer for Handelsbanken. Please go ahead, sir.
Welcome to this conference call for the fourth quarter and full year 2011. With me here today, as usual, I have Mikael Hallåker, Head of Investor Relations, and Jörgen Olander, Group Head of Accounting. As usual, the slides used for my presentation are available at handelsbanken.com. On slide number two, I think you will find a good summary of the bank's performance from a shareholder perspective. This graph, as you know, shows the group's quarterly value creation over the last five years. The darker part of the bars represents equity per share, and the gray part represents accumulated dividends over the period. As can be seen, also in Q4 2011, we reported very stable growth, averaging 15% per year for the last five quite turbulent years. Looking at 2011 as a whole, the bank reported an all-time high operating profit when adjusting for non-recurring items.
In the five-year period, 2007 to 2011, the equity markets have, as you know, shown poor performance, and share prices are down. In spite of this, from a shareholder market return perspective, if you have owned Handelsbanken shares in these five hostile years, you will have received a positive net return when dividends are included. There is no other Swedish bank where this holds true. In the period, Handelsbanken is also the only Swedish-listed bank not asking its owners for new equity capital, not taking state support, nor central bank aid, and the only one that has generated a positive shareholder value for its owners. Looking at the brief summary of 2011 on slide number three, I would like to highlight the following. In 2011, Handelsbanken reported a higher ROE than the average of our peers for the fourth consecutive year.
As you know, meeting this target is the bank's financial goal. The bank's value creation has been very stable, and we have on average grown equity per share, including paid-out dividends, by 15% per year over the last five years. In 2011, earnings per share increased by SEK 2.06- SEK 19.78. We continued to improve cost efficiency, and the cost-to-income ratio fell by 0.9 percentage points to 47.1%. The U.K. operations continued to perform and increased the growth rate with operating profits up by 66%. We continue to be pre-funded one year ahead, and the bank's liquidity reserve remained over SEK 700 billion, equaling close to half of total lending to the general public. The board proposes a dividend of SEK 9.75 per share, representing an increase of 8%. If we then turn to slide number four, you will find some of the trends in 2011.
For the full year, revenues outgrew cost by 2 percentage points, and loan losses were almost halved compared to 2010. We saw double-digit growth in operating profits, and return on equity improved, although the bank's capital position was strengthened even further. Cost efficiency improved, and the cost-to-income ratio dropped to 47.1%. Turning then to the profit and loss accounts year- on- year, in more detail on slide number five, you can see that the operating profit was up 12% on the previous year, revenues rose by 5%, and costs were up by 3%. Exchange rate changes of -SEK 91 million reduced the increase in operating earnings by 1 percentage point. The growth in revenues was driven by net interest income being up 11% year- over- year. Here, also the stronger Swedish krona had a negative impact of SEK 326 million. Adjusted for this, the NII was up 12%.
This is mainly due to increased business volumes and increased deposit margins in Sweden on the back of the higher short-term interest rates. Fees for the Swedish Stability Fund and other state fees that affect net interest income in total increased by SEK 470 million. The cost for pre-funding upcoming bond maturities amounted to approximately SEK 250 million. Together, these two items reduced net interest income growth by 3 percentage points. If we then look at net commission income, that fell by 4%, and a 25% decline in brokerage fees due to lower turnover and prices in the equity market, which are only partly offset by payment, insurance, and mutual fund fees growing by 5%, 7%, and 3% respectively.
Net gains and losses on financial items were down by 26% or SEK 361 million, chiefly due to lower customer activity and also because of general cautiousness in periods of very volatile markets. As you know, we do not engage in proprietary trading, and we are firm in our ambition to keep market risks at very low levels. Operating expenses increased by 3%. Here, staff costs rose by 5% due to the annual salary increase and the continued expansion in the U.K. Other administrative costs were flat compared to 2010. Credit losses were more or less halved to -SEK 860 million, and the loan loss ratio dropped to five basis points compared to 10 basis points in the previous year. Taking a closer look at the net interest income on slide number 21, you will here see the different items that impacted 2011.
Deposit margins in Sweden improved by almost SEK 1.8 million and was due to higher short-term interest rates, the main contributor to net interest income growth. Adding also the improvements seen in 2010, the bank has now recovered some 60% of the SEK 3.3 billion lost when interest rates fell in 2009. Higher business volumes in Sweden added SEK 797 million to net interest income and improved lending margins contributed SEK 115 million. Adjusted for changes in exchange rates, net interest income in the branch office operation outside Sweden increased by SEK 193 million to the group's net interest income. In local currency, net interest income increased by 30% in the U.K., 8% in Denmark, flat in Finland, and fell by 4% in Norway due to pressure on lending margins here.
Increased fees to the Swedish Stabilisation Fund and deposit guarantee systems reduced net interest income by SEK 470 million in the year and changes in exchange rates by another SEK 326 million. Benchmark effect in statsbiblioteken declined by SEK 104 million from SEK 95 million to - SEK 9 million. Other items had a positive impact of SEK 301 million in 2011. Here, the main contributing factor was high return on the bank's equity capital due to the higher short-term rates. On slide number six, we compare the fourth quarter with the corresponding quarter 2010. Here you can see that pre-provision profit increased by 5% on the back of over 3% growth in revenues and only 1% growth in costs. Adding a 17% drop in loan losses, the operating profit was up 7% year-on-year.
Like for the year as a whole, revenues were driven by net interest income, and that was up 13%. Higher business volumes and deposit margins here were the main contributors. Net commission income was down SEK 250 million or 12%, and the decline here was entirely explained by lower equity market-related fees due to the falling equity markets and lower turnover. Brokerage commissions and mutual fund fees were down by SEK 277 million compared to Q4 2010. Insurance, lending, and payment commissions were up 17%, 10%, and 4% respectively. If we then go to net gains and losses on financial items, they were weak in the quarter. Here, the turbulent market affected customer activity negatively, and general cautiousness characterized the market, and the bank kept the market risks exposures at very low levels.
Total costs were up 1% due to a 2% increase in staff costs, and other expenses were down by 1%. Loan loss ratio is six basis points in the quarter, down from seven basis points in Q4 2010. When we look at the fourth quarter compared to Q3, the operating profit here declined by 6% sequentially, with the explanation being a combination of seasonally higher costs and lower net gains and losses on financial items for the reasons I just mentioned. Sequentially, I also should mention that the SEK 26 million decline in net commission income is mainly explained by the yield split in the life insurance operation that is SEK 78 million lower in Q4 on the back of lower investment return. Excluding yield split, net commissions were up 3%. Now I would like to turn to the bank's financial position, and you'll find that on slide number seven.
If we go to the total capital adequacy ratio, that was unchanged at 20.9% at the end of 2011 compared with 2010. That was despite the fact that the bank during the year in 2011 called SEK 11 billion of subordinated loans according to our plans, which in turn reduced the ratio by 2 percentage points. The Tier 1 ratio in the two terms increased to 18.4% compared to 16.5% one year ago. Profit in the period and the positive trend in asset quality more than offset the negative effects of higher lending volumes. Asset quality was mainly improved through new loans being of higher credit quality than the portfolio average, but also through positive credit risk migration within the loan portfolio. A further reduction of market risks also contributed to this improvement.
If we look at core Tier 1 ratio in the two terms, that amounted to 15.6%, up 1.8 percentage points in 2011. The implementation of CRD III at year end had no impact on these numbers. At the end of the year, if you look at core Tier 1 ratio according to the CRD IV proposal or Basel III, if you like, that number was 14.1%. As you know, some of the items that are affecting the numbers in Basel III are what I could call moving targets. Our best estimate is that the Basel III impact on the Tier 1 ratio will be in the range of - 1.5 to -1.7 percentage points. On liquidity, we continue to hold the liquidity reserve of more than SEK 700 billion.
In the fourth quarter, part of the reserve that was deposited with central banks increased by SEK 37 billion SEK 376 billion. The bank continues to see a very large flight to quality inflows. The liquidity reserve caters for the bank's funding needs for well over two years under stressed assumptions. On slide number eight, we show bond funding, and the bond funding that we've done in the bank in 2011. That was actually a year when Handelsbanken was one of only very few banks with continuous access to the long-term funding markets. In the second half of the year, Handelsbanken issued as much as 13% of the total volume of long-term senior bank bonds being issued in the whole of Europe.
In total, if you look at the whole year, we issued SEK 214 billion in bond funding, and that was close to twice the volume that matured in the period or in the year. 35% of the issuance was done in the senior unsecured market and 65% in the credit bond market. The bank has already pre-funded all bonds that matured during 2012. As before, we have continued to fund ourselves in the market solely in our own name without any state support nor central bank liquidity support. We did not participate in the first LTRO tranche from ECB, and we will not participate in the second tranche coming up at the end of February. Sometimes we are being asked why we don't take the opportunity to get hold of what can be perceived as cheap central bank funding. The answer is quite simple.
While there could be some short-term P&L upside, we are totally convinced that the long-term benefit from staying away is much larger. All empirical evidence suggests that building the bank on its own merits, purely on commercial grounds without any central bank or government aid, not only builds credibility in the funding market and reduces the long-term funding costs, it is also a good long-term investment, both for the bank, its clients, and society in general. In addition to this, you can also say that by staying away, we do not have any exit issues. If we then turn to slide number nine, I would like to once again take the opportunity to emphasize one of the most important factors behind the bank's earnings stability. The graph shows the trend in net interest income after deducting loan losses.
This is really the simplest way to show the risk-adjusted revenues from the credit risk business and how that is developing. I firmly believe that when analyzing a bank's performance over time, net interest income and credit losses have to be analyzed together. It is often a simple thing to increase net interest income and to optically improve what I sometimes hear the market call revenue momentum. However, as history often shows, it is not as easy to create this growth without also raising the risk level and thereby the credit losses. In Handelsbanken, we have over the last five years of financial crisis seen a more stable and positive trend in risk-adjusted net interest income than what is the case for any of our peers.
The main reason behind this performance is the bank's credit policy with high asset quality and, as a consequence, the ability to keep the credit losses relatively low. In the last five years, the average annual growth in risk-adjusted net interest income has been 10%, which I claim is far above the average of our peers. Moving on now to the performance in the Swedish branch office operation on slide number 11, you can see here that in 2011, the operating profit increased by 20% to SEK 13.4 billion, mainly due to high net interest income and lower credit losses. Net interest income rose by 22%, mainly due to higher short-term interest rates resulting in wider deposit margins, as well as to growing lending and deposit volumes. The fee to the Swedish Stabilisation Fund and deposit guarantee rose by 93% or SEK 337 million year-on-year.
The benchmark effect in statsbibliotek was SEK 104 million lower than in the previous year. Adjusted for this, the underlying net interest income increased by 25%. The cost-to-income ratio declined to 34.8% compared to 38.5% in 2010. The bank continues to invest to improve efficiency in the branch office operations, and we continue to see a potential to reduce the cost-to-income ratio to 30% in the longer term. Credit quality remains solid, and Swedish operation reported loan losses of only - SEK 47 million for the full year, which is corresponding to a loan loss ratio of zero basis points. The positive trend in the Swedish mutual fund market continued also in the fourth quarter. In 2011, we saw a net inflow to the bank's mutual funds in Sweden of SEK 14.4 billion.
If you look at the total market in its entirety, there was an inflow of SEK 16 billion, which means that the bank's share of these flows was actually 90% in the Swedish market. Now, if we turn to slide number 12, you'll see the branch office operation outside Sweden. Here, year- over- year, the operating profit increased by 9% to SEK 3.2 billion. Adjusted for exchange rate changes, the increase was 11%. Reported net interest income declined by SEK 70 million or 1% in 2011. However, adjusting for exchange rate effects of -SEK 294 million and an increase in state and deposit guarantee fees of -SEK 105 million, the underlying net interest income rose by 5% with the U.K. operation as the main contributor.
Loan losses were down 45% to -SEK 769 million, and loan loss ratio fell to 18 basis points compared to 28 basis points in 2010. Moving on to the U.K. business on slide number 13, you can see that the British operation continued to perform in 2011. Operating profit rose by 66% to £61 million. Net interest income was up 30% on the back of deposit and lending volumes increasing by 30% and 25% respectively. At the end of the year, we had 117 branches, and that includes branch managers that are in the process of opening branches. This number has increased by 24 branches in total in 2011. In the fourth quarter, operating profit in local currency rose by 34% on the back of higher net interest income and lower loan losses.
If we then go to slide number 14, you can see how the average income and costs develop as the branches grow older. As can be seen from the chart, breakeven is reached after roughly 20 months after capital coverage costs. After that point in time, the cost through revenue gap widens at a quite stable pace for three to four years. The earnings growth tends to pick up when the branch is some five to six years old. We cannot see any signs today indicating that this historical trend should change. I should also mention that the slightly slower revenue growth seen in the graph for the nine-year-old branches is explained by the deliberate transfer we do of customers from old branches into new branches when we split the branch into two in the same geographical area.
More than 60% of the branches, as you can see, have not yet reached an age of four years and are consequently not generating any significant profits yet. However, as the graph indicates, time is of essence here, and we now have a fair amount of branches moving into the right section of the graph. We therefore believe that the earnings generation will continue to grow despite the cost of opening new branches. If we then turn to the following slide, number 15, you can here see the total income and cost development for the entire U.K. operation over the last three years. As you can see here, we see a continuous widening of the cost revenue gap. Starting at Q1 2009, we have seen an average annual growth in revenues of 47% with the corresponding cost growth being only 21%.
In the period, we have gone from 60 to 104 branches, not counting the branch managers that are in the process of opening their branches. The cost-to-income ratio had declined from 82% in Q1 2009 to 51% in the fourth quarter 2011. I would argue that this is a quite competitive level compared to the U.K. peers, especially if we consider the fact that we keep making significant and increasing investments in new branches. We, of course, remain positive to our prospects in the U.K. market, where our decentralized business model has proven to work very well and where we keep identifying interesting prospects in the high-quality customer segments we are targeting. To sum up the year of 2011, operating profit as well as earnings per share increased by 12%, and the return on equity rose to 13.5% compared to 12.9% in 2010.
Revenues grew faster than costs by 2 percentage points, and the loan loss ratio was 0.5 to five basis points. The Basel II or Tier 1 ratio improved 1.8 points to 15.6%. Estimated according to the proposal Basel III, or if you like CRD IV rules, the core Tier 1 ratio was 14.1%. Liquidity reserve remains in excess of SEK 700 billion, and the bank has stayed pre-funded one year ahead. U.K. operation continues to show strong development with the operating profit in local currency being up 66% in 2011. Over the last five years, 2007 to 2011, I believe our business model again has proven that it works well, also in these turbulent times.
In this period, Handelsbanken is the only Swedish-listed bank and one of very few European banks that have been able to deliver an increased shareholder value, not only in equity per share, but also from a shareholder market return perspective, taking into account dividends given and indeed rights issues that we have not done. That concludes my presentation, and I would now like to invite you all for questions. Thank you.
If you have a question for the speakers, please press zero one on your telephone keypad, and you'll enter a queue. The first question comes from Mr. Chintan Joshi from Nomura. Please go ahead, sir.
Hi, good morning, Chintan Joshi from Nomura. I've got three questions on NII, please. First question is from slide 21. If I see the year-on-year evolution of your NII, then only SEK 115 million is coming from lending margins in Sweden. If I think about it anecdotally, you and your peers have pointed out improving margins in lending. I'm just wondering how to think about margins out here. Is it that you have less repricing potential because your loans are already priced well, or there's more in the pipeline for the next year? How should I think about that? The second question is on mortgages. If I look at the margins on fixed mortgages, they've gone probably, depending on how you calculate it, probably 50%- 100% over the year for various reasons.
What proportion of your, what is the duration of the fixed mortgage book that you have so that I can understand how to think about the margin repricing coming through over the coming years? Finally, on NII, at the moment, consensus is probably expecting another 25 bps rate cut. I'm just thinking behaviorally, how should I think in a stress scenario where if rates go to 1%, is there a potential for banks to reprice further to offset the deposit margin impact, or do you think that is not the case? Thank you.
Thank you very much for those questions. Yes, you're right when it comes to what part of the increase in NII that comes from increased lending margins to 115 when you talk about Sweden. As you know, I think the best way to characterize the margin situation in Sweden is that for technical reasons, I'm thinking of the need for many banks to increase their liquidity duration, also the new capital rules, also the fact that the stabilization fees have gone up and so on. There is a need to increase margins. Of course, competition is fierce here. There are a lot more banks in Sweden than there are political parties, so to say. The competition here is fierce, and you never know what will happen. You saw in the fall that margins on mortgages rose in the quarter, but came down actually at the end of the quarter.
It's hard to guide more than that on margins. When you asked about the duration, you can say that about 50% of the stock is a three-month repricing in terms of interest rates towards the clients, and about 50% of the stock is fixed. The duration of the fixed, I would say, would be slightly about two years. Let's say two years, 2.1 years in duration when I'm talking then about the fixed portion of the portfolio. You talked about maybe the Swedish Central Bank will cut the rate 25 basis points on Thursday. As you know, we are not funding ourselves through any central bank, so we will not be affected by that administrative decision. What of course affects us is the general funding levels. As you have seen the STIBOR, it has been anticipated that this downturn will come. I think that's already priced into the STIBOR.
You come to the effects, and you can say the general rule of thumb is that when interest rates go down, deposit margins also go down. That has to do with the fact that, of course, you can't go down more than zero. If you get very low interest rates level, of course, the margins on the deposit side are affected. If you look at the downturn we had in 2009, the bank in total lost SEK 3.3 billion when it comes to margins on deposits. Since then, we have regained now 60% of that. You saw that the addition in 2011 was SEK 1.8 billion in more increased deposit margins in Sweden. There will be, of course, some effects if interest rates go down. On the other hand, I would also claim that the competition on the deposit side in Sweden is very fierce at the moment.
Some banks think this is an important part of their funding and are currently pricing up. That means maybe that the impact from the general interest rate level going down, if it goes down, would be a little bit less.
If I just follow up on that last question, I mean, behaviorally, do you see a potential for repricing on the lending side if rates were to go down so that it can offset some of the deposit margin pressure, or do you think that is less likely?
I think in general, as I said, there is a general need in the market to increase the prices towards the clients. It's not necessarily to increase the margins. That depends on your funding costs and how you're doing capital-wise. For us, as you know, we are already compliant with the capital rules that have been proposed. Also, we are very, very conservative when it comes to liquidity. We don't have that kind of effect. If that happens, of course, we would be able to enjoy a higher price towards the clients as an increased margin. That is not necessarily true for every institution in our vicinity.
Thank you.
The next question comes from Mr. Nick Davey from UBS. Please go ahead, sir.
Yes, good morning everyone. Nick Davey from UBS. Three quick questions if I can. The first one, please, on market risk. You noted in this morning's report that a decline in market risk-weighted assets added about 30 basis points to your core Tier 1. Could you talk us through, please, what changes you've made there, whether that had anything to do with the weak fair value gain number in this quarter, whether this will have any implications for fair value gains going forward, or whether this could be a volatile number with regards to capital, and therefore we shouldn't read too much into that 30 basis point core Tier 1 gain. The second question, please, on liquidity. A lot of your peers now disclose an LCR ratio, and we're moving towards that becoming a binding requirement.
Would you be happy to share with us your best estimates on where you currently stand on LCR? The third question, please, if you could talk a little bit around wholesale funding maturities. You included a slide in your appendix about expected maturities in 2012 on slide 28. You also say that you think of yourselves as one year pre-funded. Does that mean we should be looking at SEK 150 billion of maturities in 2013 as more or less your funding plan for this year? Maybe if you could just expand on that theme a little bit. Thank you.
Thank you very much. Very good questions. As you know, we have been keeping market risk at the low level for a long time, and it has now further decreased. There are two elements. One is that when it comes to different arrangements, when it comes to clearing and so on, there is a structural feature here which we have been able to be more efficient when it comes to the market risk that we have. That will not go up again, so to say. I would say maybe half of that is coming from that part. The other part is that when there's low, all the positions that we have are client-driven. We are market makers, and we, of course, want to always service our clients good. It's not proprietary trading. That means that when the market activity goes down, also you will have a reduced market risk.
That is also what you see in the numbers. I would claim 50/50 on those two accounts. Liquidity ratio, LCR, please show me the definition, and I can give you a number. Let me say that all the definitions that I have seen so far indicate that we are well, well, well, well above 100%. We have no, there is no issue or any need to tackle that. In order for you to have an exact number, you have to show me the definitions. Wholesale funding, yes, you're absolutely right. We have pre-funded all maturing bonds that mature during 2012. The funding we are doing now is then going to exchanging the maturities in 2013, and the number you quoted was correct. At the moment, we don't see any reason to change our general policy when it comes to pre-funding activity.
As you know, it has cost us about SEK 250 million from the P&L, and the logistics here is very easy that if you reduce the pre-funding duration, of course, that has a positive impact on NII and vice versa.
That's very clear. Thank you.
The next question comes from Mr. Johan Ekblom from Bank of America. Please go ahead, sir.
Thank you. Maybe I can pick up on one of Nick's questions here. In terms of the funding, can you give us some indication about what the relative spreads you're paying is, and I guess what you've done year to date and what you have that is maturing in 2012, just to get a feel for what margin impacts we should expect from the funding side?
We have done transactions in the early part of the year in British pound sterling. We did a euro transaction. We've done credit bonds in the Norwegian market. If you look at the pricing level, the relative pricing levels, I think you can see a good proxy if you follow the CDS spreads of different banks. In the American market, the distance between ourselves and certainly our peers tends to be larger. When you look at our funding costs and our CDS spreads in the European market, we have from time- to- time during January here been the absolutely lowest of all banks. Rabobank is also pretty low. The difference there, last quarter I saw, was about five basis points. You talked a little bit, you wanted more information on the funding activity going forward of a bank.
I mean, from a technical position, which day we choose, which market we choose, and so on, that has of course to do with how the basis swap is looking from different markets. Also, from an investor perspective, we get a lot of phone calls from investors that really like our name and would like to buy our bonds. Of course, we want to service those contacts. Therefore, it's important to be in the market. From a sort of risk perspective, what we need to do, of course, we are in an extremely comfortable position, not having to do anything if we don't like. You will probably see us here and there in the market because we think it's very, very important to keep contact with investors and so on. That goes for Asian investors, European investors, and certainly American investors.
I guess what I'm trying to get at is just what's the difference in the spread of what you're issuing now versus what you have to mature? I mean, what's the vintage of the debt that's coming up for maturity in 2012?
Yes, yes. I think when looking at Handelsbanken, you can do it very easily because since we don't like liquidity risk and riding the yield curve, we match liabilities and assets. That means that if you have a maturity on the liability side, the funding side, you will also have a repricing on the asset side. From that perspective, we are not dependent on the general interest rates level at all, if you see what I mean. I've seen some analysts that have gone totally wrong trying to say that, oh, now cheap funding is maturing and it will become more expensive and this will have this NII effect. That's not how we have built the bank. With the match funding in terms of repricing ability, you don't get that kind of effect. You don't have to do that calculation. That's meaningless.
The important thing is, of course, that the price towards the clients is always the same in a competitive world among banks. The difference is the funding advantage. From what I can see and understand, the difference in different funding prices for different banks has not yet come into the profit and loss placement totally because all banks are not of the same liquidity risk standing. Also, some banks have used central bank money and cheap money that are rather temporary. All things being equal, I think going forward, you'll see a larger effect here.
Thank you.
The next question comes from Mr. Henrik Christiansson from Citigroup . Please go ahead, sir.
Thank you. Good morning. Two questions on capital, please. One of your peers yesterday mentioned a Q1 capital target of 12.5%- 14.5%. You're currently at 14.1% under Basel III, not taking into account floor mortgage audit risk. What's your current thinking where you will run your bank relative to 12% Q1 regulatory limit? Also, related to that, the same peer gave an assessment of the impact of a 10% audit rate for mortgages. Could you maybe also provide a sensitivity to what the 10% floor on mortgage risk rate would reduce your capital by? Actually, a third question as well. More detail. Looking at your capital markets division, the fair value line is particularly weak while NII is a little bit stronger than usual. Are there any effects when it flows between the fair value line and NII that has increased NII over time?
Thanks. On the first question, when we look at the bank with our own eyes, you can see that nothing much has changed. I mean, what the capital we need has been the same throughout Basel I, Basel II, and Basel III. We had 6%- 7% in Basel I, and we had 9%- 11% in Basel II. We will have a corresponding number in Basel III terms. Of course, before we set that, we want the rules to be very clear and, more importantly, funding market and rating agencies and so on to calibrate to this new world. That's the reason that we have not put up any firm numbers on this. If you look at the capitalization we have, we don't perceive this as a dramatic thing. I mean, as you know, it's easy for us to comply with the rules that we will see coming.
The risk weight on mortgages is a bit more complicated, actually, because it has to do with the fact how Sweden will implement this. I think more and more evidence speaks in favor of that it will not be just a minimum risk weight. It will more likely be some sort of add-on or multiplicator of the LGD or something like that. That means that the good mortgage will always be superior to mortgages that are not so good, if you see what I mean. It's a little bit hard to give you any exact numbers here. Mikael, I know that this is your favorite subject.
No, Henrik, it's Mikael. If you look at the risk weight table in the report, you can easily apply a 10% risk weight and see what that will do to risk-weighted assets and make the calculation yourself. That would be a good proxy, would it? If you want to calculate 10% minimum, it would be a good proxy, yes.
I'm also saying that it may be that the system is not constructed in that way, but we will see. We'll have to see the rules. On the last question, you talked about the investment banks. Of course, this is not a quarter that we are happy with the result in the investment banking division. It was a slow market. It was very low activity, especially when it talks about fixed income trading. Having said that, we don't find it acceptable to show a minus, even if the markets are slow. You have to also look at the cost side in that kind of situation. You talked about, is it numbers moving from net gains and losses and NII? I can only say that on a group level, there's no such effect that you have to take into consideration going forward.
Thank you.
The next question comes from Mr. [Marcela Yatzi] from Credit Suisse. Please go ahead, sir.
Hi. Two questions for you. The first one is on shipping. I can see in your report that you increased lending by about SEK 5 billion or 35% in the quarter. Could you say something about what subsegments in the shipping industry you're increasing your lending to, and what kind of opportunities you really see in this market going forward? The second question was on your U.K. expansion. Could you say something about how that's progressing? Do you think you're going to have the same kind of growth levels as you've had in the last couple of years?
All right. For my first question, it's very easy. We don't have any sort of views in that sense of different segments of industries like shipping or so on. We have a credit policy. As the credit policy turns out, since it's conservative of nature, it seems that when you look at the composition of the portfolio, shipping is a very, very small portion if you want to analyze our portfolio as of industry sectors. We don't pick credits in a sector way. We evaluate each credit on its own merits, regardless of that it happens to have an industry classification, so on and so on. We have no ambition whatsoever strategically to go into a segment like shipping. That seems to have to do with the risk level associated with clients. U.K., yes, we have provided some slides.
We see nothing from the figures or what the experience that we have that would show that the development wouldn't continue. On the contrary, we are very happy and enthusiastic about the British operation. There is a lot of more places where there could be a Handelsbanken branch. The performance of the branches that we have started is looking very good. From a structure point of view, which I think is rather clear if you look at the pictures, the portfolio now is coming into a stage where branches are sort of coming into that phase of their life where you really see a sort of hockey stick effect when it comes to the gap between revenues and costs.
Okay, thank you.
Next question comes from Mr. Andreas Hakansson from Exane. Please go ahead, sir.
Yes, hi. Two follow-up questions, really. First one on NII or related to funding. I think it was about a year ago, you talked quite a bit about structural subordination. We've seen that you continue to issue a fairly good balance between senior and covered over the year. Could you tell us, do you have any contact with the Swedish regulator today about this topic? Could you just shed some light on that? The second question is just related back to that as a quality question on Norway. Could you tell us, sure, you grew a bit in shipping, but it's still very small. We saw a pickup in loan loss provisions in Norway and Denmark. Could you tell us what segment these losses came from, please?
On the first question, we don't have any discussions with authorities when it comes to the importance of keeping a balance between senior and covered. This comes from our own belief. Also, if you hear what the authority says, and that, of course, if you look at FSA and other authorities, also I think EBA have had some discussions on this. This is a concern. We clearly understand why because for a bank that only does covered bonds, it's rather easy to come to a situation where it's hard to fund the bank because you can only use covered bonds for mortgages, and you can't use it all. Therefore, it's very hard to do a banking business in general if you only rely on covered bonds. I think that has been now more and more realized.
You have seen some of our peers that have claimed that they should only do covered bonds that have now actually used this first part of the January year and issued senior, of course, at rather high prices compared to ourselves. I think that's important. Norway credit losses and Denmark, no, there is no sector or any product or so on. We are talking rather few cases. It's not like whole portfolios have changed in credit nature or so on. When you look at the credit losses that we have had, you cannot see any trends or do any conclusions from that. We don't see any, in general, any deteriorating portfolio in Norway or Denmark. It's on too few occasions and too small numbers to draw any conclusions.
Okay. Thank you.
Next question comes from Ms. Claire Ken from Bank of Canada. Please go ahead.
Hello there. Many of the questions have already been asked, but can I just say, if you look forward through now to the rest of this year, what areas do you think will be the most challenging? In general, would you say coming from maybe three months ago, are you more optimistic on the outlook now? Where do you think you'll probably be spending most of your focus, really? Thanks.
When managing the bank, we are really fearing the worst but hoping for the best. We feel very prepared for whatever will come. Of course, on the fear side is the development in Europe. It has been in a phase where there have been more positive news than negative news. Obviously, the ECB facility has been good and so on, but it's a fragile structure. As you know, the fundamental problems have not yet been solved. That is, of course, important on the fear side. On the other side, when you look at Sweden and Swedish companies, they are doing rather good. More and more of what they do is actually not done on the export side for Europe, but it's Asia. It's also the U.S. looking better and so on. The mood among customers and clients in Sweden is actually rather good. Of course, it depends very much on how the European situation ultimately will develop.
Okay, thanks. Could I just have one follow-up on your outlook for asset quality? I know we're clearly at a low base, but would you think that it's more likely we see a deterioration going forward?
I think it's very hard to say. I mean, there's nothing in the figures that would indicate any deterioration. As you say, we have very, very, if you look at Sweden, it's occurred. I mean, as you know, it's typically on the company side and so on. There is no indication as of now that that has started to happen. Swedish companies, in general, are in good shape and with good solvency and so on. An immediate downturn or problems arising from that is hard to see.
Thank you.
Next question comes from Mr. Ronny Rehn from KBW. Please go ahead, sir.
Yeah, good morning. Also, most of my questions have been asked. Just one more. On the risk rates, we have seen a lot of debate on the mortgage side. Is there also a debate starting on the corporate risk rates? If so, where do we stand? Thank you.
The Swedish FSA, when they held their press conference, talked about mortgages, but also on companies. I don't think it was the FSA that said it, but in the discussions afterwards, I think it came from a bank actually in Sweden that said that it is strange that the same corporate credit in two banks can have different credit weights. Of course, you get very different risk weights on the same corporate loans if you have different credit policies in different banks. If you look at our own experience from 140 years of banking, about 70% of the outcome of a credit comes from how you manage the credit during a lifetime. Only 30% of the explanation lies in the initial credit decision. If you have one bank that only grants the credit and then puts it in the vault and forgets about it, then you will have an outcome.
If you have another bank that is very, very close to the client, monitors the credit, has personal responsibility, takes actions very early, takes in more pledges, etc., you will get a different result and a different risk weight because risk weight is only historical, of course, numbers. As to your specific question, I haven't heard any of what's happening on that, but they have said that they will look into it.
Okay, thank you.
The next question comes from Mr. Jan Walther from Deutsche Bank. Please go ahead, sir.
Yes, Jan Walter here. Deutsche Bank, a couple of follow-ups there just from the press conference today. The funding plan that you have, does it include turning up meaningfully during this year? If you could share with us where you are on the net stable funding ratio if possible. The second one on capital markets, the negative trading result there. You allude to low client activity being the reason. Would your best guess be that this will then rebound and be positive or close to positive with higher activity in the market, and there is nothing else there going on? Thank you.
Thank you. As regards funding, I think in general, we don't see any immediate shift in our funding strategy. Of course, we will have tactical consideration.
As I said, but I really don't have any more to say than I've already said about the funding side. On the trading side, I mean, as you know, our position is coming from client activity, so we don't have positions on proprietary trading. The activity was very low during Q4, and normally low. Of course, we anticipate that gains, losses, and financial items on the investment banking side would normally be on a higher level than you saw in the year. Having said that, I think you also have seen, especially in Sweden, a structural change in the fixed income markets. You can also see it in other portions of investment banking activity, where it will be much harder to do good business on position taking and so on. I think there's a structural change in the whole of the business.
For ourselves, of course, as was said on the press conference, even though you have a market with low activity, we don't like, of course, to see a minus when it comes to the result. There is, of course, a managerial task of looking also on the cost side in order to be able to meet also a low client activity.
Okay, very clear. Thank you.
Next question comes from Ms. [Sofie Petersen] from J.P. Morgan. Please go ahead, ma'am.
Yeah, hi. Thank you very much for taking my question. I had a question regarding your NII. I noticed that you mentioned as well that SEK 1.8 billion out of the SEK 2.3 billion growth in 2011 came from deposit margins. I thought the competition was quite fierce in Sweden also, that the margins were quite low and also interest rates have been coming down. Could you maybe just elaborate a little bit how or what the drivers of this deposit margin increase is? My second question is around your $700 million U.S. dollar Fed deposit. How much in basis points do you earn on this deposit?
Right. On the first question, the numbers you mentioned, SEK 1.8 billion is the whole year number. If you look at the fourth quarter, of course, you will see t hat we actually lost a little bit when you look at margins on deposits in Sweden. The whole year number is very much driven by the general interest rates level in Sweden, which went up. Of course, lately, you have seen the opposite direction. As I touched upon, I think also the competition has increased, and that means that if interest rates go down, maybe margins do not go down as much as normally because that coming down has already occurred, so to say. I think that's the best answer I can give on that.
When it comes to the SEK 700 billion, we have a specification of SEK 376 billion of those is placed in central banks, and you mentioned Federal Reserve. As you know, you don't gain, they don't give you much interest rates, but they give you great safety. The reason why we take in a lot of dollars and deposit in Federal Reserve is not to earn money, but it's to help all those international high-quality institutions that have a very hard time knowing where to place the dollars in a safe way. We provide a service to them by taking that money and placing it in Federal Reserve. Of course, we think it's very good and important that these institutions learn us, analyze us. When we do long-term funding, the same institutions tend to be very, very interested in buying our name and paper in the market.
Okay. Thank you. Just very quickly, in terms of these U.S. dollar CP funding deposits that you get and the interest that you earn on that, if I look at slide 21, under which segment would that be reported?
When it comes to the client part of activities that we have in the United States through our New York operation, that you will find out under Handelsbanken International part, and that's part of branch office operation outside Sweden. When it comes to the treasury part and the liquidity reserve and all matters regarding the funding, you will find it in what is called Others. Technically speaking, from an accounting point of view, that is not a segment, but it's all other things that is not included in a segment. You will find it under the heading Other. There you have the funding activity of the bank.
Thank you.
Next question comes from Mr.[ Fridjof Björn] from Arctic Securities. Please go ahead, sir.
My question has already been asked.
We have a question from Mr. Chintan Joshi, Nomura. Thank you.
Hi, Chintan Joshi, Nomura again. Just a couple of follow-ups. Firstly, on corporate risk rates, if I look from the start of 2010 to the end of 2011, corporate risk rates have fallen from 42%- 33%. I'm just wondering, is there a risk out here that the FSA may want to review it to reverse this trend, or are you fairly comfortable with your position? The second question is on the liquidity reserves. If I look at the amount of liquidity reserves you're holding now, it's 20% of your assets or about 40% of your loans. Should we expect these reserves to remain at these levels now? Is this the new standard, or do you think levels will probably need to go higher or lower from here? Thank you.
Thank you. No, let me be very clear. When it comes to the risk rates we have and the models that you see that we use, there is no issue outstanding whatsoever with the Swedish FSA that those models would not be correct or certified or so on. There is no such discussion regardless of whether it's corporate or anything else. The discussion about risk rates is something else and coming from a totally different angle that is not directed towards any specific bank, but more a general concern from the authorities. The fact that the risk rates have gone down is very easy to understand because this is pure mathematics. We cannot choose our risk rates. There is an immense amount of governance surrounding these models and how they are validated and FSA coming and certifying that the validation is okay.
The explanation between the numbers you mentioned is the pure fact that clients with higher risk have left the balance sheet, and clients coming in are of better standing risk-wise. In general, the whole stock of clients that have been in the portfolio all along is a little bit better, have migrated. This is surrounded by an immense amount of governance and so on. This is pure mathematics based on historical outcomes and resilience of the clients. You talked about the liquidity reserve. It goes without saying that SEK 700 billion, or rather above that we are now, is, of course, far too much that we need from a purely risk perspective. Since the market is such that it's an advantage for us to be so overly prudent and have this enormous amount, this is no question whatsoever. The normal level would, of course, be a lot lower.
As I said, part of these liquidity reserves comes from the fact that we want to service the best quality institutions in the world when they have a hard, hard problem of knowing where to place the dollars. That also affects the numbers and makes it larger than it has to be from a risk point of view.
Thank you.
There are no further questions at this time. Please go ahead, speakers.
Okay. Thank you very much for attending this telephone conference. As usual, we will, of course, be happy to meet and answer any kind of questions that you have. Please don't hesitate to contact Mikael Hallåker and his colleagues or myself going forward.
Thank you very much for your attending.