Earnings Call: Q4 2009

Feb 18, 2010

Summary

Full-year pre-loan-loss profit rose 3%, while operating profit fell 10% amid higher credit losses and prior-year one-offs. Capital and liquidity strengthened, and U.K. branch expansion was set to accelerate in 2010.

Welcome to this telephone conference on our Q4 numbers. Here with me I also have Mr. Mikael Hallåker, Head of Investor Relations, and Mr. Jörgen Olander, Head of Group Accounting. As usual, my comments during this presentation will refer to the slides available at handelsbanken.com. I would like to start with some general reflections over the business environment in the last couple of years. As you know, the banking sector is now almost three years into the financial crisis. For the sector as a whole, it has certainly been a dramatic period with huge losses and large issues of new equity and other types of capital. In addition, the crisis has, as you all know, required significant systemic support from states and central banks. In this period, Handelsbanken has delivered solid results, even if loan losses has amounted to irritating numbers. The return on equity has, however, not been below 12% in any individual quarter, and the business model has again proven its resilience in turbulent times, strengthening the financial position of the bank without issuing new equity or utilizing any state support or central bank money. Without any doubt, we are a stronger bank today than before the start of the financial turmoil. Early in 2007, when the first signs of disturbances in the financial markets became visible for us, we started to increase the duration of the bank's funding. The de-risking process continued with the reduction of our market risks and through the sale of SPP in late 2007, and also with the sale of asset-backed bonds in March 2008. Parallel to this, and throughout the period, the bank has driven a continuous process to improve the credit quality in our loan book, mainly by focusing on lower risk business and by securing more collateral. Together with stable earnings, this has led to a significant strengthening of our capital ratios as well as of the bank's funding and liquidity position. The business model has enabled the bank to continue to pay dividends throughout the period, and for 2009, the board is proposing an increase from SEK 7 to SEK 8 per share. Volumes and earnings in branch office operations outside Sweden continued to grow in 2009, and operating profits were up 33%. However, the opening of new branches was affected by the weaker business environment. Now we see that the pace of expansion outside Sweden is increasing, and the number of branch openings are likely to accelerate again in 2010, and mainly in the U.K. Then to some comments on the performance of the bank in 2009. The bank generated a full-year profit before loan losses of SEK 17.1 billion, an increase of 3% compared with 2008. Due to higher loan losses and one-off realized gains of SEK 1 billion in 2008, the operating profit decreased and amounted to SEK 13.7 billion. Looking at Q4, the operating profit amounted to SEK 3.2 billion, marginally down from Q3. Higher income and lower loan losses offset seasonally higher expenses. The level of net impaired loans fell to 18 basis points in the quarter and amounted to 21 basis points for the full year. The capital position of the bank continued to strengthen. Tier 1 ratio improved by 3.7 percentage points in 2009 to 14.2%. Compared to the end of Q3, the increase was 0.7 percentage points. Capital adequacy ratio reached 20.2%, up from 19.1 in Q3 and from 16% one year ago. The funding position of the group remained strong and improved further in the quarter. in Q4, the bank issued SEK 23 billion of covered bonds as well as SEK 15 billion in a wide range of different one to five years senior bank bonds, and that was, of course, without any state guarantee. Issuance was done in all major markets, and in 2009, the total issuance of bonds amounted to SEK 263 billion. Relative to its size, Handelsbanken was the largest issuer of unguaranteed bonds in Europe in 2009, according to investment bank reporting. The bank's liquidity reserve remained over SEK 450 billion and continues to cover all the bank's liquidity needs for over two years without access to market funding. Moving to slide number 3 and 4, you can see that net interest income was up by SEK 2.8 billion or 14% in 2009, despite the fact that falling interest rates lowered deposit margins in Sweden by some SEK 3.3 billion. Higher lending and deposit volumes and higher margins due to favorable funding were the main drivers of the improvement. Lending volumes were up 8% and deposit volumes increased by 10%. Quarter-on-quarter, net interest income was down by 4% or SEK 251 million, of which SEK 100 million is explained by decreasing deposit margins. A deliberate reduction of lending volumes in markets outside the bank's home markets explained the decline in net interest income of SEK 91 million in Handelsbanken International. Furthermore, the benchmark effect in Stadshypotek explained another SEK 89 million of the reduction. Net fee and commission income rose by 9% or SEK 598 million year-on-year, mainly due to Handelsbanken Capital Markets being up 40%. Lending commissions together with brokerage fees were the main drivers behind the increase. In Q4, net fee and commission income was up 11%, driven by rising equity-related commissions. Net gains and losses on financial items at fair value decreased by SEK 712 million to SEK 2.5 billion year-on-year. The change here is mainly explained by the realized gain from the sale of shares in NCSD of SEK 716 million, which occurred in Q4 2008. In the quarter, net gains losses on financial items was up by SEK 219 million, mainly explained by higher client activity. If we then turn to slide number 6, you can see more detailed analysis of net interest income. Since we have received some questions concerning the composition of the underlying change in net interest income and especially the part which we refer to as other in previous editions of this slide, we have now made some changes in order to clarify the analysis. Previously, the slide was partly done by looking at all items compared with STIBOR. Now we have used our funding cost as the starting point for analyzing the portion of lending that is not funded by deposits. For deposits and the portion of lending that is funded by deposits, we have continued to use STIBOR to split the margin. All in all, this means that SEK 1.2 billion in funding margin has moved from other to lending in branch office operations in Sweden in the slide. As can be seen in the slide, the large negative effect of declining income from Swedish deposits has been more than counteracted by an increase in income from lending in Sweden, as well as increased volumes and margins outside Sweden. In total, this is the explanation of the 14% increase in net interest income in 2009. If we then turn to slide number 12, you can see here that expenses rose by SEK 2 billion or 15% year-on-year, and that was mainly explained by five items. Lokalbanken that was acquired in Q4 2008 explains SEK 225 million. Costs for higher variable remunerations explains SEK 218 million. Costs related to the corridor effect when calculating pension costs according to IAS 19 were up SEK 310 million, and the provision made to the profit sharing foundation Oktogonen was SEK 741 million higher than in 2008. Adjusted for these four items and for exchange rate changes of SEK 327 million, underlying costs were up by SEK 170 million or 1.4% in 2009. Compared to Q4 2008, the corresponding figure was a decrease of 3.2%. Turning to slide 13, you can see the loan loss development for Handelsbanken. Loan losses amounted to SEK 691 million in Q4, a decrease of SEK 175 million from Q3. Loan loss ratio fell to 18 basis points. In branch office operations outside Sweden, the loan loss ratio was 27 basis points, and in Sweden it was 13 basis points in the quarter. The proportion of net bad debts or impaired loans amounted to 21 basis points in Q4, down from 24 basis points in the previous quarter. For the full year, loan losses amounted to SEK 3.4 billion and loan loss ratio was 21 basis points. On slide number five, you see that the return on equity on total operations after tax for 2009 amounted to 12.6%. Cost income ratio for the year amounted to 47.1% and earnings per share amounted to SEK 16 and 44 öre. The board proposes a dividend of SEK 8 for 2009, an increase of 14%. As I said earlier, Tier 1 ratio increased to 14.2% and that is, of course, after deducting the proposed SEK 8 dividend. While the capital adequacy ratio was up four percentage points to 20.2%. This, I think, is actually one of the highest, if not the highest level for any universal bank in Europe. Quarter-on-quarter, Tier 1 ratio improved by 70 basis points, and this increase was mainly a result of the ongoing work to further improve the credit quality. New volumes that entered the balance sheet had high quality and lower risk weight than the volumes that left the loan book. Adding more collateral to the portfolio also reduced the average risk weight in the quarter. Altogether, this explains 0.4 percentage points of the increase, and the net profit for the period explains the remaining 0.3 percentage points. Credit risk migration in the fourth quarter was marginal. Turning to slide 23 and funding. You can see the weekly development of the bank's position against the Swedish central bank, Riksbanken. Handelsbanken has remained a large net lender to the Swedish state and has continued to be a large net lender in the Swedish krona interbank system throughout the period, as well as being a net lender to other central banks. In Q4, Handelsbanken issued a total of SEK 15 billion in unguaranteed long-term senior bonds, which includes, for example, a U.S. dollar 1.4 billion extendable note and a number of private placements. We also issued SEK 23 billion in covered bonds with up to 8 years duration. At the end of Q4, the unused liquidity reserves remained over SEK 450 billion, which corresponds to the bank's liquidity need for more than 2 years without any market access. The amount is clearly higher than what the bank needs in a longer perspective, and the reason behind the current size is actually twofold. First, deliberate build-up due to the market turbulence, and secondly, also a result of large inflows of deposits from private and institutional clients. Finally, I also want to touch upon our growth model, the branch office operations outside Sweden in general, and on the U.K. operation in particular. This you can find in slide 21 and 22. Operating profit in branch office operations outside Sweden increased by 33% year-on-year, and that was mainly on the back of net interest income being up 28%. Quarter-on-quarter, operating profit grew by 44%. Slide 21, as you can see, shows the average income and cost per branch office by age group in the regional banks outside Sweden. As you can see here, there is a very stable increase in profits as a branch office grows older. Indeed, in 2009, the share of group operating profits that came from branch office operations outside Sweden was 23%, up from 16% in 2008. If we turn to slide number 22, you can see that we continue to grow in the U.K., where we now have 62 branch offices. In 2009, total income exceeded SEK 1 billion for the first time. These branches are, however, still quite young and are consequently not very far along the profit curve, but the impact will grow as the branches get older. In light of the financial turmoil, only 6 new branches were opened in 2009, but we now see that the pace is increasing with 8 new locations being decided so far with branch managers already appointed. To conclude with slide number 2, the underlying business developed well during 2009 in spite of the difficult market conditions. Profit before loan losses were up 3% year-on-year and adjusted for one-off gains in 2008, pre-provision profits were up by 7% and underlying earnings generation capacity improved. In spite of the fact that lower interest rates dramatically affected margins on deposits, net interest income was still up 14%. Overall, however, the extraordinary gains in 2008, together with the increased loan losses in 2009, caused the operating profit to fall by 10%. Return on equity came in at 12.6%, which means that 2009 is the 38th year in a row that the bank has achieved its target of having higher return on equity than its peers. The board is proposing an increased dividend from SEK 7 to SEK 8 per share. Finally, I would like to end where I started this presentation. The bank reported solid earnings in 2009 and has done so throughout the financial crisis. We have continuously improved our financial strength and have a proven business model that we will continue to pursue. After a slowdown in 2009, we now also expect to accelerate the number of branch openings in 2010, and that's mainly in the U.K. market. Now I would like to invite you all for questions. Thank you. If you'd like to ask a question, you'll have to press 01 on your telephone keypad. That is 01. First question comes from Per Löfgren from Morgan Stanley. Please go ahead, sir. Thank you very much. This is Per Löfgren from Morgan Stanley. I have three questions. First of all, I wanted to ask you on the drop in deposits on a quarterly basis. From what it looks like to me, this is coming from the international side of the business. The drop that we see here, I just assume that that is driven by the new liquidity regulation proposed. Could you confirm if that is the case? Second, I would like to ask you about the U.K. expansion. Looking at the press releases and the comments that's coming out that's hitting the tape today, I have been of the understanding that you have up until now not been clear in answering the question, how big can it become? It now looks to me that you are looking for the operations in the U.K. market could become bigger than what we have in Scandinavia or in Sweden so far, but it's still a timing issue. It could take 15 years. It could take 50 years. Is that correct? Finally, I wanted to ask you on the cost growth, just reading your explanations here that you are doing in the quarter developing online services. I just wanted to ask you, is there some investment? Is it a project ongoing behind this? If so, could you explain a little bit more what you're doing? Or is this just maintenance? Those were my questions. Thank you very much, Per. I will take the three questions in the opposite order. Regarding the cost items you refer to, it is actually that we have changed the security login function of our internet bank, and that meant that other administrative expenses went up in Q4. There is also always a seasonal effect in Q4. But if you compare the normal seasonal effect between Q3 and Q4 in history and compare it with this year, Q3 to Q4, you will see that the increase is a little bit larger, and that is explained by this implementation of a new login facility for our internet bank. On the second question, U.K., how big? Well, as you know, we do not do any budgets or so on, but I think in the press conference and what we have communicated in the report and also as you have seen the changes we are now doing in the organization in Great Britain in order to facilitate the expansion. Of course, for us, we think Great Britain is a very good market for us. The distance between our level of satisfaction when it comes to customers' satisfaction and the others is at its greatest in Great Britain. We have more satisfied clients in all our home markets, but the difference is much greater in Great Britain. So in every respect, and also if you see the performance of the U.K. operations and you see credit loss levels, et cetera, in every sense, for us, it is a very positive experience. Therefore, of course, we think it is a good idea to do whatever we can to facilitate the expansion. We also have said that we had 62 branches at year-end, and we have already, so far this year, got 8 new locations with branch managers already appointed. But we do not want to give out any sort of number because we simply do not know. It is a local decision for the management in the U.K. to decide how to go about it. But definitely the signal, as I said, is clear that there is going to be a lot more branches this year than last year. How great can it be? Well, we got the question, could it be larger at any point in time than Sweden? Theoretically speaking, if you have a very long timeframe, it is hard to see why not. It is a larger market. It has very good characteristics for a bank like ours with relationship banking, and the competition is moving in the other direction, more process-oriented, centralized organizations and so on. Good margins and a high level of education, a very good segment of the sort of the segment we are looking for, the top 40%, 35%, 40% cash flow type of clients. So yes, we are optimistic here. You talked about the drop in deposits, if I understand you correctly. I did not quite get your question. We have one drop, as you have seen in the U.K., which is, of course, because of technical matters, because we have moved the responsibility for the short-term funding from the U.K. operation to our central treasury, and we say that in the report. That means that short-term deposits coming from the institutional market has moved out of the figures you see for Great Britain. But that is the only thing that I could think of. Okay, thank you. The next question comes from Mr. Nick Davey, UBS. Please go ahead, sir. Yes, good morning, everyone. Thank you very much for the call. It is Nick Davey from UBS. Just three very quick questions, if I may, on NII. The first question, just very briefly, if you could talk through the divisional contribution from other, so I suppose group treasury, around 300 SEK for the quarter. If you could just talk through the sort of key drivers there and the sustainability, because I am looking at your slide 6 from today's presentation. Obviously, I think your message here is obviously the other portion of the NII contribution is very low. So I am just trying to match the two and just kind of get a feel for how sustainable that other NII is in the coming few quarters. The second question on NII is just to refresh the sensitivity to rising rates. I think you said in the previous quarter it was around SEK 2.6 billion to deposits and equity from 100 basis points of hikes. It looks like there is around SEK 100 million of deposit margin erosion in the quarter. Is SEK 2.7 billion the right number for 100 basis points of hikes? If you could again, just sort of tie that in with what your outlook is for the treasury. Then finally, just on the international division, which you flagged, clearly volumes are contracting relatively quickly just in that small international division, I think down 30% since Q1. If you could just give us an update on your targets and your views for that division going forward. Thank you. Thank you very much for those questions. Yes. If we start with the first question, you have in the report a segment that is called Other, and here you can see the functions that comprise the central treasury and also other central head office functions. The question you rise is the net interest income that you see here, is there anything extraordinary since it is placed there and not in the operational segments? The answer is no. It has to do with the internal pricing system. We price everything from the central treasury to the segments and to products. We charge on the terms of being the self-cost of the bank. But of course, when you have such large movements in interest rates as we have seen, it takes some time before the true funding cost of the bank at any point in time gets out to the product result. So in effect, if you do not have any movements in interest rates going forward, you will see that Other will go down and then the operational segments will go up. So there is nothing funny, no speculation or anything like that. Then in the slides, which I just described in this telephone conference, then we have an analysis of the changes in net interest income and where we have divided net interest income into different products. As I mentioned, 1.2 million of funding margin we have, if you compare it with previous editions of this slide, we have moved from other to lending. That has to do with the part of our lending that is funded from external funding through the treasury, we have used the true funding marginal as the starting basis. For the lending that is funded by deposits, we have used STIBOR as the division when we divide between interest rates margins on lending products and deposit products. Then you asked also about what will happen when interest rates moves, and we have said that in the last year, we have lost SEK 3.4 billion when it comes to decreased margins on deposits in Sweden. It is easy to calculate that if we would have the same interest rates level as in Q4 again, or when that happens, all things being equal, net interest income would go up by SEK 3.3 billion-SEK 3.4 billion. On top of that, you also of course have a positive effect on what happens with equity because we have not hedged our. If you take the deposit side, I have learnt that some banks have used that as their long-term funding, and they call that a hedge. What happens then is, of course, when net interest income goes up, nothing happens. But for us, when net interest income goes up, we have a positive effect both on deposit side and on the equity, because equity is going in as a short-term funding in this calculation. Then you asked about Handelsbanken International, and that the volumes have deliberately been taken down. Behind that decision was that we have felt that we want to place all our resources in really the core part of our business. When syndications and other kind of deals we have done in Handelsbanken International that is not linked to our home market clients, we have let those volumes expire. So you are absolutely right. Volume has gone down. It has affected net interest income by SEK 91 million. Going forward, most of this decreasing has been done. It is only fine-tuning now on this stage. So one wouldn't expect this to be continuing decrease, if you see what I mean. I do. Thank you very much. That is all very clear. Thank you. The next question comes from Mr. Jacob Kruse from Autonomous Research. Please go ahead, sir. Hi, Jacob Kruse from Autonomous. I just had three questions, I guess. The first one, just on the net interest income, to confirm, so in your net interest income number, there are no positive effect of the crisis as we've seen in some of the other banks, hedges that will roll off or other similar effects? I think you already said it, just to confirm. Secondly, on the credit side, I just wanted to see if you could talk a little bit about your expectations for loan loss provisions going forward. Do you consider this level that you see in the Nordic countries to be an elevated level given your books and given the market, or should we expect some deterioration in 2010 or 2011? Lastly, on the funding side, I just wanted to ask if you could give some indication of where you view yourself on a net stable funding ratio perspective. I think there's been very little guidance, but KBC so far came out with 80. If you could comment on roughly where you stand as the rules are currently formulated. Thank you. Thank you. Yes. On the first question, yes, you're right. We have not used our deposit side or our equity to hedge, so I can't see any positive effect from the financial crisis. Other than the obvious fact that, of course, we are very happy that we enjoy the lowest relative funding costs of all our peers. That is in the relative sense, of course, important, and also, of course, in the relative sense that the difference between a bank that is not in so good shape and a bank like ourself has. That difference has increased a lot when it comes to the funding costs. So in the relative sense, that's a positive, of course. Credit losses. From the figures you see here, credit losses are going down Q4 compared to Q3. We are now at 18 basis points. If we look at impaired loans or bad debt, the ratio has also decreased for the year. We are now at 21 basis points. If you look at migration, it was a very small movement in the quarter, but there is no sign in any deterioration. Also the internal risk reporting we got is moving in the positive sense. So there is nothing in the figures, as one can see, of any evidence of any deterioration. Then, of course, one can always speculate what will happen with the general business cycle and so on. But from the figures we see, we see no signs of any deterioration. It's going on the positive side. Then you asked about new liquidity rules and net stable funding ratio, and I think you're referring then, of course, to the Basel proposal of December 17. It's short-term measurements there, the 30-day measurements in a stress test. I don't anticipate any problem with meeting that, although no details, as you know, is put on the table yet. When it comes to net stable funding ratio, it's the same. We are in a very good position. There might be technical things in this because as the proposal now stands in the liquidity reserves, you are not allowed to count unused covered bonds. As you know, we have quite a substantial amount of that. We have got over SEK 250 billion in unused covered bonds, which is, of course, a very good resource because we have a very high demand on covered bonds, so it's easy to issue that. We have that as part of our liquidity reserves because we can always convert that into immediate cash by issuing it and have it as collateral to the Swedish Riksbank. But in the new rules as they stand now, they're not included. So probably one would do some alterations of the composition of the liquidity reserves. But apart from that, I think before all details is concluded, I think to the best of my knowledge, we have the best situation of all our peers. So whatever any cost will be associated with this, I would anticipate that to be lower in Handelsbanken than in any of our peers. But as you said, the details are not 100% clear now. Okay. Thank you. The next question comes from Chintan Joshi from Nomura. Please go ahead, ma'am. Sorry, that is Mr. Chintan Joshi from Nomura. Good morning. I have one question on U.K. and then a few follow-ups. On the U.K., can you tell me what do you think in terms of funding the expansion? The U.K. loan-to-deposit ratio is over 400% at the group level. If I even adjust for the mortgage bonds, the loan-to-deposit ratios are about 145%-150%. I just want to know what you think in terms of a sustainable funding model for this expansion, I guess in U.K. in particular and just generally. The clarifications are on your sensitivity of net interest income to increasing interest rates. You highlighted the areas how it would grow. But it would be great if you could give us a sensitivity for a 1% increase, if you could. Then to clarify on deposits, it's a 9% drop in deposits that I see. If you could just repeat where that drop is coming from. Thank you. Sorry, could you take the last question once again? It was unclear to hear here. There's a 9% drop in deposits sequentially. Just wanted you to highlight why that is. Thank you. When it comes to the first question on funding in the U.K., as you may know, the FSA has put out rules that point out that it should have self-sufficient funding. But also said that if you are a branch, which we are, a branch operation, it is also possible to get a waiver from that if you have a central treasury and you have rules in your home country, which is then approved by FSA. So we have applied for this waiver, and now FSA has to look into the Swedish FSA's coming rules on liquidity in order for the British FSA to say it is okay. That is how we operate. We operate through a central funding. What happens if we do not get that exempt? Well, it is very undramatic because what we do is that the portion of our liquidity portfolio where we hold bonds denominated in British pound sterling, we will then place instead in the U.K. physically. Also the part of funding that we do from Stockholm in British pound sterling, we will filter through our operation in the U.K. So there will be no obstacles. Then to your more fundamental question, which I read as, is there any obstacles in our growth because of funding reasons? We really cannot see that. With our funding structures, with covered bonds covering our mortgage business, and apart from that, very handleable deficit in the rest of the bank, we cannot foresee any such problem at all. Of course, the important thing here is that you always have a liquidity planning, making sure that whatever happens, you can fund the cash flow that you have committed your balance sheet to. Structurally speaking, it is also interesting to see as a branch office grows older, deposit comes on. Typically, when a branch starts, they start on the lending side and then comes deposit. So this is something that naturally, over time, there will be an increase on the deposit side. Coming to net interest income and the interest rate sensitivity, I think that as I said, I propose that for you to do that calculation, you look at the interest rate levels we had in Q4 2008, and you see the interest rates levels that we now have had in Q4 2009 in the general interest rates. You know that SEK 3.4 billion has been the reduction of the net interest income because of margins on deposits. Then on top of that, you can see that our equity is somewhat above SEK 80 billion. If you put that into an Excel sheet, you could easily toss around the figures and get some sort of feel of it. Then you also had a question on the deposit side. Mikael, you have got some figures here. Yes. You talked about the decrease in deposit volumes in the balance sheet, I guess, and that is related to Handelsbanken International and short-term funding. If you look in the fact book, page 15, you see that normally range between SEK 20 billion and SEK 80 billion, and it was actually quite high in the third quarter, and it was down again in the fourth quarter. It is really Handelsbanken International that explains that volatility. Thank you very much. The next question comes from Ms. Fiona Swaffield from Execution Noble. Go ahead, ma'am. Hi, good morning. Can I have a follow-up on net interest income? On slide 26 there is a reduction due to lending branch offices. I do not know if that is due to the mortgage issue, the 89, or could you just talk a bit more about margins? I think you say in the statement mortgage margins are established, but there was obviously this issue of repricing of the credit margin. Have we come to the end of that? The second area was lending volumes. Do you think you can grow lending volumes in 2010? What is the outlook, particularly on corporate lending? Just so we can get a feel for the drivers of net interest income. Thanks. Thank you. Yes. On slide number 26, you see the lending in Sweden and minus 73 here. We also talked on that briefly in the report, and it has to do with the fact how the mix has shifted and volumes and demand from corporates on existing lines, drawdowns, and also on new credit has gone down. While on the other hand on the fee side and so on, there's a positive impact because the demand for credit promises, credit facilities has gone up. On the contrary, if you see on the lending side, volumes in Stadshypotek on the mortgage side has gone up. Corporate lending down, private mortgages up, and since the margin on private mortgages is less, it means that in nominal terms, interest rate goes down. This is not necessarily good or bad thing from a shareholder perspective because the return on equity and the need for capital, of course, is so much less on private mortgages. Volumes going forward, I think it has to do very much with what you think about the general business cycle. As of year-end, we haven't seen any great new demand from corporates, as you've seen from the figures. Having said that, I think when you look at Sweden, it's true to say that there are positive signs and of course the general expectations for the growth in GDP, et cetera means that investment proposals could be coming forward. But it's nothing that at all could be seen in the figures here. We are taking market shares, as you know, and we will of course take in any good clients if they hold the right quality. We are happy on that. That's the most I can say on volumes going forward. Could I just follow up quickly on the credit on margins? Regardless of mix change, there were corporate margins. Are they starting to stabilize? Has the repricing already happened? Margin has. Yes, I think it is true to say that they have stabilized. They came down, as you know. First they went up sharply after Lehman, then they came down, but not, of course, to the level pre-Lehman. Then just since year-end, if you follow, for instance, the iTraxx, there is an interesting trend that the iTraxx, as you have seen, has gone up. So right now it is a bit hesitant, really. One could ask, are margins now on the way up or not? Because the whole funding situation, of course, of European banks and what is happening now is something that, in my mind, would have a direct effect on the demand for margins. Also, I think it will be very interesting to see. As you know, some of our peers have funding costs when and if they can fund themselves in longer duration, which is, of course, a lot higher than the ones that we have. For a five-year bond, you maybe are talking 1%, 1.2% or something like that. And of course, that has a very important impact in an environment where the liquidity rules in the future say that you should match fund this to a much larger extent than the situation today. On the household side, as you say, there has been stable margins on mortgages. So you cannot really see any trend here. Thank you. The next question comes from Mr. Aron Ibertsson from Goldman Sachs. Please go ahead, sir. Yes. Hi there. It's Aron Ibertsson from Goldman. Just one question actually on capital, if I may. Your core Tier 1 ratio is now higher than your total capital level was three years ago. I am just wondering because everything in the Basel III consultation paper and everything suggests that the demands on core capital is going up, but nothing suggests, as far as I can tell, the total capital demands are going up that much. What I am trying to understand is what role does Tier 2 and Tier 1 capital as well, I guess, play in your capital structure at the moment? With 11%, 12% core Tier 1, I do not really understand why you are keeping as much Tier 2 and Tier 1 capital. I realize it's a long-term question, but it would be interesting to hear your thoughts on that topic. On the same topic, I would like to ask about dividends. Considering the limited or nonexistent growth in risk-weighted assets, your continued profitability, should we expect dividend payout ratios to move up towards maybe 70%, 80% going forward? Thank you. Thank you very much for that question. On the question on total capital, I think it's very important to understand that, yes, there might be regulations about minimum capital and so on, but when it comes in terms of funding and those buying our bonds, of course, they are very happy to see that we got a total capital coverage of 20.2%, because for them it does not matter whether it's Tier 1 or Tier 2 or equity or what it is. The important thing is that all of the 20.2% is really defending their lending to the bank. Of course it has an important impact. When we look at our capital, as you know, we have the range of 9-11 in full Basel II, and that's our own view of what we need. That's based on stress testing of our portfolio, and there has happened nothing in this downturn that makes us have any reason to change that. The portfolio and credit situation is if anything, better than our models would predict. Then, of course, the reason why we have now 14.2, and in the short term, I am happy with that, is that we get that back in terms of cheaper funding. We've got the lowest funding costs of all our peers, as you know. Then you have, as you said, new regulation may be coming here, and I think the situation here will be much clearer towards the end of this year, I expect that. Then one could address to see how much capital one should have going forward based on those regulations. We have always said that first of all, we want to make sure that we got the capital for all the expansion possibilities that we want to pursue. If there is any capital left at the end of the day of that because of our good earnings generation capacity, we will of course be happy to distribute that to our shareholders, either as dividends or buybacks or whatever. But in this situation, the financial turmoil is still prevailing, and it is a good investment for us to have this capital situation. We see good opportunities to grow in Great Britain, as you have heard. Then we have to see about the regulations. Then in a normal situation, we of course will address the issue. Dividends, no. There has been no change whatsoever in the payout ratio ambitions or policy of the bank. No, it is not that we have any payout ratio goal, although as you have seen in the past, it has usually been around 40%. This year it is a little bit higher. But there is no change in that. Okay, thank you very much. Can I just clarify then, just very quickly. Is your impression then, because that had not been my impression, that your debt investors are quite focused on your total capital ratio, rather than primarily focused on your equity and your core capital ratio? Do you think your funding costs would increase meaningfully, for instance, if you reduced your Tier 2 capital by, say, 2 percentage points or something like SEK 10 billion-SEK 15 billion? I think you cannot be too theoretically mathematical in these issues. The only thing I can say that we are at 20.2%, and we enjoy very good funding costs, and always when we want to issue, we are very well-received in different markets and so on. Then you can ask, could you take that down to 18% or 16% or 15%, or where should it be? And, of course, you are absolutely right. This is very much on the high side. As I mentioned, I think this might be the highest, probably the highest in all of Europe, of all universal banks. I think so. So there is, of course, room to take it down. But in the immediate future, and as of now, we have got good use of it because it has been positive for our funding. Okay, thank you. That's very clear. The next question comes from Jan Wolter from Deutsche Bank. Please go ahead, sir. Yes. Hi, Jan Wolter here, Deutsche Bank. A couple of follow-up questions, if I may, from the press conference earlier today. First of all, is it a reasonable ambition for the bank to continue to term out debt? That's question number one. Number two, you have around SEK 966 billion of issued securities on the balance sheet, and I wonder how much of that matures in the next 12 months. Thank you. Yes. The first question, I didn't really grasp that. You said? Is it a reasonable ambition for Handelsbanken to term out debt to prolong your liability side? So, take up longer and longer maturities on the debt that you issue. Going forward, you mean? Going forward, yes, of course. I think that question would have to do very much with what comes out of the Basel II rules, really. Because we do not know the details yet, and also the Swedish Financial Supervisory Authority. So I think it is a little bit hard to say. We have a very good maturity situation, and as we touched upon during the press conference, the way we go about it is that we plan the total balance sheet and look at all our commitments and what could happen in a stress situation. And then we have got also our liquidity reserve and so on. So overall, we are in a very good position. Then it is more also a matter of tactical considerations, because I think we have a rather interesting market situation coming up with a lot of banks and money needed to be funded in the European banking markets. If you sum up all the money that is taken out from central banks, provided by central banks today and also state guarantees, and combine that with the liquidity ratio regulation that is now rolling in, it is not so hard to picture that there might be a demand for higher prices and higher margins for that money to come about in the market. Of course, those kind of technical considerations is always important for our treasury function when doing the operational work. If we disregard regulation for a second, how do we look at our match funding and our situation? Do we need more liquidity reserves? No, we got too much liquidity reserves, because we get so much deposit and so on. But we do not need to be at all as liquid as we are. The match funding is very good. When we look at ourselves, we do not see any such need. But there might be tactical and operational alterations in the medium term. The SEK 969 billion that we are looking at, you ask for the maturity of that, and you will see this in our annual report. This is something that will come out when we print the yearly report, and that will come in the- About two weeks time. About two weeks time. You will have a table where you can see this. Okay. Thanks a lot for that. The next question comes from Mr. Johan Ekblom from Bank of America Merrill Lynch. Please go ahead, sir. I think all my questions have been answered. Thank you. The next question comes from Mr. Martin Durrell from PC Investors. Please go ahead, sir. Two questions. One is on asset quality and on Sweden primarily. Sweden is a very export-sensitive country. If you look at the Swedish krona over the last period, it has strengthened quite a lot, and it is quite fair to say that this is a trend that could continue further. How would you see that could affect your asset quality given that you are quite exposed to SMEs? The other question has to do with funding again. You talked about the relative attractiveness of Handelsbanken and Handelsbanken's bonds. That was very much the case during 2009 with your competitors having very weak balance sheets and strong questions about their asset quality, especially in the Baltic region. If I look at your competitors now, most of them at least have done rights issues and the questions about the Baltic asset quality seem to have calmed down the market quite a lot. What I am asking you is, going forward now, how do you see the relative advantage of Handelsbanken in the bond market? Well, I think you should ask our peers about their individual situations. I think if we look at general and lump all the peers together, I think it is absolutely true to say that we are in a relatively very good position. If you look at CDS spreads in Bloomberg, I did that yesterday, I think we are talking 5 basis points to some and 8 basis points to another in terms of 5-year senior bonds, and that was the very best of the others I was looking at. If you look at those that are not so fortunate, you will see rather big differences, and we are talking here large numbers. Then it is anybody's guess what will happen in the future. I personally think that the division between a good bank in the future and a less or more risky bank in the future will increase in the medium term. That is my personal view. In a situation where there will be a lot of demand for funding in the market, I think it is a good thing to have a strong position, and that will come out in better prices. It is anybody's guess, of course. On the asset quality? The asset quality. There is nothing in the figures we see of any deterioration that you could see. Of course, when you talk about the Swedish currency towards the euro, it's a rather recent event. I mean, that would then take time. Do I think that will be a material effect? No, I don't think that. When I look at the structure of our clients and the shape they are in and so on, they should be managed to cater with such a situation with any sort of normal currency fluctuations. You have to go to more profound developments than if you should look into such risk, I would say, with general downturn, a sort of business cycle scenario. For instance, if there will be another downturn in the U.S. and Europe and so on. I think there are good signs of the real economy. The problems really lies more in the financial economy. My personal view for what it's worth, experts, but when we saw Dubai, for instance, it seems like the real world sort of thought, "Well, should we go down again now or what?" But it continued with improved sentiments. The financial system, of course, has a lot of homework to do before coming back to ordinary states. I think it's interesting to see now that the iTraxx since year-end actually have moved in the wrong direction. Okay. Any more questions? Yes. The next question comes from Mr. Per Löfgren from Morgan Stanley. Please go ahead, sir. Yes. Hello. Sorry. I just have a follow-up question on the very first question that we had on this call, and this goes back to the deposit drop. Mikael, you kindly guided us there to look in your fact book to see this drop that is coming from the international division. I am just going to repeat my question just to make sure I understand correctly. I was wondering, is the drop that we see here in deposits and the whole moves of the deposits in this division, is that a reflection of how you read the liquidity proposal from Basel as of December 17 or not? No, it has nothing to do whatsoever with the Basel proposal. No. Okay. Thank you very much. The next question comes from Mr. Henrik Schmidt from KBW. Please go ahead, sir. Hi, Henrik Schmidt from KBW here. Can I ask you to maybe speculate a little bit about what the regulators' proposal that there might be introduced a maximum LTV on new mortgage lending? What kind of impact that would have if people would be forced to start to amortize? What impact does that have on loan growth and credit quality? Also maybe put that into perspective with the higher interest rates, which I think is expected to be at 1.5% and 3% by the end of 2011. Yes, I really don't want to speculate on what Finansinspektionen or authorities might come with here. You have to ask them. In general, for us, will this be any sort of problem? No, I don't see that because we are very conservative when it comes to our credit policy, and you really must have a good cash flow situation and so on in order to be able to lend on your house. I can't see that. It's of course for a client that has a good income and so on, there will always be a possibility of borrowing money if you can show that you got repayment capacity, and then you don't need the house as well, so to say. I can't foresee any problem for ourselves here. In the general market, of course, there has been a lot of discussion on whether it's not so that mortgage lending in general and house prices in general has gone too far, as you know, is that an overheated market and so on. I can only say that from a bank perspective and from our bank's perspective, especially, it's very hard to foresee a situation where you would lose money on mortgages. We have not lost money since we bought Stadshypotek in 1997, where we haven't lost anything. On the contrary, we got money back on old loans. You have to really picture a Japanese deflationary scenario going on for many, many years in order to have a situation. It also has to do with the personal security system, social security system in Sweden and so on. It won't be any question of credit quality here. What about the volume growth? Mortgage loans were up by 9% year-on-year. Yep. I suppose with that kind of regulation, you probably don't get any house prices moving up. No. In such a scenario, I think, of course, the general market increase would be less. As you've seen from our figures, we have actually lost a little bit of market share in mortgages in Sweden, and that's simply because we turn down people that should not have the loans they're applying for. Our market share last year on Swedish mortgages went down slightly. I think you got a point here going forward. Could we end up in a situation where basically corporate loans may be down deliberately or not, and then mortgage loans is kind of flat-ish, best case scenario? We don't do any budgets, but as I said, on the company side, typically in a business cycle like this, although one has to remember that this was a very special business cycle, normally you would see with GDP growth that are expected by the market that one would see investments start coming on during 2010. It would be strange if that would not happen. Then, of course, the demand for lending if you look historically, would come up. On mortgages, of course, there could be impacts from new regulations and also maybe from the fact that the increase in mortgage lending has been very high. All right. Thanks. The next question comes from Mr. Fridolf Berends of Arctic Securities. Please go ahead, sir. Yes, thank you. I just go back to your risk weights, which you show here following the IRB standard. I just wanted to make sure I understand it correctly, because you're still on standardized method. What would the implication be if you went over to advanced? Further, do you give a split for the risk weights for your property lending, also regarding Sweden, Norway, Finland, for instance, individually? Thank you. Thank you. On the last question, you will have look forward to our Pillar 3 report where you get a lot of good details on our portfolio and PD values and so on. So you should look out for that. When it comes to the advanced method, you're absolutely right, we're on the standardized method today. We have applied for advanced method. We are waiting for the FSA to come with their answer to this. There will be a positive effect, but having said that, will that affect what the kind of capital we think we need? No, it won't. Because when we look at the capital we need, we look at our portfolio and we look at capital, and we do stress testing. Regardless of whether the advanced method or there is any floor rules or whatever, of course we should always be above the minimum legal requirements. That goes without saying. But apart from that, we are looking on the capital we need from a true operational point of view and for being very conservative when it comes to the risks we have on the asset side, and that does not change with the advanced method. It is the same answer that I would answer to the question, how are you affected now when the floor rules are prolonged for 2 years? It is exactly the same. We are not affected at all. We do not run the bank on the floor rules. We will always be above the minimum legal requirements. That is never a question for us. The question is how much capital do we need and want and feel is a good security level, being very conservative. If I may just have a quick follow-up. As you state, according to the current definition, a Tier 1 capital ratio of 9%-11% is still judged to be a level, et cetera, meaning that is then related to the floor or transition rules, and we will maybe get a new specification moving on to full implementation of, for instance, advanced method and so on. No, the goal is set in full Basel II terms. With the standardized method or advanced, or is it irrespective of that? It is based on the standardized method. Okay. Thank you. The next question comes from Mr. Andrew Lim from Matrix. Please go ahead, sir. Hi, it's Andrew Lim from Matrix. I've got two questions. First of all, following on from the previous question about deposits. I still don't quite understand why you've lost so much deposits from your international division. Could you provide more color there again? Secondly, with regards to your NPLs and loan losses. Your NPLs, your non-performing loans have stayed at roughly the same level absolutely now for about three quarters in a row, and you've been building up loan losses to the extent that your coverage ratio has been ticking up for the past two quarters now. It seems to me that at this rate, you're soon going to be at a coverage ratio consistent with the longer term average. Would it be the case that soon you'd be not increasing your provisions much further? Sorry, I didn't get the second question. That was the reserve ratio you're talking about? Yes, that's right. Yeah. Your coverage ratio. Yeah. Are you near to a level that you would be comfortable? It is the wrong question. It is like saying why is the Earth only flat and not round? The reserve rate is what it is, but it does not say anything really, because when you take the bad debt really, the definition of bad debt or impaired loans you do not at all look at the securities behind the collateral that you have behind that bad debt. That means that the reserve rate can go up and down, but it does not say anything about the real risks you have. So the coverage rate or reserve rate is nothing that we look at at all when we compare or operate the bank. It so happens it goes up now, but it does not say anything about the risk situation. We always take and reserve whatever we can. I have really only got one discussion with our auditors, and that is that they say it has to be some sort of risk before we reserve, but we always have as a principle to take whatever we can to reserve as soon as we see risk. Coming back to the other question, deposits on the international side. When it comes to short-term deposits, it is actually going very much up and down or if you are on the corporate side, which you are in Handelsbanken International. It is also affected a little bit on the funding structure, what you pay for short-term deposits. If you pay a little bit more, you get a lot. If you pay a little bit less, it walks away immediately. Of course, with our very good funding situation, we never want to pay as much as some other banks would be prepared to do. We do not have to pay that much. So volumes on the deposit side goes out and comes in a little bit, depending on that. You shouldn't look at it structurally. It is nothing structurally that has happened apart from the fact that, yes, non-core lending we have deliberately moved out of. Are you saying then that your deposit situation internationally is symptomatic of the fact that your competitors are paying a much higher rate for deposits, so you suffered from that? No, I am saying that on the wholesale market, including corporate deposits, you always, of course, take the cheapest money. Since we have such a good standing, we are in the good position of getting a lot of money with paying very low rates. That means that for some totally non-strategic, non-core deposit coming from clients that are just placing money overnight wherever they want from an overnight basis, that kind of money is just bulk. It does not say anything about the underlying business. It is like taking money from the institutional money market. So we do not see any sort of problem with that. Okay. Thank you very much. The final question comes from Mr. Chintan Joshi from Nomura. Please go ahead, sir. Hi, just a quick follow-up on your risk ratings. If you get approval for AIRB, how much reduction in risk-weighted assets could we expect? We have moved to the IRB standardized, as you know, almost all volumes. Now going to advanced, one would expect the numbers, of course, they will come down, but it depends also on how the Swedish FSA will judge how much the figures will be taken down. I think the important takeaway is don't be too mathematical about this, because in effect, it's of course positive for us. We get better numbers, but we run the bank on the capital we have and the portfolio we have. You shouldn't see really any dramatic changes in the need for capital or so on because of this. It's good. It's another quality mark for the bank when we get this. We have put a lot of resources into the models. We have got a lot of good feedback from the authorities on the work we have done being very excellent in how we have gone about these measures. It's good. It's good for also our stress testing and so on. It's good to be advanced, yes. But don't see it, please, as a way of taking down capitalization for the bank. We won't use it in that way. Thank you. Okay. Thank you very much for attending this conference. As usual, you are most welcome to contact us for any sort of follow-up questions. Please call Lars Kenneth Dahlqvist or Mikael Hallåker on any more information that we can provide to you. Thank you very much, and goodbye.