Swedbank Mortgage Annual Report 2011

Transcription

1 Swedbank Mortgage Annual Report 2011

2 Contents 3 Swedbank Mortgage in brief, the Swedish housing market and rating 4 About Swedbank Mortgage 4 Market trends 5 Mortgage market 6 Loan portfolio 8 Funding 9 Risk management 11 Key financial highlights Five-year summary 13 Income statement, Statement of comprehensive income 14 Balance sheet 15 Statement of changes in equity 16 Statement of cash flow 17 Notes 36 Definitions 37 Signatures of the Board of Directors and the President 38 Auditors report 40 List of bond loans 46 Board of Directors, Auditor and Executive Committee

3 SWEDBANK MORTGAGE IN BRIEF, HIGHLIGHTS AND RATING Swedbank Mortgage Annual Report Swedbank Mortgage in brief Swedbank Mortgage is the leader in the Swedish mortgage market. Market share: 26% (26% in 2010). Distribution: Access to 571 branches, which through Swedbank and the savings banks forms Sweden s largest bank-owned retail network. Loan portfolio: Residential mortgages account for over 90%. Low geographical concentration risk through a broad-based distribution network. All lending is in Sweden with collateral in Swedish assets. Collateral: Maximum loan-to-value ratio of 75% on residential mortgages. Average loan-tovalue ratio 1 in the loan portfolio of 60% calculated by property level (60% in 2010). Funding: Swedbank Mortgage issued a total of SEK 233m 2 (233) during the year, of which SEK 145m 2 (155) in the domestic market. During the year a total of SEK 60m 2 was redeemed, of which SEK 46m 2 in the domestic market. During the first quarter, a new covered bond programme primarely directed to US investors (144A) was finalised. The Swedish housing market Transparent information from, among others, UC AB, Sweden s leading credit information agency, which provides public data on income, debts, payment history, etc. Sweden s Consumer Credit Act requires financial institutions to conduct a detailed analysis of each customer s ability to pay, an affordability calculation, and stress tests if interest rates rise. Borrowers are fully responsible for repaying their debts and have an unlimited recourse obligation.rec Stable social welfare system with widespread unemployment insurance. Not a buy-to-let market. No third party origination. 1 Volume weighted 2 Nominal amount Swedbank Mortgage Rating Rating Outlook Standard & Poor s Short A-1 s Long A+ s Covered bonds AAA s Moody s Short P-1 s Long A2 s Covered bonds Aaa * * Based on Moody s rating methodology for covered bonds, no outlook is used.

4 4 Swedbank Mortgage Annual Report 2011 BOARD OF DIRECTORS REPORT About Swedbank Mortgage Swedbank Mortgage is the leader in the Swedish mortgage market. Its loans are part of the overall offering from Swedbank and the savings banks. Group relationship Swedbank Mortgage AB (publ), corporate identification number , is a wholly owned subsidiary of Swedbank AB (publ), The Swedbank Group includes six business areas: Retail, Large Corporates & Institutions, Baltic Banking, Asset Management, Russia & Ukraine, and Ektornet and support from group functions. Swedbank Mortgage AB (also called the company where appropriate) is part of the Retail business area within Swedbank AB and is the parent company of a subgroup with responsibility for mortgage lending in Sweden. The subgroup comprises Swedbank Mortgage AB and the dormant wholly owned subsidiary Swedbank Skog och Lantbruk AB, Swedbank Mortgage s more than one million customers include Swedish homeowners, businesses, tenant-owner associations, municipalities and agricultural and forestry businesses. Swedbank Mortgage s products primarily consist of loans secured by underlying collateral in Swedish residential, agricultural and forest properties up to 75% of their market value. Of Swedbank Mortgage s total lending volume of SEK 711 bn 3 (SEK 695bn in 2010), slightly over 90% is represented by mortgage loans to individuals. Swedbank Mortgage has a market share of 26% (26% in 2010) of the Swedish mortgage market. Co-ordination with Swedbank Swedbank Mortgage s loans are part of the overall offering from Swedbank and the Swedish savings banks, and lending is arranged through their Swedish retail network, the telephone bank and internet channels. This is an important reason for Swedbank Mortgage s strong market position. The 571 branches of Swedbank and the savings banks (317 and 254, respectively) and Swedbank s internet and telephone banks together make up Sweden s largest bank-owned distribution network. The savings banks consist of 59 independent savings banks that collaborate with Swedbank through a common framework agreement with the national association of savings banks, Sparbankernas Riksförbund, and separate agreements with individual savings banks. The collaboration encompasses a common IT platform, mortgage lending and mutual fund sales. Swedbank Mortgage s functions are totally integrated in Swedbank, which creates economies of scale with the bank s other operations. To offer customers a complete solution of home buying services, the Swedbank Group utilises a number of partners in addition to its own brand, Swedbank Fastighetsbyrå, including home builders and other construction companies. Outlook Despite current concerns in the financial market, the result for 2012 is expected to be in line with the result for The result is sensitive to interest rates, the market s assessment of credit risk and the cost to exchange financing in foreign currency to Swedish kronor. These factors can change both net interest income and net gains and losses on financial items at fair value. Market trends The spiralling fiscal crisis in the EMU countries in 2011 has increased the risk that the global economic slowdown could be more severe than previously anticipated. This has created fears in the international financial markets. According to Swedbank Economic Outlook 2011, this has created fears in the international financial markets. At the same time it is a crisis, where the necessary changes in economic policy are not being made rapidly enough to slow the increasing sovereign debt. The economic policies of the most debt-burdened countries have led to major increases in interest rates. At the same time credit ratings have been lowered on a number of countries in Europe, but also the US. Fears of default and of the risk of huge credit impairments have led to higher capital adequacy requirements for European banks. Credit austerity is also hurting several Eastern European countries as the inflow of capital from foreign banks tapers off. The fiscal austerity several EU countries face means that monetary policy likely will be more expansive going forward through lower discount rates and liquidity-supporting measures. In early December the European Central Bank (ECB) cut its benchmark rate for the second time in 2011, to 1%. 3 Refers to nominal amounts. Does not take into account market valuations according to IAS 39.

5 BOARD OF DIRECTORS REPORT Swedbank Mortgage Annual Report Through midyear 2011 the Swedish economy grew by nearly 5% on an annual basis despite weaker global conditions. By the end of the year, there were increasing signs that growth will be significantly weaker in upcoming quarters. In addition to lower order bookings for Swedish exporters, household consumption has slowed partly due to increased uncertainty about the labour market. During the fall the number of layoffs rose, and fewer companies are planning to hire. Increased household savings and lower lending to households have been followed by lower lending to the business sector, where investments are being put on hold. The sales frequency in the housing market decreased during the year partly due to the economic uncertainty and higher mortgage rates. Although GDP growth decreased during the last quarter of 2011, the Swedish economy is estimated to have grown by slightly over 4% for the full year. Due to the slowdown in the economy and revised growth outlook, the Riksbank cut its repo rate in December from 2% to 1.75%, which is likely to be followed by more rate cuts in 2012 when inflation pressures ease and unemployment rises. Mortgage market The Swedish economy was affected in 2011 by the turbulence and concerns that have stifled the global market since the summer. The economic situation during the fall was marked by signs of a rapid slowdown. Worries about the European sovereign debt crisis and weaker development in the US have also affected the Swedish export market and growth. The Swedish economy is relatively strong and well-balanced, but the export growth is impacted by the global turbulance creating a greater uncertainty among households and businesses. This leads to falling consumption and lower investment levels. Real estate market Expectations are that investments and consumption will both grow more slowly than forecast in the first half of 2011 according to Swedbank Economic Outlook. There is a risk that housing prices could fall, which could be seen as a threat to growth. This would mainly affect households and consumption, and at a later stage the credit market. Increased construction in metropolitan regions in recent years has been outpaced by a population influx, which has instead exacerbated the housing crisis and may limit any decline in prices. During the fall companies that build new residential housing saw lower demand for tenant owner rights despite the housing shortage in many areas. Owner-right-apartments have been available in the Swedish market since May 2009, but the response from buyers has been limited. Uncertainty in the housing market will continue in Mortgage demand according to the bank, is expected to further decline for residential units and other real estate investments. This is due to uncertainty in the labour market and macroeconomy. Market shares and volumes After having grown in volume by nearly 10% annually in recent years, the mortgage market noted a gradual decline in growth in 2011 to 5,2% annually by year-end. Swedbank Mortgage saw its market shares for both private and corporate lending decline in This has been part of a deliberate strategy to help ensure that the mortgage market s growth is better harmonised with GDP growth in Sweden. Swedbank s priority is to provide full-service solutions for both private and corporate customers, at the same time that it positively influences net interest income without sacrificing credit quality. During fall 2010 the Financial Supervisory Authority introduced a mortgage cap that limits first mortgages to 85% of a property s value. Swedbank Mortgage has decided to draw a tighter limit of 75% of property value. Moreover, Swedbank raised the requirements on mortgage borrowers, such as credit accessment and affordability calculations, in the underwriting process Agricultural and forestry sector Structural changes in the dairy industry put pressure on many companies during the year. Shifting weather patterns were a challenge for farmers and growers, which have benefitted from higher crop prices. Companies focused on pork production faced economic pressure for much of the year, resulting in lower production. Prices of agricultural and forestry properties remain stable however. The forestry sector was also affected by the slow economy during the fall, and structural changes in the sawmill industry are continuing. At the same time demand has increased for forest products, which has resulted in higher returns for both lumber and pulpwood owners.

6 6 Swedbank Mortgage Annual Report 2011 BOARD OF DIRECTORS REPORT Loan portfolio Slightly over 90% of the residential sector accounts for Swedbank Mortgage s lending. During the year total lending increased by SEK 19bn before provisions or 3% (SEK 31bn, 5% in 2010). Nearly the entire net increase has been in the private residential segment. The lending increase in 2011 was lower than in immediately preceding years. The year was distinguished by global concerns, a slowing Swedish economy with relatively high unemployment, repo rate cut by the Riksbank and uncertainty about future housing prices. In late 2010 the Financial Supervisory Authority issued recommendations on mortgage caps 4. Swedbank Mortgage decided at the same time to reduce its maximum ratio from 85% to 75%, despite that the supervisory authority s recommendations did not require a change. Swedbank at the same time introduced tighter requirements on new lending. As a whole, these factors slowed the increase in the company s lending during the year. Stable risk level in the loan portfolio Extensive stress tests of the mortgage portfolio were conducted during the year. The tests incorporated scenarios with substantially higher interest rates, higher unemployment and significantly lower housing prices. The results of these tests indicated robust solvency among the company s mortgage customers and a low risk of credit impairments, even if economic conditions were to substantially worsen from a Swedish perspective. A deep understanding of customers gained through their large retail network and an emphasis on each customer s solvency have also helped Swedbank and the savings banks to maintain past due loans at very low levels. A low loan-to-value ratio among Swedbank Mortgage s customers, combined with a favourable real estate market, has meant that the few customers who have incurred payment problems have usually been able to sell their properties without losing money. The figure on page 7 (Risk classification Swedbank Mortgage) illustrates how the overall portfolio of loans to homeowners, businesses and agricultural and forestry enterprises is distributed by risk class. On the scale, 21 represents the lowest risk and 0 the highest risk, with an additional class for defaults. In 2011 there was a marginal migration to lower risk classes. The company s mortgage customers remain able to repay their debts, and the risk of credit impairments is low. Swedbank Mortgage s low risk profile is the result of restrictive credit requirements, a geographical diversification of lending among many customers and close monitoring of customers locally. Loans judged as having higher risks are given added attention. Lending to tenant-owner associations and real estate management firms (mainly tenant-owner associations with low loanto-value ratios) fell by SEK 3bn to SEK 11bn. Agricultural companies have been affected by major fluctuations in food prices due to the financial crisis and global changes. The need for larger, more efficient farms is growing and driving loan demand. Mortgage demand in the agricultural and forestry sector therefore remained high in Lending to the sector increased by SEK 4bn during the year to SEK 50bn. 4 According to the Financial Supervisory Authority s rules on new lending or loan increases as of 1 October 2010 Loan portfolio by LTV Loan portfolio as of Dec 2011 distributed by collateral Receivables past due > 60 days as % of loan portfolio (segment) Over half the loan portfolio has a loan-to-value ratio (LTV) of less than 30%.

7 BOARD OF DIRECTORS REPORT Swedbank Mortgage Annual Report 2011 Limited credit impairments during the year In 2011 credit impairments affected profit by SEK 56m (SEK 168m in 2010). Established credit impairments amounted to SEK 45m (38), utilisation of previous provisions amounted to SEK 6m (5), and recoveries from previous years impairments totalled SEK 2m (1). Provisions for credit impairments amounted to a net of SEK 23m during the year, against a year-earlier net reversal of SEK 5m. Swedbank s risk classification system and rules serve as the basis of efficient monitoring routines that are designed to minimise future impairments. The volume of loans past due by more than 60 days remains at a very low level, but increased somewhat during the year. Household loans past due by more than 60 days as a share of the total loan portfolio remained low at around 0.12% (0.07). The corresponding figure is 0.01% (0.02) for commercial loans and 0.06% (0.07) for agricultural and forestry loans. The portfolio s impaired loans, after deducting provisions of SEK 73m (56), amounted to SEK 131m (86) as of 31 December 2011, corresponding to 0.02% (0.01) of the total loan portfolio. Loans with interest reductions amounted to SEK 0m (0). Provisions for impaired loans and book values are shown in note 4. Loan portfolio as of December

8 8 Swedbank Mortgage Annual Report 2011 BOARD OF DIRECTORS REPORT Funding The financial markets have been strongly affected by the European fiscal crisis and slow economic growth. This has led to lower demand for high-risk assets in favour of low-risk alternatives. Debt investors have gradually reweighted their portfolios from bonds issued by countries such as Portugal, Italy, Spain and even France to German and Swedish government bonds, for example. Investors risk aversion has been reflected in falling equity prices, rising financing costs for debt-burdened Southern European countries and lower yields on bonds from countries that are considered stable such as Sweden. The escalating sovereign debt crisis has also raised concerns about the exposures of European banks to Southern Europe. Parts of the European banking system have very limited access to the funding markets from the funding markets and are to a large extent being financed by the ECB, which has reintroduced liquidity support with longer maturities. Swedish banks and mortgage institutions, have benefitted from the country s strong economy and stable fiscal situation, and despite the turbulence have maintained sufficient access to funding markets. Investors preference for safe assets has raised demand for Swedish covered bonds. In the euro market, the prices of Swedish covered bonds have remained stable at the same time that mortgage institutions from other countries have had to pay a higher price for their funding. In 2011 Swedbank Mortgage issued three euro benchmark 5 covered bonds (maturing in January 2016, September 2014 and September 2015) with a total volume of 4bn 6 euro. Swedbank Mortgage now has nine euro benchmark covered bonds outstanding. In 2011 Swedbank Mortgage also established a socalled 144A USD covered bond programme designed for the US market. As part of the new programme, Swedbank Mortgage issued three USD benchmark covered bonds during the year with a total volume of USD 3bn 6. Swedbank Mortgage has also issued CHF 1.3bn 6 in covered bonds in the swiss market, divided among 12 transactions. The Swedish national market for covered bonds, which is Swedbank Mortgage s principal source of funding, has been able to withstand the international financial turbulence and has continued to function well. During the year two Swedish benchmark covered bonds have matured at the same time that SEK 145bn 6 was issued in the Swedish market. In 2012 Swedbank Mortgage has no maturing international benchmark bonds and only one maturing Swedish benchmark covered bond, large amounts of which were already repurchased during Public issuance exceeding certain volume according to market standards 6 Nominal amount Swedbank Mortgage Rating Rating Outlook Standard & Poor s Short A-1 s Long A+ s Covered bonds AAA s Moody s Short P-1 s Long A2 s Covered bonds Aaa * Outstanding volume of covered bonds by program* Book values Per 31 December 2011, SEKbn Mortgage bonds in Sweden 325 Euro Mid Term Note program A USD program 21 Mid Term Note program 9 Registered Covered Bonds 25 Norwegian mortgage bond program 6 * For further information, see note 4. * Based on Moody s rating methodology for covered bonds, no outlook is used.

9 BOARD OF DIRECTORS REPORT Swedbank Mortgage Annual Report Risk management Swedbank Mortgage measures and reports risks in accordance with the guidelines and policies of the Swedbank Group. Swedbank Mortgage s principal risks are credit risks, financial risks and operational risks. For further information, see note 4a-d. CREDIT RISK Credit risk is the risk that a counterparty cannot meet its obligations and that pledged assets will not cover the company s claim. Credit risk also includes concentration risk, i.e. large exposures or concentrations in the loan portfolio to certain regions or industries. Swedbank Mortgage s credit risks primarily arise in its lending to the public (private individuals, Forestry and Agriculture and companies). Risks are geographically diversified throughout Sweden, which reduces risks within a geographical dimension, and largely consist of loans secured by single-family homes and condominiums. Swedbank Mortgage s lending is handled through the distribution network of Swedbank and the savings banks. The right to grant loans has been delegated to Swedbank and the savings banks within specific limits. Decisions of principle regarding credit issues or otherwise of major importance are made by Swedbank Mortgage s Board of Directors. Furthermore, Swedbank Mortgage s Board sets loan limits for various types of properties. Swedbank Mortgage has delegated the right to establish instructions for appraisal and management of collateral and for borrowers with financial difficulties to Swedbank. The delegation applies until further notice and can be recalled immediately by Swedbank Mortgage at any time. Swedbank Mortgage s Board regularly receives reports on credit risks in the company and various analyses of the loan portfolio. Loan evaluations take into account the customer s ability to repay and the value of the collateral. The latter is based on the property s long-term market value as determined by an internally or externally appointed appraiser familiar with the local market. If a commitment exceeds a certain size or involves a certain type of property, an external appraiser or independent internal appraiser (working at a central Group level) must be used. Moreover, the customer is carefully analysed in an internal risk classification system and assigned a value on a risk scale. The risk classification system plays a central role in the Group s dayto-day lending operations. It is used in the preparation of loan applications, as guidance in making decisions and in monitoring. The risk classification is also used to measure risks at an aggregate level according to Group-wide models. Swedbank Mortgage s loan portfolio has a very high credit quality with low risks and is evaluated according to the Swedbank Group s risk classification expressed on a scale of 23 classes, where 0 represents the greatest risk and 21 represents the lowest risk of default, with one class for defaulted loans. In the risk classification of the credit portfolio, 88% (88% in 2010) have received an investment grade classification, which corresponds to risk classes 13 to 21, and are considered to have very low risk with a probability of default of less than 0.5 percentage points for the coming 12-month period. The treasury department also faces counterparty risks, for Swedbank Mortgage mainly in derivative contracts. In the majority of derivative contracts, the Parent Company is the counterparty. Counterparty risks are reduced through bilateral agreements, which allow the risks to be settled against each other according to standardised procedures. Moreover, risks are reduced for certain counterparties, including through special agreements on settling outstanding credit risk exposures through an exchange of financial collateral. Swedish mortgage regulations became more conservative in 2010 when the Financial Supervisory Authority introduced a mortgage cap of 85% of a property s value. Swedbank Mortgage s restrictive credit policy was already in compliance with the new rules. In addition, Swedbank Mortgage further tightened its mortgage requirements in late FINANCIAL RISK Financial risks are divided into two main types: market risk and liquidity risk. Swedbank Mortgage s Board sets comprehensive goals for market and liquidity risks. It also sets limits within the risks mandates assigned to Swedbank Mortgage by Swedbank. The Board also retains responsibility for ensuring that the requisite guidelines and instructions for risk management are established and followed. Market and liquidity risks that arise in lending are transferred to Swedbank Mortgage s treasury department, which has specific mandates for these risks. The department has a risk control function responsible for the day-to-day monitoring and compilation of information on financial risks. Financial risk utilisation is reported to the Board of Swedbank Mortgage and Swedbank s risk control unit on a continuous basis. Market risk Market risk refers to the risk that changes in exchange rates and interest rates will lead to a decline in the value of net assets and liabilities, including derivatives. Because Swedbank Mortgage s lending in SEK is partly financed with funding in other liquid currencies, a currency risk arises. This risk is managed through derivatives in the foreign exchange market. Despite extensive funding in foreign currency, Swedbank Mortgage s exposure to currency risks is very limited. Swedbank Mortgage had no open currency positions as of 31 December The interest rate risk in Swedbank Mortgage s operations primarily arises as a result of differences in the average interest fixing periods in the lending portfolio and funding. The risk is managed primarily through Swedbank Mortgage s active participation in the funding market, but also by using derivatives in

10 10 Swedbank Mortgage Annual Report 2011 BOARD OF DIRECTORS REPORT the fixed income market, e.g. swaps and forwards. Interest rate risk cannot be completely eliminated, since residential mortgages are constantly refinanced at new terms and new loans are granted and primarily due to the difference in maturity profile of the funding in relation to the lending. The remaining risk that affects Swedbank Mortgage s profit is limited, however, and is kept within an interval approved by the company s Board. or insufficient internal routines, human error and faulty systems, or due to outside circumstances. Swedbank Mortgage s work to minimise these operational risks is based on Swedbank s methods and routines. The Swedbank Group applies qualitative methods such as self-evaluations, incident management and approval processes for new products, as well as quantitative methods that include reporting in an operating loss database. Liquidity risks Liquidity risks arise because the maturity structures of Swedbank Mortgage s assets and liabilities, including derivatives, do not coincide. Swedbank Mortgage defines liquidity risk as the risk of not being able to fulfil payment commitments on any given due date without significantly raising the cost to fund payments. Swedbank Mortgage s liquidity can be forecast, since the maturities and interest payments on its mortgages and funding are known in advance. With the help of accurate forecasts and diversified funding in a number of capital markets, Swedbank Mortgage reduces liquidity risk. Liquidity exposure is limited by the company s Board and monitored continuously by Swedbank Mortgage and the Swedbank Group. Liquidity risk is also limited by covered bond regulations. In 2007 the Financial Supervisory Authority gave Swedbank Mortgage permission to issue covered bonds. Having access to the covered bond market has proved very valuable during the turbulent times that the financial markets have faced since The high credit rating of covered bonds broadens the investor base, facilitates favourable funding costs and makes it possible to pledge the bonds as mortgage collateral with the Swedish Riksbank. As a whole, Swedbank Mortgage is wellprepared to manage liquidity risks going forward. OPERATIONAL RISK Operational risk is defined as the risk of losses due to inadequate CAPITAL ADEQUACY Swedbank Mortgage s capital adequacy ratio should not fall below the level that at any given time is considered appropriate in order to maintain sustainable financial stability while developing the business. Basel II According to the current capital adequacy rules, Basel II, the capital requirement is closely linked to risk profile, risk measurement and the assessment of risk capital needs. With the approval of the Financial Supervisory Authority, Swedbank Mortgage bases capital requirements for credit risks primarily on internal risk measurements according to the Internal Ratings Based Method (IRB method) that has been developed by the Swedbank Group. There is also a capital requirement for operational risks, which, with the approval of the Financial Supervisory Authority, is calculated according to a standardised method. For Swedbank Mortgage, the Basel II rules mean a limited need for equity, as its business is focused on mortgages, which are generally characterised by very low levels of risk. The special transition rules introduced in 2009 gradually lowered capital requirements due to Basel II compared with the previous Basel I. According to these transition rules, the minimum requirement in 2009 was at least 80% of the requirement calculated according to the old rules. The transition rules have been extended, and no date has been set for their expiration.

11 BOARD OF DIRECTORS REPORT Swedbank Mortgage Annual Report Key financial highlights Profit Investment margin, % ** 0,59 0,53 0,56 0,56 0,67 Return on equity, % 8,6 7,4 9,3 10,0 10,6 Earnings per share, SEK 120,91 101,70 113,26 116,52 119,70 Capital Capital base, SEKm Capital quotient *** 1,19 1,17 1,2 1,05 1,11 Capital adequacy ratio, % *** 9,5 9,3 9,6 8,4 8,9 Tier 1 capital ratio, % *** 9,5 9,3 9,6 8,4 8,2 Number of shares at start/end of period, million Equity per share, SEK 1 483, , , , ,00 Credit quality Credit impairment ratio, % 0,01 0,02 0,05 0,00 0,00 Total provision ratio for impaired loans, % 203,6 141,8 43,1 41,8 73,9 Share of unimpaired loans, % 0,02 0,01 0,02 0,02 0,01 Other Number of employees * Not restated according to IAS 39. ** Calculated as of 2008 as a 12-month average. The previous calculation method used the report period s average. *** As of 2007 capital ratios are calculated according to FFFS 2007:1 (Basel 2). Profit analysis Operating profit amounted to SEK 3 773m (3 179). Net interest income increased marginally to SEK 4 147m (4 069). Both interest income and interest expense rose due to higher short term market rates and bigger volumes. Interest expense also increased due to further prolonged maturities on funding during the year. Net commissions amounted to SEK -558m (-523) and consist to most part of commission costs from the interchange between the savings banks and partly owned banks. These costs amounted to SEK 609m (562). A new long-term collaboration agreement is valid from the 1st of July Realized and unrealized changes in value are included in net gains and losses on financial items at fair value. In April 2009 a gradual transition was initiated to increase amortized cost and hedge accounting by applying fair value hedge accounting and cash flow hedging, which in the long term will reduce the effect of financial instruments valued at the fair value option. In total the net gains and losses on financial items at fair value amounted to SEK 233m (-206). The main driver behind the increase is that long-term market rates have plummeted during the year, which had a positive effect on the P/L. Net credit impairment decreased by SEK 112m and amounted to SEK 56m (168), which is largely explained by a new valuation model for portfolio provisions in This new model resulted in a one-time effect of credit impairments amounting to SEK 153m. Proposed distribution of profit Proposed distribution of profit msek Swedbank Mortgage AB (publ) Retained earnings Profit for the year Total available The Board of Directors proposes that the following amount be carried forward Total

12 12 Swedbank Mortgage Annual Report 2011 BOARD OF DIRECTORS REPORT Five-year summary Income statement SEKm Interest income Interest expenses Net interest income Net commissions Other operating income Total income Other operating expenses Profit before impairments Credit impairments Operating profit Tax expense Profit for the year Balance sheet Assets Loans to credit institutions Loans to the public Interest-bearing securities 50 Other assets Total assets Liabilities Amount owed to credit institutions Debt securities in issue Other liabilities Subordinated liabilities Total liabilities Equity Total liabilities and equity

13 INCOME STATEMENT Swedbank Mortgage Annual Report Income statement Group Swedbank Mortgage AB SEKm Note Interest income Interest expenses Net interest income Commission income Commission expenses Net commissions Net gains and losses on financial items at fair value Other income Total income Staff costs Other administrative expenses 0 0 Total administrative expenses 1 1 Total expenses 1 1 Profit before impairments Credit impairments Operating profit Appropriations Tax expense Profit for the year, attributable to shareholders Earnings per share, before and after dilution, kr , Statement of comprehensive income Group Swedbank Mortgage AB SEKm Note Profit for the year reported via income statement Cash flow hedges: Gains/losses during the period Reclassification adjustments to income statement,net interest income Reclassification adjustments to income statement, net gains and losses on financial items at fair value Income tax relating to components of other comprehensive income Total comprehensive income for the year, attributable to shareholders

14 14 Swedbank Mortgage Annual Report 2011 BALANCE SHEET Balance sheet Group Swedbank Mortgage AB SEKm Note Assets Loans to credit institutions Loans to the public Shares and participating interests Investments in Group entities Derivatives Current tax assets Other assets Prepaid expenses and accrued income Total assets Liabilities and equity Liabilities Amounts owed to credit institutions Debt securities in issue Derivatives Deferred tax liabilities Other liabilities Accrued expenses and prepaid income Total liabilities Untaxed reserves Equity Equity attributable to shareholders of the Parent Company Share capital Statutory reserve Retained earnings Total equity Total liabilities and equity Pledged assets Commitments, nominal amount Notes not directly related to the income statement, balance sheet, statement of cash flow or statement of changes in equity: Note 1 Note 2 Note 3 Note 4 Note 5 Note 6 Corporate information Accounting policies Critical accounting judgments and estimates Risks Capital adequacy analysis Operating segments Note 16 Tax for each component in other comprehensive income Note 31 Related parties Note 32 Fair value of financial instruments Note 33 Events after 31 December 2011

15 STATEMENT OF CASH NOTES FLOW Swedbank Mortgage Annual Report Statement of changes in equity Equity attributable to shareholders of Swedbank Mortgage AB Other capital Fair value Retained Group SEKm Share capital contribution fund earnings Total Opening balance 1 January Group contribution provided Tax reduction due to Group contributions provided Total comprehensive income for the year Closing balance 31 December Opening balance 1 January Group contribution provided Tax reduction due to Group contributions provided Total comprehensive income for the year Closing balance 31 December Restricted equity Non-restricted equity Statutory Cashflow Retained Swedbank Mortgage AB, SEKm Share capital reserve hedge earnings Total Opening balance 1 January Group contribution provided Tax reduction due to Group contributions provided Total comprehensive income for the year Closing balance 31 December of which, conditional shareholder s contributions Opening balance 1 January Group contribution provided Tax reduction due to Group contributions provided Total comprehensive income for the year Closing balance 31 December of which, conditional shareholder s contributions

16 16 Swedbank Mortgage Annual Report 2011 STATEMENT OF CHANGES IN EQUITY Statement of cash flow Group Swedbank Mortgage AB SEKm Operating activities Operating profit Adjustments for non-cash items in operating activities Taxes paid Increase/decrease in loans to credit institutions Increase/decrease in loans to the public Increase/decrease in amount owed to credit institutions Increase/decrease in other assets Increase/decrease in other liabilities Cash flow from operating activities Investing activities Increase in fixed assets -1-1 Cash flow from investing activities -1-1 Financing activities Issuance of interest-bearing securities Redemption of interest-bearing securities Increase/decrease in other funding Group contribution paid Cash flow from financing activities Cash flow for the year Cash and cash equivalents at beginning of the year Cash flow for the year Liquid assets at end of year* Comment on consolidated statement of cash flow The statement of cash flow shows receipts and disbursements during the year as well as cash at the beginning and end of the year. The statement of cash flow is reported using the indirect method and is based on operating income for the period and changes in the balance sheet. Operating income is adjusted for changes not included in cash flow from operating activities. Cash flows are reported separately for receipts and disbursements from operating, investing and financing activities. Operating activities Cash flow from operating activities is based on operating profit for the year. Adjustments are made for income tax paid and items not included in cash flow from operating activities. Changes in assets and liabilities in operating activities consist of items that are part of regular business activities, such as loans to and borrowings from the public and credit institutions, and that are not attributable to investing and financing activities. The profit generated cash flow includes interest receipts of SEK mkr (20 301) and interest payments, including capitalised interest, of SEK mkr (17 116). Financing activities The issue and repayment of bond loans with maturities exceeding one year are reported gross. The item Change in other funding includes the net change in funding with shorter maturities and high turnover. Cash and cash equivalents Cash consist of balances on cash accounts, see note 17. Specification of adjustment of non/cash items Group Swedbank Mortgage AB SEKm Unrealised translation differences, bonds in issue Prepaid expenses and accrued income Accrued expenses and prepaid income Change in value of loans to the public and credit institutions Change in value of funding and derivatives Increase in fairvalue fund Increase in other liabilities Total

17 NOTES Swedbank Mortgage Annual Report Notes All amounts in the notes are in millions of Swedish kronor (SEKm) and at book value unless indicated otherwise. Figures in parentheses refer to the previous year. 1 Corporate information The consolidated financial statements and the annual report for Swedbank Mortgage AB (publ) for the financial year 2011 were approved for issuance by the Board of Directors and the President on 13 February Swedbank Mortgage AB, which maintains its registered office in Stockholm, Sweden, is a wholly owned subsidiary of Swedbank AB (publ). The Group s operations are described in the Board of Directors report. The consolidated financial statements and annual report will be adopted by the Parent Company s Annual General Meeting. 2 Accounting policies BASIS OF ACCOUNTING The financial reports and the consolidated financial statements are prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU and interpretations of them. The standards are issued by the International Accounting Standards Board (IASB) and the interpretations by the IFRS Interpretations Committee (IFRIC). The standards and interpretations become mandatory for listed companies consolidated financial statements concurrently with their approval by the EU. Complete financial reports refer to: balance sheet at the conclusion of the period, statement of comprehensive income for the period, statement of changes in equity for the period, cash flow statement for the period, and notes, comprising a summary of significant accounting policies and other explanatory information. The consolidated financial statements also apply recommendation RFR 1 Complementary accounting rules for groups, issued by the Swedish Financial Reporting Board, the pronouncements of the Swedish Financial Reporting Board, certain complementary rules in the Annual Accounts Act for Credit Institutions and Securities Companies and the regulations and general advice of the Swedish Financial Supervisory Authority, FFFS 2008:25. The financial statements are based on the historical cost basis. Subsequent measurements are based on the valuation category of the financial instrument. The carrying amounts of financial assets and liabilities subject to hedge accounting at fair value have been adjusted for changes in fair value attributable to the hedged risk. The financial statements are presented in Swedish kronor and all figures are rounded to millions of kronor (SEK m) unless indicated otherwise. PARENT COMPANY The Parent Company prepares its financial statements according to the Annual Accounts Act for Credit Institutions and Securities Companies, the regulations of the Swedish Financial Supervisory Authority and recommendation RFR2 of the Swedish Financial Reporting Board. CHANGES IN ACCOUNTING POLICIES In 2011, no changes in accounting policies have been implemented which affect Swedbank Mortgage s reporting SIGNIFICANT ACCOUNTING POLICIES Presentation of financial statements (IAS 1) Financial statements provide a structured representation of a company s financial position and financial results. The purpose is to provide information on the company s financial position, financial results and cash flows useful in connection with financial decisions. The financial statements also indicate the results of management s administration of the resources entrusted to them. Complete financial statements consist of a balance sheet, statement of comprehensive income, statement of changes in equity, cash flow statement and notes. Swedbank Mortgage presents the statement of comprehensive income in the form of two statements. A separate income statement contains all revenue and expense items in profit provided that a special IFRS does not require or allow otherwise. Such other revenue and expense items are recognised in other total comprehensive income. The statement of comprehensive income contains the profit recognised in the income statement as well as the components included in other total comprehensive income. Consolidated financial statements (IFRS 3, IAS 27) The consolidated financial statements comprise Swedbank Hypotek AB (publ) and those entities in which the Parent Company has control, i.e., the power to govern a company s financial and operating strategies to obtain economic benefits. These entities, subsidiaries, are included in the consolidated financial statements in accordance with the purchase method from the day that control is obtained and are excluded from the day that control ceases. All intra-group transactions and intra-group gains are eliminated. Investments in subsidiaries are recognised according to the acquisition cost method in the Parent Company. In case of an indication of value decrease the investment s value is tested for impairment. When the Group value is lower than carrying amount, impairment is recognised. Assets and liabilities in foreign currency (IAS 21) The consolidated financial statements are presented in SEK, which is also the Group s functional currency and presentation currency. Functional currency refers to the main currency used in an entity s cash flows. Transactions in a currency other than the functional currency (foreign currency) are initially recorded at the exchange

18 18 Swedbank Mortgage Annual Report 2011 NOTES rate prevailing at the transaction day. Financial assets, liabilities and derivatives in foreign currency are translated at the rates prevailing at the closing day. All gains and losses on the translation of monetary items and non-monetary items measured at fair value are recognised through profit or loss as changes in exchange rates in net gains and losses on financial items at fair value. Financial instruments (IAS 32, IAS 39) The large part of the Group s balance sheet items refers to financial instruments. A financial instrument is any form of agreement which gives rise to a financial asset in one company and a financial liability or equity instrument in another. Cash is an example of a financial asset, while financial liabilities might include an agreement to pay or receive cash or other financial assets. Financial instruments are classified on various lines of the balance sheet such as loans to the public or credit institutions depending on the counterparty. If the financial instrument does not have a specific counterparty or when it is listed on the market, it is classified on the balance sheet among various types of securities. Financial liabilities where the creditor has a lower priority than others are classified on the balance sheet as subordinated liabilities. A derivative is a financial instrument that is distinguished by the fact that its value changes, for example, due to exchange rates, interest rates or share prices, at the same time that little or no initial net investment is required. The agreement is settled on a future date. Derivatives are reported on separate lines of the balance sheet, either as assets or liabilities depending on whether the contract has a positive or negative fair value. Contractually accrued interest is recognised among prepaid or accrued income or expenses in the balance sheet. Financial assets are recognised on the balance sheet on the trade day when an acquisition agreement has been entered into, with the exception of loans and receivables, which are recognised on the settlement day. Financial assets are derecognised when the right to obtain the cash flows from a financial instrument has expired or essentially been transferred to another party. Financial liabilities are removed from the balance sheet when the obligation in the agreement has been discharged, cancelled or expired. Repos A genuine repurchase transaction (repo) is defined as a contract where the parties have agreed on the sale of securities and the subsequent repurchase of corresponding assets at a predetermined price. In a repo, the sold security remains on the balance sheet, since the Group is exposed to the risk that the security will fluctuate in value before the repo expires. The payment received is recognised as a financial liability on the balance sheet based on who the counterparty is. Sold securities are also recognised as a pledged asset. The proceeds received for acquired securities, so-called reverse repos, are recognised on the balance sheet as a loan to the selling party. Financial instruments, recognition (IAS 39) Financial instruments are divided into the following valuation categories: financial instruments at fair value through profit or loss, loans and receivables, and other financial liabilities. A few individual holdings of insignificant value have been categorised as available-for-sale financial assets in the valuation category available-for-sale. All financial instruments are initially recognised at fair value. The best evidence for fair value at initial recognition is the transaction price. For financial instruments that subsequently are not measured at fair value through profit or loss, supplementary entries are also made for additions or deductions of direct transaction expenses to acquire or issue the financial instrument. Subsequent measurements depend on the valuation category to which the financial instrument is attributed. Notes to items in the balance sheet with financial instruments indicate how the carrying amount is divided between valuation categories. Valuation category at fair value through profit or loss Financial instruments at fair value through profit or loss comprise instruments held for trading and all derivatives, excluding those designated for hedge accounting. In the notes to the balance sheet, these financial instruments are classified at fair value through profit or loss, trading. This category also includes other financial instruments that upon initial recognition have irrevocably been designated as at fair value, the so-called fair value option. The option to irrevocably measure financial instruments at fair value is used in the Group for individual portfolios of loans, securities in issue and amounts owed to credit institutions, when they together with derivatives essentially eliminate the portfolio s aggregate interest rate risk. The option is used to eliminate the accounting volatility that would otherwise arise because different measurement principles are normally used for derivatives and other financial instruments. In the notes to the balance sheet, these financial instruments are classified at fair value through profit or loss, other. The fair value of financial instruments is determined based on quoted prices on active markets. When such market prices are not available, generally accepted valuation models such as discounting of future cash flows are used. The valuation models are based on observable market data, such as quoted prices on active markets for similar instruments or quoted prices for identical instruments on inactive markets. For loans measured at fair value where observable market data on the credit margin are not available at the time of measurement, the credit margin for the most recent transaction with the same counterparty is used. Changes in value are recognised through profit or loss in net gains and losses on financial items at fair value. Changes in value owing to changes in exchange rates are recognised as changes in exchange rates in the same profit or loss item. Changes in the value of financial liabilities owing to changes in the Swedbank Mortgage s credit worthiness are also recognised separately when they arise. Decreases in value attributable to debtor insolvency are attributed to credit impairments. Valuation category loans and receivables Loans to credit institutions and the public, categorised as loans and receivables, are recognised on the balance sheet on the settlement day. These loans are measured at amortised cost as long as there is no objective evidence indicating that a loan or group of loans is impaired. Loans are initially recognised at fair value, including fees received and any costs that constitute an integral part of the return. The interest rate that produces the loan s cost as a result of the calculation of the present value of future payments is considered the effective interest rate. The loan s amortised cost is calculated by discounting the remaining future payments by the effective interest rate. Interest income includes interest payments received and the change in the loan s amortised cost during the period, which produces a consistent return. On the closing day, it is determined whether there is objective evidence to indicate an impairment need for a loan or group of loans. If, after the loan is initially recognised, one or more events have occurred that negatively impact estimated future cash flows, and the impact can be estimated reliably, impairment is made. The impairment is calculated as the difference between the loan s carrying amount