Annual report Swedbank Mortgage

Transcription

1 Annual report 2007 Swedbank Mortgage

2 Contents Cover Contents 1 Swedbank Mortgage in brief, Highlights and Rating 2 President s statement 3 About Swedbank Mortgage 4 Market trends 4 Mortgage market 6 Loan portfolio 8 Funding 10 Risk management 12 Key financial highlights Five-year summary Income statement 15 Balance sheet 16 Cash flow statement 17 Statement of changes in equity 18 Definitions 19 Notes 34 Signatures of the Board of Directors and the President 35 Auditors report 36 List of bond loans 40 Board of Directors, Auditor and executive Committee Financial information Apr 24 Interim report Q1, January March 2008 Jul 17 Interim report Q2, January June 2008 Oct 23 Interim report Q3, January September 2008 While every care has been taken in the translation of this Annual report, readers are reminded that the original Annual Report, signed by the Board of Directors, is in Swedish.

3 Swedbank Mortgage in brief Market share: Approximately 30 percent of the Swedish mortgage market Loan portfolio: Residential mortgages account for about 90 percent Distribution: Access to 720 branches, Sweden s largest bank-owned branch network Collateral: Average loan-to-value ratio of the loan portfolio is 44 percent Funding: Scandinavia s largest issuer in the euro market. Highlights Credit risks remain low Market shares for new loans rose during the year Swedbank Mortgage received permission from the Swedish Financial Supervisory Authority to issue covered bonds. avsnitt Rating Moody's Fitch Standard & Poor s Long-term rating: Aa1 AA Short-term rating: P 1 F1+ A 1 Bank Financial Strength Ratings

4 President s statement The Swedish mortgage market was characterised by stability in an otherwise turbulent financial market in president s statement 2007 was an eventful year. The Swedish real estate market experienced a number of changes, including new rules on real estate taxation and higher interest rates. Internationally, the economy began to slow. The international credit crunch triggered by the United States subprime mortgage crisis has also affected Swedish credit institutions to some degree through higher funding costs. There is no question that the price of risk has changed. Positive trend continues Sales continued to grow during the year, and our share of new sales increased slightly. Access to the distribution network of Swedbank and the savings banks, totaling 720 branches, has been a contributing factor to our success. Swedbank maintains a conservative lending policy based on customers long-term ability to repay. Lending growth in 2007 was attributable to customers with solid finances and the resources to meet any increases in operating and living costs. As part of risk management, the loan portfolio is regularly analyzed. Risks are carefully monitored, so we can be proactive in our approach. Sound lending practices, combined with active risk management, have given us a loan portfolio with historically low risks. Good payment readiness Despite higher funding costs in the financial market during the second half of 2007, Swedbank Mortgage maintained good access to liquidity in both the Swedish and international capital markets. In September 2007 Swedbank Mortgage received authorization from the Swedish Financial Supervisory Authority to begin issuing covered bonds. We intend to convert our outstanding long-term debt to covered bonds in the second quarter of This will improve our rating and help broaden our investor base while reducing funding costs somewhat. Strong position As a whole, Swedbank Mortgage stands strong after another year of solid performance. I would like to take this opportunity to thank all the employees of Swedbank and the savings banks for their efforts in By remaining focused, I believe we can help Swedbank Mortgage retain its strong position as Sweden s leading mortgage lender. Stockholm, February 2008 Jan Lilja President jan.lilja@swedbank.se

5 About Swedbank Mortgage Market leader Swedbank Mortgage s loans are part of the overall offering from Swedbank and the savings banks. Group relationship Swedbank Mortgage AB (publ), formerly AB Spintab (publ), with corporate identification number , is a whollyowned subsidiary of Swedbank AB (publ), Swedbank Mortgage AB is the parent company of a group with responsibility for mortgage lending in Sweden. The group comprises Swedbank Mortgage AB and the wholly owned subsidiary Swedbank Jordbrukskredit AB, Farms Securitisation Ltd., which was established to trade the synthetic securitization by Swedbank Mortgage in 2001, is consolidated in accordance with SIC-12. Swedbank Mortgage in brief Swedbank Mortgage is one of Sweden s leading mortgage lenders. Its more than one million customers include Swedish homeowners, businesses, municipalities and agricultural and forestry businesses. Of Swedbank Mortgage s total lending volume of SEK 565 billion*, 75 percent is represented by loans to individuals. More than one of every three single-family homes in Sweden is financed by Swedbank Mortgage. Swedbank Mortgage generally grants loans up to 75 percent of a property s long-term market value. Coordination with Swedbank Swedbank Mortgage s loans are part of the overall offering from Swedbank and the savings banks, and lending is arranged through their Swedish branch network and internet channels. This is an important reason for Swedbank Mortgage s market-leading position. The 720 branches of Swedbank and the savings banks and Swedbank s growing Internet and telephone banks together make up Sweden s largest bank-owned distribution network. Swedbank Mortgage s functions are largely integrated with those of Swedbank. This creates economies of scale with the bank s other operations. Swedbank Mortgage s organization is limited to functions needed for the company s management, control and funding in the capital market. Products Swedbank Mortgage s products primarily consist of loans secured by underlying collateral in Swedish residential, agricultural and forest properties. Products are continually adapted to customer needs. In 2007, for example, a loan commitment with attractive options was introduced. To benefit customers while creating openings for more and better business, the Swedbank Group utilizes a number of partners in addition to its subsidiary Swedbank Fastighetsbyrå, including various home builders and other construction companies. Environmental work Environmental issues are part of Swedbank Mortgage s daily work. Environmental work is handled in close cooperation with Swedbank and is governed by the agreements and policy decisions that apply to the entire Swedbank group. Most prominent among these is the environment management system Swedbank has developed for the Swedish market. Through a structured approach, the system is designed to reduce the bank s environmental impact. Since 2003, the environment management system has been certified according to the international ISO standard. In addition, all companies in the Swedbank group support sustainable development. * Refers to nominal amounts. Does not take into account market valuations according to IAS 39. board of directors report Business concept By utilizing high cost efficiency and low funding costs, Swedbank Mortgage provides customers of Swedbank and the savings banks with competitive loans for the long-term financing of housing, municipal property holdings, agricultural properties and businesses with ties to the agricultural and forestry sector. Swedbank Mortgage s lending volume SEKbn

6 Market trends Higher growth than the rest of the EU leaves the Swedish economy well prepared for an international economic slowdown. board of directors report Interest rate hikes in a stable economy Sweden again reported strong GDP growth in 2007, at about 3 percent, exceeding the average for the rest of Europe. The Swedish economy has been strong for several years. Productivity improvements and a robust labor market have helped to lift real wages. Together with positive tax effects, this has contributed to higher real estate prices and consumer spending, compensating for lower U.S. export demand. Despite this growth, Swedish inflation remains under control. The Riksbank has maintained a tight monetary policy that has focused on concerns of future economic overheating, which have been fed by rising international commodity and food prices. The Riksbank s rate hikes in 2007 totaling one percentage point mean that the repo rate has more than doubled in less than two years to 4.0 percent at year-end. Slower growth in U.S. and Europe The rate hikes and slowdown in the United States have not yet significantly impacted the Swedish economy. There are clear signs, though, of weaker conditions in the United States and certain countries in the euro zone. This will leave Sweden in a slow-growth environment at the same time as inflation is slightly higher than it has been in recent years. Weaker international demand and the expectation of a dip in real wages could mean slower economic growth in Subprime crisis having limited effects The American residential mortgage crisis, which has resulted from certain lending institutions granting large amounts of credit to weak borrowers, has contributed to international concern for the banking system, as an unknown number of lenders are behind the financing of those lending institutions that have lent to subprime customers. Viewed from a long-term perspective, Sweden may be somewhat affected by the spin-off effects of the American mortgage crisis. Up until now, however, these international credit worries have only had marginal effects on Swedish banks, as these banks have only minimal direct or indirect exposure to subprime-related products. Problematic rate squeeze If liquidity shrinks and the credit crunch spreads, there are not likely to be any further increases in Swedish interest rates. The Federal Reserve cut interest rates a number of times in 2007, and it is doubtful that the ECB will raise rates if economic growth tails off. The question is at what rate central banks will compensate for the credit crunch that the subprime crisis contributed to. The banks funding costs rose by an extra half percentage point in the fall, and together with the Riksbank s rate hikes resulted in an effective increase in Swedish interest rates of 1.50 percentage points in This has had a direct effect on consumer lending rates. In the United States., the Federal Reserve s rate cuts to stimulate a slowing economy have also been neutralized by higher risk premiums.

7 The mortgage market The Swedish real estate market continued to show strong growth in 2007, but slowed slightly late in the year. Positive price trend Swedish real estate prices have increased in the last decade, with the price of single-family homes more than doubling during that period in some Swedish towns. During the second half of 2007 activity slowed due to higher interest rates, a new law on property taxation and the concerns weighing on the financial markets. The price gains in recent years are the product of several favorable factors, including changes in the property tax, low real interest rates and a low level of construction. The rise in property prices is not a result of speculation, to any significant degree. Unlike many other countries, Sweden does not have a buy-to-let market where buyers purchase one of more properties to let. One reason is that tenant-owner associations generally do not allow subletting. Though this generally creates stability, the real estate market is nevertheless expected to remain cautious and see lower liquidity in the year ahead. Financially stable households A positive factor for the Swedish real estate market is the industry s conservative lending practices. Mortgage lenders generally do not grant loans for more than 75 percent of a property s value, and Swedish laws force lenders to consider customers long-term ability to repay in all lending. The work of mortgage lenders is facilitated by Sweden s efficient system for evaluating the creditworthiness of borrowers. On the whole, around half of the aggregate value of Swedish residential properties is leveraged. Changing conditions In 2007 the real estate market was affected by a new tax law that takes effect on 1 January The elimination of the property tax has been offset by the introduction of a new municipal fee. Moreover, capital gains deferments have become more restrictive, at the same time that interest is charged on new and existing deferments. This is likely to contribute to a slowdown in the sale of private residences at least in the short term. Although there has been a certain increase in construction starts in attractive areas, new housing construction in Sweden is lower than other OECD countries measured in terms of GDP. Continued growth In 2007 mortgage volume in Sweden grew by approximately 10 percent. Competition remains high, since the mortgage business is considered an important gateway to other banking services. In addition, the new Basel 2 rules reduce equity requirements. In recent years large players with a strong local presence have regained their share of new sales from niche players. More condominium associations The corporate sector is primarily driven by demand from converted and newly built tenant-owner associations. This segment is expected to continue to thrive thanks to the government s positive stance toward tenant-owner conversions. The trend among municipal housing companies is to mortgage properties with the help of municipal guarantees, which reduces their need for traditional mortgages. Growth in agricultural and forestry sector Mortgage demand in the agricultural and forestry sector remained strong. The consolidation trend toward larger and more efficient agricultural businesses is one of the driving forces behind loan demand. The sector is generally optimistic owing to rising food prices, strong demand for forestry products and the debate on renewable energy. Real estate prices vs. Housing Index Index (1993=100) REPI & Swedbank Mortgage private properties Housing index (100=nom value) Housing index Private properties Real Estate Price index FPI board of directors report

8 Loan portfolio The residential sector accounts for 90 percent of Swedbank Mortgage s lending. Peter Stenborn, Chief Loan Officer board of directors report Low risk in loan portfolio Lending increased by SEK 53 billion (43) during the year, contributing to Swedbank Mortgage s total loans to the public amounted to SEK 565 billion (512) at year-end Mortgages accounted for the largest share of volume growth. The large part of Swedbank Mortgage s overall loan portfolio consists of mortgages for single-family homes, condominiums and multi-family housing, including tenant-owner associations. Together they represent 90 percent of Swedbank Mortgage s loan portfolio. As in earlier years, growth was concentrated in large metropolitan areas, where price increases have resulted in loan-tovalue ratio on new loans generally in the range of 75 percent. The risk in new lending is estimated to maintain the same low profile as the current loan portfolio, however. All lending by Swedbank Mortgage is primarily based on the borrower s longterm ability to repay, which is stress-tested by calculating how much is left to live on. New lending during the year was targeted at customers that satisfactorily meet these criteria. The debt service coverage ratio in the underlying single-family homes and condominiums amounted to 44 percent of their market value at year-end The loans regularly undergo stress tests, which continue to show that the loan-to-value ratio in the portfolio would remain low even if real estate prices decline. Risks closely monitored The changing economic conditions do not affect Swedbank Mortgage s security requirements for new loans. They are already conservative. On the other hand, analyses are frequently conducted of the parameters used in the calculations to accommodate changes in operating and living costs, for example. The results of the analyses may then necessitate changes in the requirements for a financial buffer after all expenses have been deducted. Swedbank Mortgage tests its current loan portfolio in various sensitivity analyses that take into account market factors such as rising interest rates or lower real wages. These analyses provide an overview of the risk on bad loans. The tests show that the loan portfolio has a low loss risk. The figure below shows Swedbank Mortgage s risk profile as of 31 December 2007 for loans to homeowners, businesses and agricultural and forestry enterprices. On the scale, 21 represents the lowest risk and 0 the highest risk, with an additional class for defaults. This risk classification shows that the portfolio is of a consistently high quality with very low risk of default. The loans judged in the stress tests as having higher risks are monitored more closely. Swedbank s local banking network gives Swedbank Mortgage an unrivalled ability to deal with risky loans through geographical proximity and familiarity as well as contacts and dialogue with the borrower. Corporate sector Lending to the corporate sector grew in 2007 as a result of strong demand from tenant-owner associations. Due to increased competition for municipal housing companies, margins remained compressed, however. Swedbank Mortgage retained its market shares in this sector. Swedbank Mortgage s portfolio by LTV SEKbn < 30% 30-60% 60-75% 75-85% >85% Over half of the portfolio value has a loan-to-value (LTV) ratio of less than 30 percent. Loan portfolio in 2007 distributed by collateral Municipalities, etc 3.3% Tenant-owner assoc. 13.1% Corporate, multi-family 4.4 % Agriculture 6.3 % Corporate, other 0.1 % Single-family homes 59.9% Vacation homes 1.8% Condominiums 11.1% Risk classification Swedbank Mortgage Exposure by risk class, % Def

9 Agricultural and forestry sector Demand among private agricultural and forest property owners helped Swedbank Mortgage to increase its lending to the sector by approximately SEK 3 billion in Swedbank Mortgage has been successful in maintaining its position against the increasing competition thanks to the roughly 200 specialized agricultural and forestry advisors at Swedbank and the savings banks, and it accounted for nearly half of new lending volume during the year. As a whole, customers in the sector have good payment records and loan losses are very low. Fixed long-term interest rates for half the portfolio The fixed interest term structure of Swedbank Mortgage s portfolio remains stable. As interest rates rise and the yield curve levels off, customers have shown more interest in extending their mortgages for somewhat longer periods. The majority of customers choose to divide up their loans into both short- and long-term interest fixing periods, however. Low loan losses Recoveries from previous provisions exceeded new losses and provisions. In 2007 the positive effect on profit was SEK 43m (8). Established loan losses amounted to SEK 23m (21), while recoveries from established loan losses in previous years totaled SEK 33m (4). Provisions for anticipated loan losses decreased in 2007 to a net reversal of SEK 33m (25). The volume of loans past due by more than 60 days remains at a very low level, although it increased slightly primarily after higher interest rates began having an impact. Swedbank s risk classification system and rules serve as the basis of efficient monitoring routines that are designed to minimize future losses. Household loans past due by more than 60 days as a share of the total loan portfolio remains low at around 0.06 percent (0.05). The corresponding figure for corporate loans is 0.01 percent (0.02). Impaired loans, after deducting provisions of SEK 54m (54), amounted to SEK 57m (55) as of 31 December 2007, corresponding to 0.01 percent (0.01) of total loans. Loans with interest reduction amounted to SEK 0 (0). Provisions for impaired loans and book values are shown in note 16. Past due loans > 60 days in percentage of lending volume Percent Private Corporate board of directors report Swedbank mortgage s loan portfolio distributed by remaining interest fixing period 31 Dec Dec 2006 SEKm percent SEKm percent < 1 year, variable 190, , < 1 year, fixed 82, , years 89, , years 73, , years 48, , years 40, ,584 6 > 5 years 39, ,391 6 Change in value 4,306 1,167 Total book value 560, , loan losses by category Established Anticipated * Total Total SEKm Single-family homes Condominiums Multi-family housing Agricultural real estate Writedown of the value of properties taken over 0 0 Recoveries of previous years established losses Total * Net change in provisions for anticipated loan losses

10 Funding The transition of the long-term Swedish and international loan portfolio to covered bonds improves Swedbank Mortgage s creditworthiness. board of directors report Consistent demand for bonds Swedbank Mortgage s funding market was again favorable in 2007 with strong underlying demand. For several years, investors have preferred fixed income securities with high credit quality to match pension liabilities, which has created a liquid funding market. The second half of 2007 witnessed uncertainty in the international financial markets, however. These concerns, triggered by the United States subprime crisis, made funding more expensive for Swedbank Mortgage and other credit institutions. Prepared for funding market s needs An important cornerstone in Swedbank Mortgage s funding is its access to a number of important markets. Swedbank Mortgage has secured its liquidity through both the Swedish bond market and a number of international funding markets. This is in line with the company s conservative liquidity policy, where risks are carefully monitored and limited, while consistently maintaining a store of liquid assets. Swedbank Mortgage has worked strategically for many years to internationalize its funding and is the single largest Scandinavian borrower in the euro market. However, it is a relatively small player from an international perspective, which increases the demands on transparency. Investor presentations, standardized legal documentation and liquid funding programs have created strong confidence in the company. In this way, Swedbank Mortgage has given itself flexibility and can minimize funding costs even when changes affect the credit market. If the concerns overshadowing the global financial market continue or even worsen, Swedbank Mortgage has strong creditworthiness and access to several large lending markets. As of year-end 2007 international markets accounted for 45 percent (46) of total funding. Swedbank Mortgage s bond and commercial paper programs comprise: Mortgage bonds in Sweden, SEK Foreign currency bonds (EMTN) Commercial paper programs in the: Euro market (ECP) French market (CD) U.S. market (USCP). Conversion to covered bonds Swedbank Mortgage s position will be further strengthened when its Swedish and international bond portfolios are converted to covered bonds. These bonds give holders higher priority than ordinary bonds in the event the originator becomes insolvent. Several other Swedish credit institutions have previously converted their domestic bonds to covered bonds. Swedbank Mortgage is the first credit institution in the EU, however, to also convert its foreign long-term funding. In September 2007 the Swedish Financial Supervisory Authority announced its approval to begin issuing covered bonds, and during autumn 2007 the initial ratings work was completed. During the second quarter of 2008 Swedbank Mortgage s bondholders will have their bonds converted to covered with higher credit ratings. Foreign funding by currency Swedbank mortgage s rating Other 2.05% JPY 1.99% USD 29.25% Moody's Fitch Standard & Poor s Long-term rating: Aa1 AA Short-term rating: P 1 F1+ A 1 HKD 3.84% GBP 4.43% EUR 58.44%

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12 Risk management board of directors report 10 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. 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 and companies). The risks are geographically diversified throughout Sweden 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 importance (in individual cases or in general) are made by Swedbank Mortgage s Board of Directors. Furthermore, Swedbank Mortgage s Board sets the loan limits for various types of properties. Swedbank Mortgage has delegated the right to establish procedures on the 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 other types of analyses of the loan portfolio. Loan evaluations take into account the customer s solvency and the value of the collateral. The latter is based on the property s long-term market value as determined by a local appraiser familiar with the local market. Moreover, the customer is carefully analyzed in an internal risk classification system and assigned a value on a risk scale. The risk classification system, which is designed in accordance with Basel 2, plays a central role in the group s day-to-day lending operations. It is used in the preparation of loan applications, as guidance in making decisions and to determine who may grant a loan. 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. The treasury department also faces counterparty risks, mainly through derivative contracts. In order to reduce the counterparty risk in foreign exchange transactions, Swedbank Mortgage has decided to divide its currency hedging agreements between a number of counterparties, all of which have the same or better credit rating than Swedbank Mortgage itself. Counterparty risks are also reduced through bilateral agreements, which allow risks to be netted using standardized procedures. FINANCIAL RISKS Financial risks are divided into two main types: market risk and liquidity risk. Swedbank Mortgage s Board determines comprehensive goals for financial risks. It also sets limits for financial risks as mandated from Swedbank to Swedbank Mortgage. Moreover, the Board retains responsibility for ensuring that the requisite guidelines and procedures for risk management are established and followed. Financial risks that arise in lending are transferred to the treasury department at Swedbank Mortgage, which is assigned specific mandates for financial risks. The department has a risk control function responsible for the day-to-day monitoring and compilation of information on financial risks. Financial risk utilization is reported to the Board of Swedbank Mortgage and Swedbank s risk control unit on a continual basis. Market risk Market risks refer 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 financed with funding in SEK as well as other major currencies, a foreign exchange risk arises. This risk is managed through derivatives in the foreign exchange market. Despite extensive funding in foreign currency, Swedbank Mortgage s exposure to foreign currency risks is therefore 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 mainly managed through Swedbank Mortgage s active work in the funding market, and by using derivatives in the fixed income market, e.g., swaps and futures. Interest rate risk cannot be completely eliminated since residential mortgages are

13 constantly refinanced at new terms and new loans are granted. The remaining risk that affects Swedbank Mortgage s profit is limited, however, and is kept within an interval approved by the company s board. Liquidity risks Liquidity risks refer to the risk that Swedbank Mortgage cannot fulfill its payment commitments on any given due date, without significantly raising the cost to fund payments. Swedbank Mortgage s liquidity is relatively easy to forecast since maturities and interest payments on both its mortgages and funding are known in advance. With the help of accurate forecasts and diversified funding in a large number of capital markets, Swedbank Mortgage minimizes the risk of liquidity problems. Liquidity exposure is limited by the company s Board and monitored continuously by both Swedbank Mortgage and the Swedbank group. OPERATIONAL RISKS Operational risk is defined as the risk of losses due to inadequate or insufficient internal routines, human error and faulty systems, or due to outside circumstances. Swedbank Mortgage s work to minimize these operational risks is based on Swedbank s methods and routines. The Swedbank Mortgage group applies both qualitative methods such as self-evaluations and quantitative methods, where reporting is done in an operating loss database. 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. The tier 1 capital ratio should not fall below 8 percent long-term. Basel 2 On February 1, the new Basel 2 capital adequacy rules were introduced in Sweden. These rules link capital requirements to risk profile, risk measurement and the assessment of risk capital needs to a greater degree than before. With the approval of the Swedish Financial Supervisory Authority, Swedbank Mortgage primarily bases capital requirements for credit risks on internal risk measurement according to the Internal Ratings Based Method (IRB method) that has been developed by Swedbank. A capital requirement for operational risks has also been added, which, with the approval of the Financial Supervisory Authority, is calculated according to a standardized method. For Swedbank Mortgage, the new rules mean lower equity requirements, as the company focuses on mortgages, which generally involve very low levels of risk. During a transition period ending in 2009, special rules will apply, which will mean a gradual lowering of the capital requirements as a result of the new rules. According to these transitional rules, the minimum capital requirements for 2007 are at least 95 percent of the capital requirements calculated according to the older rules, with exceptions for certain adjustments. For 2008 and 2009, the corresponding floor will be 90 and 80 percent, respectively. More detailed information (Pillar 3) regarding the 2007 risks and capital adequacy of Swedbank, which includes Swedbank Mortgage, can be found through a link at årsredovisning 2007 board of directors report 11

14 Key financial highlights swedbank MORTGAGE GROUP For definitions see page * 2003 ** Profit Investment margin, % Return on equity, % Earnings per share, Capital Capital base, SEKm 26,882 26,823 26,116 23,673 22,723 Capital adequacy quotient *** Capital adequacy ratio, % *** Tier 1 capital ratio, % *** No. of shares at start/end of period, million Equity per share, SEK 1, , board of directors report 12 Credit quality Loan loss ratio, % Provision ratio for impaired loans, % Share of impaired loans, % Other Number of employees * Not restated according to IAS 39. ** Not restated according to IFRS. Profit analysis Operating profit for the Swedbank Mortgage group amounted to SEK 3,828m (3,759). The return on equity was 10.6 percent (11.5). Operating results for the last five years are summarized in the key financial ratios and condensed income statement and balance sheet on pages 12 and 13. Volume growth during the year was very good, although competitive pressures in the market remains, which has resulted in tight margins. Net interest income for the year amounted to SEK 4,133m (4,151). Commissions paid, primarily to the savings banks for loans they arranged, amounted to SEK 561m (565). Operating expenses decreased compared with the previous year to SEK 57m (66). Recoveries from previous years provisions exceeded new losses and provisions by SEK 43m (8). Loan losses and impaired loans are further specified in notes 10 and 16. Proposed distribution of profit The following amounts are at the disposal of the Annual General Meeting SEKm Swedbank Mortgage AB (publ) Retained earnings 9,465 Profit for the year 2,607 Group contributions paid 3,600 Tax reduction due to Group contributions paid 1,008 Total available 9,480 The Board of Directors proposes that the following amount be carried forward 9,480 Total 9,480

15 Five-year summary swedbank MORTGAGE GROUP, CONDENSED INCOME STATEMENT OVER A FIVE-YEAR PERIOD SEKm * 2003 ** Interest income 25,540 20,121 19,176 20,900 21,921 Interest expenses 21,407 15,970 14,183 15,808 17,034 Net interest income 4,133 4,151 4,993 5,092 4,887 Net commission income Other operating income Total income 3,842 3,817 4,863 4,619 4,410 Operating expenses Profit before loan losses 3,785 3,751 4,797 4,556 4,273 Loan losses Operating profit 3,828 3,759 4,815 4,602 4,255 Tax expense 1,075 1,053 1,348 1,289 1,192 Profit for the year 2,753 2,706 3,467 3,313 3,063 swedbank MORTGAGE GROUP, CONDENSED BALANCE SHEET OVER A FIVE-YEAR PERIOD SEKm * 2003 ** Assets Loans to credit institutions 66,838 47,232 35,921 44,952 30,831 Loans to the public 560, , , , ,752 Interest-bearing securities Other assets 11,464 9,538 10,757 5,251 5,009 Total assets 638, , , , ,592 Liabilities Amounts owed to credit institutions 125,006 99,238 79,472 70,022 39,054 Debt securities in issue 464, , , , ,363 Other liabilities 22,544 19,363 14,684 15,591 14,247 Subordinated liabilities 2,389 2,328 4,240 5,024 5,274 Total liabilities 614, , , , ,938 Equity 24,932 24,771 22,065 18,840 17,654 Total liabilities and equity 638, , , , ,592 board of directors report 13 * Not restated according to IAS 39. ** Not restated according to IFRS.

16 Income statement Group Swedbank Mortgage AB SEKm Note Interest income 25,540 20,121 25,210 19,697 Interest expenses 21,407 15,970 21,377 15,882 Net interest income 3 4,133 4,151 3,833 3,815 Commission income Commission expenses Net commissions Net gains and losses on financial items at fair value Other operating income Total income 3,842 3,817 3,619 3,573 income statment 14 Staff costs Other general administrative expenses Total general administrative expenses Depreciation/amortization and impairments of tangible and intangible fixed assets Total expenses Profit before loan losses 3,785 3,751 3,579 3,513 Loan losses, net Operating profit 3,828 3,759 3,623 3,521 Tax expense 11 1,075 1,053 1, Profit for the year 2,753 2,706 2,607 2,535 Profit for the year attributable to the shareholder of the parent 2,753 2,706 Earnings per share before and after dilution, SEK

17 Balance sheet Group Swedbank Mortgage AB SEKm Note Assets Treasury bills and other bills eligible for refinancing with central banks Loans to credit institutions 14 66,838 47,232 98,281 76,126 Loans to the public 15,16,17 560, , , ,672 Shares and participating interets Investments in group entities 19 1,750 1,750 Derivatives 20 6,034 2,537 6,030 2,537 Intangible fixed assets Tangible fixed assets Current tax assets 1,068 1,130 Other assets ,109 1,030 4,291 Prepaid expenses and accrued income 24 3,497 2,861 3,491 2,820 Total assets 638, , , ,297 Liabilities and equity Liabilities Amounts owed to credit institutions ,006 99, ,006 99,238 Debt securities in issue , , , ,536 Derivatives 20 4,608 8,109 4,616 8,048 Current tax liabilities Deferred tax liabilities Other liabilities 27 3, , Accrued expenses and prepaid income 28 14,179 10,812 14,118 10,751 Subordinated liabilities 29 2,389 2,328 2,389 2,328 Total liabilities 614, , , ,232 Equity Equity attributable to shareholders of the parent 30 24,932 24,771 Share capital 11,500 11,500 Other funds 3,100 3,100 Retained earnings 9,480 9,465 Total equity 24,932 24,771 24,080 24,065 Total liabilities and equity 638, , , ,297 balance sheet 15 Contingent liabilities 31 1,132 1,172 Pledged assets Commitments, nominal amount 31 11,232 6,294 Notes not directly related to the income statement, balance sheet, cash flow statement or statement of changes in equity: Note 1 Corporate information Note 2 Accounting policies Note 32 Related parties Note 33 Fair value of financial instruments Note 34 Financial risks and other risks Note 35 Credit risks Note 36 Interest rate analysis Note 37 Summary of maturities Note 38 Currency distribution Note 39 Capital adequacy analysis

18 Cash flow statement Group Swedbank Mortgage AB SEKm cash flow statement 16 Cash and cash equivalents at beginning of year * 900 6, ,311 Operating activities Operating profit 3,828 3,759 3,623 3,521 Adjustments for non-cash items 1,067 2,140 1,029 2,062 Taxes paid 1,344 1,482 1,243 1,381 Increase/decrease in loans to credit institutions 2,165 16, ,660 Increase/decrease in loans to the public 53,293 43,074 50,403 40,514 Increase/decrease in amounts owed to credit institutions 26,029 20,212 26,029 20,212 Change in other assets and liabilities, net 3,335 4,360 3,321 4,371 Cash flow from operating activities 18,213 44,043 18,568 44,255 Investing activities Change in fixed assets 9 Cash flow from investing activities 9 Financing activities Issuance of interest-bearing securities 165, , , ,715 Redemption of interest-bearing securities 138, , , ,927 Increase/decrease in other funding 12,547 11,383 12,547 11,383 Cash flow from financing activities 39,885 38,405 39,885 38,405 Cash flow for the year 21,672 5,647 21,317 5,850 Cash and cash equivalents at end of year * 22, , * of which, securities pledged for OMX AB at the beginning of year at the end of year Comment on consolidated cash flow statement The cash flow statement shows receipts and disbursements during the year as well as cash and cash equivalents at the beginning and end of the year. The cash flow statement is reported using the indirect method and is based on operating income for the period and changes shown 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, which are not attributable to investing and financing activities. Cash flow includes interest receipts of SEK 24,891m (19,918) and interest payments, including capitalized interest, of SEK 18,077m (13,569). Financing activities The issue and redemption 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 and cash equivalents consist of cash and cash balances with central banks and treasury bills and other eligible bills. Specification of adjustment for non-cash items: Group Swedbank Mortgage AB SEKm Unrealized translation differences bonds in issue 1,503 4,461 1,503 4,461 Prepaid expenses and accrued income Accrued expenses and prepaid income 3,366 2,338 3,367 2,381 Change in valuation of loans to the public and credit institutions 3,139 4,652 3,096 4,595 Change in valuation of debt securities in issue and derivatives 3,299 4,489 3,260 4,489 Total 1,067 2,140 1,029 2,062

19 Statement of changes in equity Equity attributable to shareholders of Swedbank Mortgage AB Other capital Group, SEKm Share capital contributions Retained earnings Total Opening balance 1 January ,500 2,400 8,165 22,065 Profit for the year 2,706 2,706 Closing balance 31 December ,500 2,400 10,871 24,771 Opening balance 1 January ,500 2,400 10,871 24,771 Group contributions paid 3,600 3,600 Tax reduction due to Group contributions paid 1,008 1,008 Profit for the year 2,753 2,753 Closing balance 31 December ,500 2,400 11,032 24,932 Non-restricted Swedbank Mortgage AB, SEKm Share capital Statutory reserve equity Total Closing balance 31 December ,500 3,100 7,045 21,645 Change in accounting policy according to FFFS 2006: Opening balance 1 January ,500 3,100 6,930 21,530 Profit for the year 2,535 2,535 Closing balance 31 December ,500 3,100 9,465 24,065 of which, conditional shareholder s contributions 2,400 2,400 Opening balance 1 January ,500 3,100 9,465 24,065 Group contributions paid 3,600 3,600 Tax reduction due to Group contributions paid 1,008 1,008 Profit for the year 2,607 2,607 Closing balance 31 December ,500 3,100 9,480 24,080 of which, conditional shareholder s contributions 2,400 2,400 statement of changes in equity 17

20 Definitions definitions 18 Anticipated loan losses Provisions for impaired loans if the solvency of the borrower is not expected to improve sufficiently within two years and the value of the collateral does not cover the loan amount. Capital adequacy quotient The closing-day capital base in relation to the closing-day capital requirement. Capital adequacy ratio The closing-day capital base in relation to the closing-day risk-weighted amount. Capital base The sum of Tier 1 and Tier 2 capital less items in accordance with chapter 3 section 5-8 of the Capital Adequacy and Large Exposures Act. To cover capital requirements for market risks, subordinated loans with original maturities of at least two years may be included in the expanded portion of the capital base. Impaired loans Loans where payments are unlikely to made in accordance with contract terms. Such loans are not considered impaired if there is collateral that covers principal, interest and any late fees by a safe margin. Impaired loans, gross, less specific provisions for loans assessed individually and provisions for homogenous loans assessed collectively constitute impaired loans, net. Interest fixing period Contracted period during which interest on an asset or liability is fixed. Investment margin Net interest income in relation to average total assets. Loan losses, net Established and anticipated losses for the year less restored provisions and recoveries related to loans as well as the year s net expense for discharging guarantees and other contingent liabilities. original loan conditions due to solvency problems on the part of the borrower. Maturity The time remaining until the terms or amortization date of an asset or liability change. Number of employees The number of employees at year-end, excluding long-term absences, in relation to the number of hours worked expressed in terms of fulltime positions. Provision ratio for individually identified impaired loans Specific provisions for loans assessed individually and provisions for homogenous groups of loans assessed collectively in relation to impaired loans, gross. Restructured loan Loan for which the borrower has been granted some form of concession due to a deteriorated financial position. Return on shareholders equity Profit for the financial year in relation to average shareholders equity. Risk-weighted amount Total assets on the balance sheet and off-balance sheet commitments divided by credit and market risks valued and risk-weighted according to current capital adequacy regulations. Share of impaired loans Impaired loans, net, in relation to the book value of loans to credit institutions and the public. Tier 1 capital Shareholders equity less deferred tax assets and intangible assets in the group plus equity contributions and reserves that may be included in the capital base as tier 1 capital according to chapter 3 section 4 of the Capital Adequacy and Large Exposures Act. Loan loss level Loan losses, net, and changes in the value of property taken over in relation to the loan balance brought forward as well as property taken over and loan guarantees. Loan-to-value (LTV) ratio The sum of the current mortgage and any other mortgages expressed as a percentage of a property s market value. Loan with interest concession A loan on which an interest concession has been agreed. By interest concession is meant some form of allowance deviating from the Tier 1 capital ratio Closing-day tier 1 capital in relation to the closing-day risk-weighted amount. Tier 2 capital Fixed-term subordinated liabilities, less a certain reduction if their remaining maturity is less than five years, and undated subordinated liabilities included in the capital base according to chapter 3 section 4 of the Capital Adequacy and Large Exposures Act. Total provision ratio for impaired loans All provisions for loans in relation to impaired loans, gross.

21 Notes All amounts in the notes are in millions of Swedish kronor (SEK m) and at book value unless indicated otherwise. Figures in parentheses refer to the previous year. 1 Corporate Information Swedbank Mortgage s year-end report for 2007 was approved for publication by the Board of Directors and the President on 6 February The consolidated financial statements and the annual report for Swedbank Mortgage AB (publ) for the financial year 2007 were approved for issuance by the Board of Directors and the President on 6 February Swedbank Mortgage AB, which maintains its registered office in Stockholm, Sweden, is a wholly owned subsidiary of Swedbank AB. 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 consolidated financial statements are prepared in accordance with the International Financial Reporting Standards (IFRS) and their interpretations as adopted by the European Union (EU). The standards are issued by the International Accounting Standards Board (IASB) and its interpretations by the International Financial Reporting Interpretations Committee (IFRIC). The standards and interpretations become mandatory for listed entities consolidated financial statements concurrently with their approval by the EU. The consolidated financial statements have also been prepared in accordance with the Swedish Accounting Standards Council s recommendation RR 30 on complementary rules for groups, the pronouncements of the Swedish Emerging Issues Task Force, certain complementary rules in the Annual Accounts Act for Credit Institutions and Securities Companies (ÅRKL) and the Swedish Financial Supervisory Authority s regulations (FFFS 2006:16, 2007:6, 2007:13). The Swedish Financial Reporting Board replaced the Swedish Financial Accounting Standards Council on 1 April The parent company s annual report has been prepared in accordance with the Annual Accounts Act for Credit Institutions and Securities Companies (ÅRKL), the Financial Supervisory Authority s regulations and general advice and the Swedish Accounting standards Council recommendation RR 32 Reporting by legal entities. Accounting is based on historical cost, except for financial instruments which are recorded at amortized costs or fair value. 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 (SEK) and all figures are rounded to millions of kronor (SEKm) unless indicated otherwise. Consolidated financial statements The consolidated financial statements are prepared in accordance with the purchase method and include Swedbank Mortgage AB (publ), the wholly owned subsidiary Swedbank Jordbrukskredit AB and Farms Securitisation Ltd. All intra-group transactions and intra-group gains have been eliminated. CHANGES IN ACCOUNTING POLICIES As of 2007 the parent company recognizes derivatives at fair value, as a consequence of which individual portfolios of loans and debt securities in issue are recognized according to the so-called fair value option. This change means that the parent company s accounting of financial instruments follows the same policies as already applied by the group. All comparative figures have been restated. The change described in the parent company reduced profit for the year 2006 by SEK 90m and the closing equity balance for 2006 by SEK 205m. SIGNIFICANT ACCOUNTING POLICIES Assets and liabilities in foreign currency The consolidated financial statements are presented in SEK, which is also the parent company s functional and reporting currency. Transactions in a currency other than the functional currency (foreign currency) are initially recorded at the exchange rate prevailing at the transaction day. Financial assets, liabilities and derivatives in foreign currency are translated at the closing rates prevailing on the closing day. All gains and losses on the translation of financial items and nonfinancial items that are measured at fair value are recognized through profit or loss as changes in exchange rates in Net gains and losses on financial items at fair value. Financial instruments The group s financial instruments are divided into the valuation categories: Financial instruments at fair value through profit or loss, loans and receivables and other financial liabilities. A few individual holdings of insignificant amount have been categorized as investments available for sale. All financial instruments are initially measured at fair value, which corresponds to cost. Subsequent measurements are made depending on the valuation category the financial instrument is attributed to. Financial instruments are recognized on the trade day when an acquisition agreement has been entered into, with the exception of loans and receivables, which are recognized on the settlement day. Financial assets are removed when the right to obtain the cash flows from a financial instrument has expired or the right to receive the cash flows is essentially transferred to another party. Financial liabilities are removed from the balance sheet when the obligation in the agreement has been discharged, annulled or extinguished. Financial assets at fair value through profit or loss The option to measure assets and liabilities at fair value through profit or loss in order to reduce accounting volatility i.e., the fair value notes 19