Svenska Handelsbanken AB (publ)

Ulf Riese - CFO Mikael Hallåker - Head of Investor Relations Lars Höglunds - Head of Debt IR Jörgen Olander - Group Head of Accounting

Omar Keenan - Deutsche Bank Anton Kryachok - UBS Johan Ekblom - Bank of America Matthew Clark - Nomura Jacob Kruse - Autonomous

Good morning everyone and welcome to the Conference Call for the Second Quarter 2015. Joining me today I have Mikael Hallåker, Head of Investor Relations; Lars Höglunds, Head of Debt IR; and Jörgen Olander, Group Head of Accounting.

And the slides used for my presentation are as usual available at handlesbanken.com. On Slide number 3, so many times before we show the value creation of the bank.

This was yet another stable growth quarter adding to the long suit of quarters since the start of the financial crisis back in 2007 where equity per share including dividends has shown an annual growth rate of 15%. And this is in spite the fact that the also the second quarter offered its challenges even more negative interest rates in Sweden and elsewhere, continued weak loan demand in Sweden and towards the end of the quarter the situation in Greece again became very turbulent which affected financial markets and also the general business climate in Europe.

In this environment the Handlesbanken business model has continued to perform along these very steady past. We now have 837 branches in the bank and they have continued to face and handle their individual challenges in all different local markets.

And when you sum up all of these millions of local decisions the result is this continued steady growth in value creation for our shareholders. Then on Slide number 5, you can see the profit and loss account for the second quarter compared to the first quarter of 2015.

Operating profit increased by 6% quarter-on-quarter and was the highest quarterly result ever. Net interest income improved somewhat by 1% in the quarter in spite of the negative impact of even more negative interest rates in Sweden.

In UK and the Netherlands the improvement was 8% and in the other home markets except Finland we saw a marginal increase while Finland was flat. Year-over-year the increase was 4% for the Group.

Then net commission income that increased by 2% in the quarter and 11% year-over-year. Again higher asset management fees and also higher fees from the card business were the main drivers this quarter.

Net gains and losses on financial transactions an item that typically is quite stable in Handlesbanken, just as we wanted to be improved by 5% quarter-on-quarter. Other income this quarter increased due to annual dividends from shareholdings.

And all-in-all revenues rose by 5% in the quarter. Personnel costs rose 1% due to an increased number of employees in our growth markets.

Total costs were up 3% mainly due to seasonally higher activity in the second quarter compared to the first. Loan losses were 8 basis points a slight increase compared to the first quarter.

The credit quality in the portfolio remains stable where impaired loans fell to 24 basis points of total lending and credit risk migration was neutral. And in total, net results for the quarter up 7% and return on equity for the group increased to 14.5%.

Then on Slide number 20, we show how net interest income developed in the second quarter an improvement by SEK103 million compared to the first quarter. All-in-all deposit margins dropped by another SEK188 million in the quarter and the net interest income related to the financing effect of the equity declined by 38 million.

In Sweden deposit margins fell by another 200 million whereas operations outside Sweden saw small pickup of 12 million. Increased deposit volumes in Sweden gave a negative impact of 8 million while total land margins declined by 11 million we have an improvement of 77 million in Sweden that was offset by lower lending margins mainly in Norway.

In the UK lending margins improved slightly also in Q2. In Sweden the improvement was mainly driven by mortgage margins being up 3 basis points to 104 basis points.

Increased lending volumes added 90 million to net interest income with 62 million coming from outside Sweden. We have some positive currency effects, day count effect and also contribution from the bank's part but more importantly however the lower need for market funding contributed strongly to the sequential improvement in net interest income.

I will come back to that. But first if we then go back to Slide number 6, you can see that quite a dramatic impact in a longer term perspective of the lower and now even more negative interest rates in Sweden.

At least the second quarter has shown this very clearly I think. The average cyber rate in Sweden dropped another 26 basis points during the quarter bringing it down to an average level of minus 19 basis points.

Just over 15% of our deposit volumes in Sweden carried some interest in them of the quarter. And at the same time we still have not charged any Swedish customers for deposits.

Also the interest income related to the equity has of course decreased further in the quarter. All-in-all if you compare to Q4 2011 the negative impact of falling interest rates in Sweden was SEK1.6 billion in the second quarter or 6.4 billion on an annualized basis.

Then moving to Slide number 7, we show the development on net interest income for the group and here also in a longer perspective since 1999. In this slide you can see that net interest income in the second quarter was in fact the best ever for the bank, in spite of the dramatic interest rate development you saw on the earlier slide.

In fact if we again just compare with Q4 2011, net interest income on a group level was 662 million or 10% higher in the second quarter of 2015. And still the negative impact from lower rates in Sweden in the same period has been 1.6 billion as I just mentioned.

The explanation I think is clear when you look at the slide. First of all improving lending volumes and margins in Sweden have added SEK1.3 billion limiting the negative impact on Swedish net interest income all-in-all to be around SEK300 million lower this quarter than compared to Q4 2011.

But then our home markets outside Sweden of course make a big difference. Net interest income from these operations grew by more than 1.1 billion on a quarterly basis in the same period.

I think this illustrates very well the value creation that our model is able to produce, even headwinds like the current extreme interest rate situation. Then on Slide number 8, we show how the decreased funding has impacted net interest income this year.

The bank has continued to attract huge deposit volumes. Household customers in all our home markets have added 34 billion compared to one year ago, in spite of the fact that we do not pay interest on most of these deposits.

These deposits from our core household customers are to some extent useful for funding and as you can see the volume of issued bonds has indeed decreased by 37 billion in 2015 compared to 2014. Quarter deposits have also increased they have increased by 118 billion in the same time.

But here we take a very cautious view on how to use these deposits. And as you can see our position with central banks and our liquid bond portfolio has indeed increased by 97 billion as a result of this very large corporate deposit inflow.

In terms of issued bonds we have focused so far this year on the recovered bonds rather than senior bonds. The reason for this is found in the bottom table.

Here you can see that still our near rate show non encumbered assets to unsecured funding has increased from 229% to 242% in one year. So overall the protection for senior bond holders has been further strengthened.

And when you add up all of these measures even stronger liquidity and better incumbent situation you can see that these funding effects have actually added approximately SEK700 million to net interest income in the first half of 2015 compared to the same period last year. Then on Slide number 9, we show the development of our fee and commission income which is encouraging especially in of course in these low rate environment.

As you may recall this is an item where we have the actively and structurally worked on for quite some time than in the savings area and cards. During the first half of 2015, the Bank had a market share in Sweden of 26.5% of new savings in mutual funds and that is more than twice our back book share of the markets.

Fund management fees for the Group increased by 30% in the first half of the year and by 7% quarter-on-quarter, adding up all fee in the Group the improvement was 11% compared to 2014. Taking a longer perspective on our fees from mutual funds, asset management and insurance the right chart shows that in the last 2.5 years the growth has been 55%, so the trend here as you can see looks very good indeed.

Then turning to Slide number 13, you can see the return on equity for our various home markets. Here you can see UK in top second quarter with 18%, Sweden is at 16% and that’s in the quarter with even more negative interest rates.

And Norway and Denmark are between 14% and 15% and that is in spite of course the negative interest rates prevailing in Denmark. The Finnish economy continues to struggle but our branch office operation there is still running at 12% in the second quarter.

And finally Netherlands our newest and smallest home market where the underlying profitability is actually similar to that in the UK but where we’re take investments in infrastructure and more branches, resulting in total of our return on equity of 6%. Then let’s turn to Slide number 10, talking about the financial position of the Bank, which has again continued to strengthen.

Here you can see that core equity Tier 1 ratio increased to 21.3% up from 21.1% at the end of the first quarter and 20.1% one year ago. Retained earnings and of course volume migration contributed 0.3 percentage points, credit risk migration was neutral this quarter and we have lowered the discount rate this quarter for pension liability.

And all-in-all IAS 19 for pensions reduced core equity tier one ratio by 0.5%. Other effects contributed 0.5%.

Total capital adequacy ratio improved to 28.4% compared to 28.2% at the end of the first quarter and 25% one year ago. As you may recall, our targets for core capital is that we aim at being 1 to 3 percentage points above the level advised by the Swedish FSA and in May the Swedish FSA communicated that as of the end of the first quarter the Bank is advised to keep quick with the Tier 1 ratio of at least 17.7%.

The FSA has also published the models used for calculating the individual Pillar 2 add-ons instead of the standardized 1.5% that is currently used. In September 1% counter cyclical buffer will be introduced in Sweden and FSA has also decided to increase that to 1.5% in June 2016.

All this taken together according to our best assessment implies that the FSA advised core equity Tier 1 ratio for the Bank will increase and thus that the Bank is currently within our targeted range for core equity. Then looking at Slide number 11, let me comment please on the changes Moody’s announced in June for our long-term rating.

Following Moody's extensive review Handlesbanken long-term rating was indeed upgraded to AA2 and the counterparty risk assessment was upgraded to AA1. This means that the bank has a higher credit rating than all other Nordic banks and looking throughout Europe no comparable bank has a higher rating then Handelsbanken.

And if you're interested, you can study this in more detail in the credit opinion published by Moody's on June 25th. I think one interesting feature here is that Handelsbanken as one of extremely few banks actually in the whole world gets one notch uplift for corporate behavior rewarding our extreme long-term stability and our business model and the fact that for a very long time have proven to be a very different bank regardless of the external circumstances.

On Slide number 14, you can see the development in the UK which continues to be very good. The bank has now 197 branch offices including recruited branch managers for new branch openings, operating profit increased by 29% quarter-on-quarter and 44% year-on-year.

During the second quarter alone seven new branch offices were opened in the UK but at the same time average number of employees increased by 66 persons. And this means that we're also adding people in their existing branch network in order to expand business also here.

Interestingly the lending models in UK continue to be much higher than in Sweden and even though competition is certainly back in UK margins for us even continued to increase slightly in the second quarter. And as you have seen return on equity in the second quarter was just about 18% in UK, it goes without saying that we continue to be very enthusiastic about the opportunities in the UK.

So to summarize, equity per share including dividends continued to grow steadily by 15% per year also when adding the second quarter of 2015. Operating profit was the best quarterly profit ever for the bank with an increase of 6% quarter-on-quarter, this was achieved in an environment of even more negative interest rates in Sweden.

Net interest income reached its highest level ever with an increase of 103 million in the quarter. Allowing for market funding was an important driver together with higher business of our loans in our different home markets as well as improved volumes and lending models in Sweden.

Fees and commissions increased by 2% in the quarter and 11% year-over-year. And a positive trend in the mutual fund business in Sweden continued.

Return on equity for the group increased to 14.5% in the second quarter, UK reached a level of 18% and Sweden 15%. Core Tier 1 ratio at the end of the quarter increased to 21.3% and we estimate that the bank is within the target range of 1 to 3 percentage units above the level advised by the Swedish FSA.

And with that I conclude my presentation and open up for questions. Thank you.

Could I have first question just on funding and net interest income and then the second question just on capital and corporate risk weights? You've given some really interesting color around the wholesale funding cost tailwinds.

We can see that Handelsbanken's loan-to-deposit declines from about 270% to a 170% over two years, driven by deposit growth. Could you tell us how much of the deposit base is the key?

You differentiated in the slide between wholesale and corporate deposits, so just want to know if it's as simple as that. And could you help us work out how much excess funding you're carrying and if this tailwind will continue?

Then my second question on corporate risk weights. I think we're aware of the Basel IV risks but one of your peers seems to have taken an upfront increase in corporate risk weights for various reasons.

The escrow process is ongoing but also seems like the Swedish regulators looking harder at the model processes. So I guess given the Handelsbanken has the lowest corporate risk weights among its peers, do you see any kind of risks from an add on, extra add on, on the horizon

On the first question speaking as we are very-very careful to use corporate deposits for funding anything else and extremely short assets and as you can see from the slide out of the increase of 118 in corporate deposits year-on-year and 97 of that has gone into overnight placement with Central Bank. The household deposits also are much more sticky and we can use them to a large extent.

Having said that, I know that this is of course prudent because we got also very small corporate where the stickiness of course could be higher and you got large corporate where it’s very-very sort of organized. So, in the measures NSFR, LCR and that kind of regulation there is a difference, so it has some sort of impact of the ratios.

From an operational point of view the most important measure for us is of course how long can we cater for situation where we do know external funding whatsoever neither short-term or no long-term and in a situation where 10% or 20% of the deposits for some reason leased the balance sheet. And the answer is that we can cater for such a situation over three years without taking up any external funding.

So that is the kind of prudence we have and that is without any management actions. And I can get into is that will be situation of course we would take a lot of management actions in those three years.

When you’re talking about how much excess do we have? Obviously, I mean use liquidity ourselves that we got, we don’t need that kind of amount of course from a risk perspective.

So of course we have a large extra buffer that could be taken down. And I think the right answer maybe for you is that at the moment you can see from the figures that we have increased the results with SEK700 million here on a yearly basis out of the structure we have today and that is a shift so on a growing concern basis that is the level that we’re currently seeing.

But that is not to say that we don’t see more deposits coming in. Our branch offices are as you know in for instance so in new markets getting older and older and they tend to start with the lending side and then comes deposits.

You see for instance when you look at the expression that deposits of course growing much faster than the lending side. Corporate risk weights, that is of course a debate that is ongoing.

We don’t have any extract from the authorities we expect that during the long-term, risk weighting Handlesbanken as you rightly said has to do with that and the quality has then increased with each and every credit over you can say SEK1 million the branches looks at every quarter and takes immediate action if you see deterioration. And that means that the volume that are leaving the balance sheet is of less quality than the volume that is coming in, so you get an ongoing improvement in the book and that’s why you see risk rates going down.

Also of course we got a mix effect in that in Sweden corporate loans are not corporate lending is not growing but mortgages with much lower risk weights in Pillar 1 terms is growing. On the corporate risk weights I don’t have any more information that you got.

I think maybe one should look a little bit into what was served from the Swedish FSA in as an input to the stability council where they were very clearly saying that they really like the risk weighted system but they also acknowledged that sort of the debate and so on makes is very-very important that Sweden in every sort of regard is looked upon us as an extremely prudent supervisory regime and so on. So of course it’s an ongoing debate that nobody knows where it will end up.

I take home for going that if there is extreme things happening it has been said that then the extra buffers that we Swedish authorities has imposed could be somewhat reduced if you’re moving on the scale from purely risk weight to more standardized risk weights or we then leverage ratio regime but the debate is ongoing.

So I guess kind of summary to that as you don’t see in your risks from the Swedish regulated pre-amp taking the Basel IV process, at least the Handlesbanken?

I can only give the information I've got and of course it goes without saying that the whole subject has some uncertainty, you mentioned the Basel community, you can see the debate in EU et cetera and then we go to national side. So of course the rules are not finalized I think.

Just two questions please. One on capital and in the management statement you've commented that the capital ratio suffered by up to 50 basis points from the negative impact on IAS 19 accounting, which was a little bit surprising to me given that long end of the Swedish u-curve has steepened during the quarter and some of your peers have actually seen tailwinds on capital creation coming from IAS 19, not the headwinds.

Can you please remind us why you're seeing different trends? And the second question please on NII, you have commented that you've seen some margin expansion in the UK and indeed the base of NII continues to exceed the base of volume growth.

I was wondering whether this margin expansion is actually driven by the fact that customers are seeing higher prices from you, or is it driven by the fact the UK operations are receiving lower funding cost and they're foreseeing margin expansion.

On the NII question to start with, I think it's hard to say actually, I mean as I said just a minute ago I mean we indeed see a strong competition in the UK market place but seems to be all very-very different, it seems like the clients is not the matter of price, it's not that they all are taking clients because of price. We're taking clients because our extremely high service concept and relationship concept and then I can just say that the prices we see are actually giving a higher margin.

So it's hard to say but I think it might be true to say that some of our competitors which have not got such a good Moody's rating and so on of course might have another funding structure and higher input prices. I wouldn't out rule that.

On capital and pension the pension calculation is made yearly when it comes to calculating what’s called the service cost in the profit and loss statement, and we -- you can see in the annual report that we use 3% at the year end. The calculation according to regulations such that you should seek to have the long-term the same duration as your pension obligation at a long-term corporate bond rate.

The problem is that there is no such long-term bond in Sweden, so we have to use a model for that. Different banks use different models.

During the year and as you can see in this quarter, you have a calculation which goes totally through the OCI, so it's not affecting the profit and loss statement. If you see now Q1 report we lowered discount rates and we have now again lowered discount rates.

Different banks as I said have different models, if you look at the sort of numbers I see that some of our peers have higher figure, high interest rates, I don’t see anyone that has lower interest rates than we have and I see one that has the same. But really important figure is of course at the yearend we'll be able to follow this closely in the annual report.

Just want to touch a bit on the cost side, we've had a number of quarters now where costs have come in somewhat above market expectations and I guess part of it is FX driven, but maybe you can comment a bit on where you see cost income going midterm, I mean you talked previously about the potential for further improvement in the Swedish business and I guess the UK should gradually come down as the pace of investment slows. But is there any way that you can slow down cost growth and maintaining the network expansion over sort of the near to medium-term.

Yes, you're right, I've also learnt that expectations were that we should have somewhat lower costs if you look at the market, but the good news is that we have also got and even to a large extent higher income. I think that is the really interesting thing of course to look at results which understand was somewhat better than we anticipate and you can see that the cost income ratio also moved in the right direction.

The second part of your question are we happy with these? The answer is, no, of course we can do a lot and of course there is a lot of initiatives in different all parts of the Group.

And different initiatives regard between branches and so on. As a general trend you’ve seen that Sweden is putting more and more energy of course into the efficiency question since the impact is so great from lower interest rates and also the fact that core demand for corporate lending is very-very flattish in Sweden.

So for instance if you look at personnel we have gone up on average by 78% in personnel in the quarter and 96 out of those 78% is outside Sweden plus another way to say that Sweden is actually going down and the markets where we grow the UK and the Netherlands we are expanding. We don’t have any budget or any talk downs on this, it’s an automatic process and the way we look at it is of course to see the relationship between cost and income.

We have offerings since on if you look digitalization and so on there are efficiency gains that are rather powerful now in the Swedish branch offices and which means that time speed up for more of the device and relationship services while more transaction oriented tasks are handed more digitally but that is something that we don’t force our clients into but the clients chose themselves but mobile telephone banking is as if you measure it by transaction and increasing of course.

I just have two the first one was on the NII bridge the second one on your comment on capital requirements. On NII I guess specifically on lending margins, these have widened in Sweden I guess benefiting from the more enterprise that you’ve mentioned earlier.

Just wondering how sustainable is this going forward? Should we expect the tailwind from reprising to continue in coming quarters?

And on the international side, lending margins overall actually came down but I guess better margins in the UK. Can you just comment on the trends that you’re seeing here market by market?

And then on capital requirement, you mentioned in your report that you expect fees to increase from the 17.7 on the back of the higher kind of cyclical buffer and the two requirements. Can you just give us a sense as to how much you think this could increase from the current 0.5 and 1.5?

I guess your comments earlier in the call that you’re currently within your target range kind of suggests that this could be quite a meaningful increase, so just wondering whether my thinking is correct.

On NII, previous mortgages we are a price followers since our branches follow the market price and defend their clients, so that is what is typically happening. And as you can see in the Swedish markets there has been some increase, it’s not dramatic we see 2.5 basis points in this quarter and I don’t want to make any projections on this.

But it has been a development, a trend now for quite some time. And I think maybe the reflection was of the new capital rules and the risk weight floor in the Pillar 2 and so that’s what I hear from peers and so on.

But we are in Handelsbanken is very simplest branches that surprises and this is the outcome that we have been seeing. In other markets you can see that in Norway where we have the market has two very large players one ultra large and one below that and there are existing strategies so it was margins up some time ago and then it has become margins down and now it’s margins going down.

So I think you should talk to them. Again we are a price follower but that is what is happening.

You see decrease also in Finland in terms of our margins not as large as in Norway and we see small thresholds in Denmark but in the UK on the opposite we see an increase in margins. And so that's that capital, yes the 17.7 that is what they have to has said both the number at the end of Q1 and they are maybe public.

In that they’re having included a standardized 1.5% or a pension risk, concentration risk and interest rate risk in the banking books. Since then they have developed models and also actually decided on models and if you put in our numbers in that models and also combine it with a capital buffer that is coming into force, you will end up north of 18% and that's what we said in Q1.

And as you rightly say we communicate that to our best of our knowledge we are within the range with our 21.3. So I think then if you calculate it backwards I think the 18.3 that you've pointed out is some sort of number.

But yes again, we don't have the extra and we also touched upon the general debate, so based on sort of uncertainty in knowing the exact long-term number.

Just a couple of follow up questions on the funding slide. Can you just clarify the stable next funding ratio impact of the move that we've seen in the funding mix year-on-year?

I'm assuming it was negative for the NFSR, but if you could confirm whether it was negative, neutral or positive and whether that's a consideration for whether you would repeat this kind of shift and then also should we think of the kind of the ratio of increased deposits to decreased bond funding as being four to one but seems to be on slide eight, is that kind of what we should think as being the order of magnitude going forward as well, so wonder if you increased your deposits and around a quarter of that can be used to fund longer term business?

Yes, on NSFR we have communicated as we are not far from 100, it is only a small exercise to get us 100. And I can actually say that the NFSR measure is as you know very artificial if you compare it with the true for instance stickiness of different deposits, et cetera.

It's a very mechanical tool. But as a matter of fact due to the changes in our balance sheet for instance what has happened on the derivative side and so on.

I can say that actually the number has moved up not down in the sort of the last half year, so it’s not as we have deteriorated our situation, on the contrary we have a higher liquidity buffer with Central Bank, we had a even better NIA a common situation which I think is really important thing that has been forgotten in the market because there's so much other things going on but I can assure you that will return, that's a very important thing. So I'm very happy to see the NIA improving.

And we have as I said actually improved the NSFR. Looking forward I don't want to do any predictions but I can say that what you see in the slide the improvement in result that is a yearly effect, we are on a growing concern on that all things being equal that effect will continue.

What will happen with the positives and so on I don't want to speculate, I can only say that we have the most satisfied clients and we see a good influence so on. So it looks promising but I don’t want to go into any predictions here.

Could you just clarify a bit more on what changes to the derivative structure that benefited your NSFR year-to-date was, and whether this was an active kind of process for you or whether this is your passive market, moved and coincidently had a beneficial effect on your NSFR?

We don't like derivatives in the balance sheet. You have to have some expense, for instance because of the fact that we hedge all our funding abroad and when you take that since the Swedish kroner we locked it all in with swaps and it's the same with if you have got difference in interest rate in the nomination.

I think versus very balance, so on. So we look in all sorts of risk in the funding and assets that is funding and then you need to relate this.

Apart from that of course derivatives per-se may not pose any risk if you go to both sides of the balance sheet but it makes balance sheet larger and also since derivatives is hedging other objects in the balance sheet you will also get funding needs for that. We have worked very actively on that, so that has a good funding effect also in the balance sheet.

Apart from that when you look at the nominal numbers it also still happens that market value changes has made the volumes go down but that is on both sides of the balance sheet.

So in terms of what you did actively to kind of investigate the NSFR pressure, it’s just improved netting of derivatives to just to understand a bit more what you’ve done there?

Netting is one thing and if you also get out of derivatives on both sides, you will get the same effect, so there are lot of different techniques that's used to take down balance sheet when you got derivatives on both sides of it. So it’s a combination but netting is one of the technique.

I have three questions from my side, first of all on NII. If I look at your disclosure in the quarterly report I notice that -- if I do the sum of contribution from derivatives recognize the hedges, as interest income and interest expenses I see 1.2 billion contribution in the first quarter then becoming 1.4 billion in this quarter.

Just wonder what’s happening there given that rates have moved completely different in the two quarters. So I just wanted to understand how does it work, with your positioning there.

The second question I have is on the corporate risk rates, it is down to 21% is down 3 percentage points in six months. You say that this is due to the kind of mix effect what comes out, what comes in is to say that what comes out.

What is the churn rate of the corporate portfolio, what portion of the corporate portfolio is substituted every three months? This is the second question, and the third question I have is on the leverage ratio.

We kept core [Tier 1] keeps improving but the leverage ratio is actually absolutely stable, it has gone up since December just because you issued the [81] basically. The exposure in this quarter is up 20 -- mostly because of 20 billion of lower adjustments I think lower netting in the derivatives before you said you don’t like that derivatives in your balance sheet.

Why there is such a big difference between one quarter and the other in the amount of netting that you can do on your -- from the calculation of the leverage ratio exposure. So what’s happening there?

And just related on leverage ratio again, do you see is kind of 4% as an adequate level which is 30 maybe 40 basis points below your main Swedish peers and it is almost 180 basis points below the one of your Norwegian peer?

First of all on Page number 31 in the report that you’re referring to, you have quite a lot of things happening in derivatives which has to do for and foremost about currency effect. And when you look at the table on Page 31, you have to look at the items in connection because the derivatives that you see a large portion of them is actually then hedging the funding and the funding and the assets are not mark-to-market, they’re more extent to the nominal amount they came in while the derivatives are more excessive as you know to market and that is in the OCI.

But looking at the profit and loss statement that you see on Page number 31, you will actually have to then put different items together in order to see the effect. So the really interesting thing is of course the net interest income the combined effect of what you’re doing in the balance sheet.

The corporate risk weighted that they are going down, as you know it has a very large effect if you take away something that is not a good asset because they’re not good asset much if asset deteriorates it goes very quickly that risk rate goes up, it goes up dramatically when you approach the fall situation. So that is to say you don’t need a very big turnover in order to increase the average risk weight because if you take away things that are in high risk losses you get a very-very high effect.

So, the answer from your question is really that we have an extremely low turnover if you look at our stable client base, but we take in new client and yes clients that we don’t like or assets we don't like leave the balance sheet and that effect is rather dramatic because the difference between the risk rates are what's coming in and what's going out, that's a huge difference. So it's not that we're turning around the whole bank frequently but on the margin you get a high effect.

Leverage ratio, yes you can see the numbers north of 4% and what we hear from the Swedish authorities and the ruling ones is the FSA and the national debt office and also the finance ministry they're sort of talking about 3%. So we are not unhappy with what we have, should they come anyone that thinks this would be important to have a good leverage ratio it would be a lower something.

As you know it's not rocket science to bring it up easily. One very easy thing to do is to take down the liquidity reserve, we have a much more buffers than we need and then you take down the balance sheet on both sides.

Secondly if you get a more adverse leverage ratio regime, let's say 6% or whatever you want to think about. Of course one would use securitization, you couldn’t imagine the number of investment banks that are calling and knocking on our door and urging to help us with that.

That is also very easily done. It's not something that we necessarily want to do but if leverage ratio would be important in any sort of respect of course.

So, yes, I'm happy for the moment. Let's see what the regulations are in the far distant future.

And with regard to your rough statement on securitizing assets, I would suppose you mostly referring to mortgages right? What portion of our mortgage booth could be securitized in let's say in a reasonable period of time, let’s see weeks maybe, 12 months, 10%, 20%, 30%, if you had to throw a ball park.

I can assure you, much more than it’s needed, because it can take some time before the leverage ratio will be a binding restriction in Sweden. So I can assure you we can do much more than, in the timeframe before the leverage ratio comes into effect.

And you're right, the current regime is such that mortgages has in the true effect as you know, minimum risk rates of 25%. And the really risk rate is any sort of 5% including security add-ons.

So you have over there in fact that's what the leverage ratio of 4 or whatever. Of course it's a great effect and very easily done.

Having said that let's presume theoretically that the Basel committee proposed standardized risk rates or corporate risk rates goes up, then of course you get the same effect there. And it’s a little bit or more technical work in order to describe it statistically.

But it is very doable to do it on the corporate side. Maybe do it a bit more bilateral though.

So I wouldn’t worry about leverage ratio.

Just a couple of question on capital, firstly when it comes to the risk rates for the corporates. What kind of risk rates are you getting on the new loans that you're putting on to the balance sheet where you see this rolling effect.

And secondly on the escrow process, and the FSA in Sweden, so Nordea basically said that with the college of regulators now including the ECBD, Swedish FSA has to rethink at least how they fit in Nordea in the number of instances when it comes to optimizations. Do you see them doing this for you as well regardless of the ECB not being your college or do you think this is going to sort of have a very limited effect on the Swedish way of doing things.

And could you give any kind of guidance or idea of where you think this escrow add-ons may end up.

We have not got any decision on the FSA from the authorities and I think that as I said the general information that we got is of course what the FSA said in the stability council paper where they sort of, they hinted that they would look into this, the risk rates in a general manner and also by institution to institution and that they felt it's very important that they are regarded as very prudent. So that is the only information I sort of got on the subject and so I can't give you more light there than we already discussed.

Then you asked about risk rates on new volumes and Mikael I think you got the number out.

We don't have any risk rate on due don't per-se, but I think really described it in his previous answer when you said that it's an average that you see and risk that leads the portfolio have much-much higher risk rates and once that come in have low risk rate. I think it’s really a -- that is the impact that we see.

And look at average numbers, and you can think of it as of course something being lower and I would say 10%, 15% lower or something but really important thing is of course the volumes that comes in and goes out in order to get this effect. The important thing for us is that the quality work that our branches are doing the daily work by knowing our clients so much better than our competitors do and especially this is an increasing phenomenon because when the others stop doing branch offices or take down branch offices it’s hard to get the relation and we keep this and so this is a very good uptick and very positive effect of the relationship that our branches have.

And I think Jacob that this is being is really if you look at the Pillar 2 report, you can see all the different risk assets you can see the different risk rates and between those risk assets and that’s kind of -- would give you mitigation of where the new ones are coming in.

Then I thank you very much for attending today and as usual have you got more questions please do not hesitate to call us and we can discuss further. Thank you very much.

Bye-bye.