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1 20 08 Annual report

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3 Contents Key figures 2 Definitions 2 Administration report 3 Income statement 4 Balance sheet 5 Statement of changes in equity 6 Cash flow statement 7 Notes 8 Accounting policies 8 Risks and risk control 9 Notes to the income statement and balance sheet 12 Capital adequacy 18 Other disclosures 19 Recommended appropriation of profit/loss 20 Audit report 21 Five-year overview 22 Addresses 24 1

4 Key figures and definitions Key figures Operating profit, SEK m Total assets, SEK m Return on shareholder s equity, % C/I ratio before credit losses % C/I ratio after credit losses, % Capital ratio (2008 according to transitional rules), % Tier 1 ratio (2008 according to transitional rules), % Bad debt reserve ratio, % Proportion of bad debts, % Credit loss ratio, % Average number of employees Definitions BAD DEBTS Credits where payments will probably not be met according to the conditions of the contract. A credit is not a bad debt if there is collateral which covers the principal amount, interest and penalties for late payments by a satisfactory margin. BAD DEBT RESERVE RATIO Provision for probable credit losses in relation to gross bad debts. CAPITAL RATIO The capital ratio is the capital base in relation to risk-weighted volume. The Act on Capital Adequacy and Large Exposures of Credit Institutions and Securities Companies stipulates that the capital ratio should be at least 8%. C/I RATIO Total expenses in relation to total income. The C/I ratio is calculated before and after credit losses. NON-PERFORMING credits Credits where interest, repayments or overdrafts have been due for payment for more than 60 days. PROPORTION OF BAD DEBTS Net bad debts in relation to total credits to the public and lease assets. RESTRUCTURED credit RECEIVABLEs Credits where some kind of concession has been made due to the borrower s inadequate payment capacity. RETURN ON EQUITY The year s profit/loss in relation to average shareholder s equity. TIER 1 RATIO Tier 1 capital in relation to risk-weighted volume. Credit LOSS RATIO Credit losses as a percentage of the opening balance for credits to the public and credit institutions (excl. banks). 2

5 Administration report Administration report Handelsbanken Finans AB (publ), corporate identity no , is a wholly-owned subsidiary of Svenska Handelsbanken AB (publ), corporate identity no It operates in close co-operation with the Bank s branches. Handelsbanken has its registered office in Stockholm. Task and goals The task of Handelsbanken Finans (HF) is to increase the Handelsbanken s opportunities to establish long-term and profitable customer relationships with a larger number of customers by delivering a higher quality service level at lower cost than our competitors. HF defines service as: Availability, Simplicity and Care. HF operates as an integral part of the Handelsbanken ; its goal is to contribute to the Bank s corporate goal of higher return on equity than a weighted average of comparable Nordic and British banks. Lending Handelsbanken Finans s total credits to the public at year-end were SEK 65.1bn (54.2). Of this amount, the book value of lease agreements was SEK 46.3bn (35.2). Loans to the public by the parent company, including leases, increased by 21% to SEK 59.3bn. Financial performance Operating profits rose in 2008 by 20% to SEK 1,341m (1,121). Total operating income, reduced by the amortisation of lease assets according to plan, increased by 17% to SEK 2,088m (1,780). Expenses excluding amortisation of lease assets totalled SEK 651m (625), up 4% on the previous year. Credit losses were SEK 96m (34). Net bad debts, after deductions for provisions, totalled SEK 220m (135) at year-end. Operating profit was SEK 2,712m (964), a rise of SEK 1,748m. This increase included SEK 1,814m distributed by subsidiaries. Operating income, reduced by the amortisation of lease assets according to plan, increased by SEK 1,805m to SEK 3,261m (1,456). Expenses excluding amortisation of lease assets totalled SEK 496m (481). Credit losses were SEK 53m, an increase of SEK 42m. Net bad debts, after deductions for provisions, totalled SEK 120m (67). For information regarding proposals for distribution of profits, see page 20. Risks and risk control For information concerning Handelsbanken Finans s risks and risk control, see page 9. Capital adequacy At year-end, the s capital ratio calculated according to Basel II was 158%. The corresponding figure according to the transitional regulations was 121%. The previous year, the capital ratio calculated according to Basel I was 94%. In the parent company the capital ratio at year-end according to Basel II was 189%, or 181% excluding the transitional regulations. The previous year, the capital ratio calculated according to Basel I was 125%. For further information about capital adequacy, see page 18. The board The board held six meetings during the year. At these meetings, the board discussed the financial position and strategy of Handelsbanken Finans. It also followed up limits for interest rate risks, etc. The board received regular information on credit risks and operational risks The board has taken decisions on major investment matters and strategic questions. IT development In 2008, Handelsbanken Finans focused on IT projects for the purpose of developing business, mainly in the area of leasing. Environmental work Environmental issues are a vital element in the Handelsbanken s operations, and thus also in the Handelsbanken Finans. This applies both to the Bank s responsibility for the environment in its own operations and consideration of environmental risks when assessing credits. Handelsbanken has signed and complies with voluntary agreements, such as the ICC Business Charter for Sustainable Development and the UN Environment Programme - Banks and the Environment. Employees In 2008, the average number of employees in the was 520 (493). structure During 2008, Handelsbanken Finans conducted business via the following wholly-owned subsidiaries: Handelsbanken Finans (Shanghai) Leasing Company Ltd Handelsbanken Rahoitus Oyj Kredit-Inkasso AB Kreditt-Inkasso AS Spartacus A/S In Sweden, Kredit-Inkasso AB conducts debt collection services on behalf of Handelsbanken Finans AB. During the year operations started up in China, via the newly formed subsidiary. business areas Regional Bank Operations are responsible for leasing, conditional sales and vehicle administration which is offered to companies in Sweden via Handelsbanken s branch operations. Direct sales provides financing for purchases of consumer and capital goods through co-operation with vendors in Sweden. Card operations is responsible for card issuing and acquisition of card transactions within the Handelsbanken. International is responsible for business operations outside Sweden. In Denmark Spartacus A/S works mainly with retail financial services. Handelsbanken Finans s Danish branch runs a leasing operation. In Finland Handelsbanken Rahoitus Oyj provides leasing, conditional sales and debt collection services and also operates an extensive card business under the name Aktiiviraha. Handelsbanken Finans s Finnish branch runs a leasing operation. In Norway Kreditt inkasso AS offers debt collection services. Handelsbanken Finans s Norwegian branch runs operations in leasing, promissory note credits and retail financial services. Handelsbanken Finans s branches in Great Britain and Poland conduct leasing and hire purchase operations. In China, Handelsbanken Finans (Shanghai) Leasing Company Ltd works with leasing. The four business support units IT & Business Development, Accounting & Treasury, Credits and Personnel are organised as separate areas. The future In the current market situation, the rapid growth of the past few years is expected to slow down. Material events A decision has been taken by the board to transfer HF s operations in Spartacus A/S to HF s Danish branch. The process is expected to be completed in

6 Income statement Income statement SEK m Interest income Note Lease income Note Interest expense Note Dividends received from group companies Fee and commission income Note Fee and commission expense Note Net gains/losses on financial operations Note Other operating income Note Total operating income General administrative expenses Staff costs Note Other Note Depreciation, amortisation and impairments of property, equipment and intangible assets Note Total administrative expenses Net credit losses Note Total operating expenses Operating profit Appropriations Note Profit/loss before taxes Taxes Note Profit/loss for the year Net earnings per share, SEK

7 balance sheet Balance sheet SEK m ASSETS Credits to credit institutions Note Credits to the public Note Shares and participating interests Note Shares and participations in companies Note Intangible fixed assets Note Property and equipment Equipment Note Lease assets Note Current tax assets Deferred tax assets Note Other assets Note Prepaid expenses and accrued income Note Total assets LIABILITIES AND EQUITY Due to credit institutions Note Borrowing from the public Note Current tax liabilities Deferred tax liabilities Note Other liabilities Note Accrued expenses and deferred income Note Total liabilities Untaxed reserves Note Share capital Other funds Statutory reserve Other funds Retained earnings Profit/loss for the year Total equity Total liabilities and equity MEMORANDUM ITEMS Collateral pledged none none none none Other commitments Note

8 statement of changes in equity Statement of changes in equity Restricted equity SEK m Share capital Other funds Hedge reserve Retained earnings Total Shareholder s equity 31 December Change in cash flow hedges, after tax Change in exchange differences Change of exchange rate difference in financing of net investment in subsidiaries Total changes in equity not reported in the income statement Transfer between retained earnings and other reserves Profit/loss for the year contribution received Tax effect of group contribution Shareholder s equity 31 December Change in cash flow hedges, after tax Change in exchange differences Change of exchange rate difference in financing of net investment in subsidiaries Total changes in equity not reported in the income statement Transfer between retained earnings and other reserves Profit/loss for the year contribution received Tax effect of group contribution Shareholder s equity 31 December Restricted equity SEK m Share capital Other funds Hedge reserve Retained earnings Total Shareholder s equity 31 December Change in cash flow hedges, after tax Total changes in equity not reported in the income statement Profit/loss for the year contribution received Tax effect of group contribution Other change in shareholder s equity 2 2 Shareholder s equity 31 December Change in cash flow hedges, after tax Total changes in equity not reported in the income statement Profit/loss for the year contribution received Tax effect of group contribution Other change in shareholder s equity -6-6 Shareholder s equity 31 December More information about hedge accounting and the hedge reserve can be found on page 19. 6

9 cash flow statement Cash flow statement SEK m OPERATING ACTIVITIES Operating profit Adjustment for non-cash items in the income statement: Credit losses Depreciation, amortisation and impairments Paid income tax Change in assets and liabilities of operating activities Credits to the public Lease assets Financial current assets Due to credit institutions Borrowing from the public Other assets and liabilities Cash flow from operating activities INVESTING ACTIVITIES Change in shares Change in tangible fixed assets Change in intangible fixed assets Cash flow from investment operations FINANCING ACTIVITIES contribution received Cash flow from financing activities CASH FLOW FOR THE PERIOD Liquid funds at beginning of period Cash flow from operating activities Cash flow from investment operations Cash flow from financing activities Exchange rate difference on liquid funds Liquid funds at end of period

10 notes Notes Accounting policies STATEMENT OF COMPLIANCE The parent company s annual report is prepared in compliance with the Annual Accounts Act for Credit Institutions and Securities Companies (1995:1559), the directives and general advice issued by the Swedish Financial Supervisory Authority, FFFS 2008:25 Annual reports in credit institutions and securities companies, and the Swedish Financial Reporting Board s recommendation RFR 2 Accounting for legal entities. In accordance with the Supervisory Authority s general advice, the parent company and both apply statutory IFRS. This means that the international accounting standards and interpretations of these standards as adopted by the EU have been applied to the extent that is possible within the framework of national laws and directives and the link between accounting and taxation. Issuing and adoption of annual report The annual report was approved for issue by the board on 18 March 2009 and will be adopted by the annual general meeting on 29 April CONSOLIDATED ACCOUNTS The consolidated accounts comprise all companies in which Handelsbanken Finans has a participating interest and directly or indirectly has a controlling influence. Subsidiaries are consolidated in accordance with the purchase method. All foreign operations have been classified as independent. This classification is based on the observation that the foreign operations only carry out transactions with the parent company and other companies to a small extent, that financing is in local currency only, that salaries and other expenses are paid in local currency, that all billing is done mainly in local currency and that the operations do not have any direct influence on the cash flows of the parent company. The s presentation currency is Swedish kronor. The functional currency for the s operations outside Sweden may be different to the s presentation currency. The currency used in the economic environment where the operations are primarily conducted is regarded as the functional currency. ASSETS AND LIABILITIES IN FOREIGN CURRENCIES Receivables and liabilities in foreign currencies were converted at the rate applying on the balance sheet date, which is the average of buying and selling prices for the currency in question according to the officially listed rates on the balance sheet date. Unrealised gains or losses which have arisen as a result of the aforementioned valuation method are credited or charged to the operating result. When translating the foreign operations balance sheets and income statements, the current method has been used. Assets and liabilities have been translated at the closing day rate. Equity has been translated at the rate applicable at the time of investment or earning. Goodwill and surplus value from the acquisition of foreign operations are reported at the closing day rate. The income statement has been translated at the average annual rate. The resulting translation differences have been classed as equity. RECOGNITION OF ASSETS AND LIABILITIES An asset is defined as a resource over which there is control as a result of past events and that is expected to provide future economic benefit. Assets are recognised in the balance sheet when it is probable that the future economic benefits related to the asset will accrue to the and when the value or acquisition cost of the asset can be reliably measured. Liabilities are the s existing obligations which as a result of past events are expected to lead to an outflow of resources from the. A liability is recognised in the balance sheet when, in order to fulfil an existing obligation, it is probable that the must surrender a resource with a value that can be reliably measured. RECOGNITION AND MEASUREMENT OF FINANCIAL ASSETS AND LIABILITIES Financial assets are recognised in the balance sheet when the becomes a party to the contractual provisions of the instrument. Purchases and sales of money market on the spot market are recognised on the trade date. The same applies to derivatives. Other financial assets and liabilities are normally recognised on the settlement date. Financial assets are removed from the balance sheet when the contractual rights to the cash flows originating from the asset expire or when all risks and rewards related to the asset are transferred to another party. A financial liability is removed from the balance sheet when the obligation ceases or is cancelled. Credits and other receivables are carried at amortised cost, i.e. the discounted present value of all future cash flows relating to the instrument where the discount rate is the asset s effective interest rate at the time of acquisition. Credits and receivables are subject to impairment testing when indications of an impairment loss are present. The impairment loss is recognised in profit or loss. Thus credits and receivables are recognised at their net amount, after deduction for probable and actual credit losses. Shares which are held on a permanent basis, such as shares in subsidiaries, are recognised at cost. For shares where the value has fallen and this decline in value is considered to be permanent, an impairment loss is recognised. Dividends on shares in subsidiaries are recognised as income in the parent company s income statement under Dividends received. Other shares are measured at fair value using prices from official market places. HEDGE ACCOUNTING Cash flow hedges are applied to eliminate undesirable variations in cash flows related to changes in the floating interest rate on lending and funding. The hedging instruments used are interest rate swaps measured at fair value. If the value changes on the swap are effective that is they correspond to cash flows related to the hedged item they are recognised directly in equity. Ineffective components of gains and losses on the swap are recognised in profit or loss. More information about cash flow hedges is provided on page 19. Hedging of net investments in foreign units is applied to protect the from exchange rate differences due to operations abroad. Credits in foreign currency raised to hedge net investments in foreign operations are recognised in the at the exchange rate on the balance sheet date since the purpose is to reduce the rate difference arising when translating the foreign operations balance sheets and income statements. The exchange rate difference that arises when translating these liabilities is recorded directly against shareholder s equity. In the parent company, debts raised for the purpose of hedging exchange rate differences for net investments in subsidiaries are recognised at the historical rate of exchange. LEASES Leases are normally defined as finance or operating leases. A finance lease implies that the lessor transfers substantially all the risks and rewards associated with ownership to the lessee. Operating leases are all non-financial leases. The Swedish Financial Reporting Board s recommendation RFR 2 allows a lessor the right to classify all leases as operating leases in its annual accounts for a legal entity. This classification has been used in the parent company s annual accounts The income is thus reported as lease income. The assets are recorded as fixed assets, thus permitting the parent company to depreciate them. In the, all leases are categorised as financial leases. Such leases are accounted for as credits, which means that lease payments received are recognised as interest income and repayments. INTANGIBLE ASSETS An intangible asset is an identifiable, non-monetary asset without physical substance that is held for use in production, supply of goods or services, for hiring out to others or for administrative purposes. In the case of development of new intangible assets, or new business operations for existing intangible assets, the direct expenditure accrued is capitalised from the time when it is probable that economic benefit that can be reliably measured will arise. An impairment test is performed when there is any indication that the asset may have decreased in value. In addition goodwill items at Handelsbanken Finans are annually tested by Handelsbanken for impairment. 8

11 notes Goodwill, acquisition assets and other intangible assets with an indefinite useful life are amortised in compliance with the provisions of the abovementioned Annual Accounts Act. PROPERTY AND EQUIPMENT Property and equipment are recognised at cost less accumulated amortisation and impairment. Depreciation according to plan is based on the estimated useful lives of the assets. A linear depreciation plan is usually applied. Impairment testing of property and equipment is carried out when there is an indication that the asset may have fallen in value. Impairment loss is recognised in cases where the recoverable amount is less than the carrying amount. Any impairment losses are recognised immediately in profit or loss. An impairment charge is reversed if there is an indication that there is no longer any impairment loss and there has been a change in the assumptions underlying the estimated recoverable amount. The increased carrying amount of an asset after a reversal of an impairment loss never exceeds the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognised. DEPRECIATION AND AMORTISATION Lease assets Lease assets are depreciated according to the annuity method. Since a vendor or other party secures a future residual value, such as when a sale can be made on a functioning secondary market, the asset is depreciated during the lease period at a prudently calculated residual value according to plan. Otherwise the total depreciation during the lease period is equal to the acquisition price of the asset. The depreciation plan is determined individually for each object. Equipment Equipment is depreciated on a straight-line basis over the useful life of the asset. This implies that personal computers are depreciated over three years and other equipment over five years. Intangible assets Intangible assets are amortised over their estimated useful life. This item mainly comprises goodwill from acquisitions and goodwill on the purchase of net assets. Normally the useful life does not exceed five years. However, acquired trademarks and customer contracts are regarded as having a very long useful life, and thus the amortisation period may be much longer. More information about depreciation of intangible assets is provided in note 14. INCOME Income is reported in the income statement when it is probable that future economic benefits will be gained and these benefits can be reliably measured. CREDIT LOSSES Actual credit losses for the year, probable credit losses and write-offs of interest shown as income in previous annual accounts are reported as credit losses. Lending is reported net, after deduction of actual credit losses and probable credit losses. Any part of a credit receivable where there is no realistic possibility of recovery is reported as an actual loss. This is the case, for example, when a trustee in bankruptcy has estimated bankruptcy dividends, a scheme of arrangement has been accepted, or the receivable has been reduced in some other way. An amount forgiven in connection with a reorganisation is always reported as an actual loss. An impairment loss for probable credit losses is made if the value of the collateral together with other payments from the counterparty do not cover the book value of the credit receivable. Write-downs are made down to the amount which is expected to be realised, taking into account the value of the collateral. For collectively valued homogeneous groups of credit receivables, mainly comprising card credits and small consumer credits, where a debt collection process has begun, an allocation to credit loss provisions is made, the amount of which is calculated based on past experience. Apart from the risk assessment for individual credit receivables which is made quarterly, an assessment of homogenous groups of credit receivables is made. This takes into account whether there have been credit losses in these groups of credit receivables which cannot yet be allocated to an individual credit. If necessary, a group provision is made for these credit receivables. As soon as the receivable can be individually identified, the provision is transferred to probable credit losses. Unpaid interest on non-performing credits for which the value of the collateral does not cover both the principal amount and accrued interest by a satisfactory margin is not recognised as income. Interest on these credits that was recognised as income but not paid during the financial year is reversed. Interest payments subsequently received for such credit is reported on a cash basis. TAXES The tax expense for the period consists of current tax and deferred tax. Current tax refers to taxes relating to the period s taxable result. Deferred tax is tax referring to temporary differences between the carrying amount of an asset or liability and its taxable value. Deferred taxes are valued at the tax rate which is deemed to be applicable when the item is realised. The impact of changed tax rates is recognised in profit or loss. In the parent company, untaxed reserves are recognised as a separate item in the balance sheet. Most of this item comprises depreciation in excess of plan on lease assets. Untaxed reserves can be divided into one part which is deferred tax liability and one part which is equity. contributions are recognised in accordance with the economic substance of the contribution. Contributions which are justified for tax purposes are thus recognised after tax adjustment as an increase of Retained earnings. Risks and risk control Risk and capital management The Handelsbanken Finans is an integral part of the Handelsbanken. Handelsbanken s ability to manage risks and conduct efficient capital management is of decisive importance to the Bank s profitability and the same applies to Handelsbanken Finans (HF). Historically, HF has low tolerance of risks, which is reflected in its low credit losses and even earnings performance. HF s strict approach to risk means that the company deliberately avoids high-risk transactions, even if the remuneration is high at that moment in time. This low tolerance of risk applies to all areas in the. The aim of this strict approach to risk is not just to maintain favourable and even earnings performance, but also to be a good business partner for the Bank s customers; this requires sound credit capacity and preparedness even in troubled times. Risk organisation The board is responsible for assessing and monitoring the risks arising in the s operations. The board establishes policy documents and instructions describing how various risks should be managed and reported. The policy documents and instructions that Handelsbanken Finans applies follow the corresponding policies and instructions applicable to Svenska Handelsbanken AB (the parent company). The parent company also delegates limits for interest rate risk and liquidity risk to the Handelsbanken Finans. As well as reporting utilisation of these risks to Handelsbanken Finans s board, reports are also made to the risk unit in the parent company in compliance with the Handelsbanken s instructions. Credit losses as a percentage of lending HF operates in several countries and many different business fields. This entails a variety of risks that are systematically identified, measured and managed. The most significant risk is credit risk. Credits offered via Handelsbanken s branch office operations are subject to internal guarantees from the parent company. Credit losses as a proportion of lending for other credits where Handelsbanken Finans bears the credit risk are shown in the below diagram. SEK bn Volume SEK bn 2007 Recoveries % Gross credit losses % Net credit losses % 2008 % 1,6 1,2 0,8 0,4 0,0 9

12 notes Risks at Handelsbanken Finans Credit risk The risk that an individual borrower cannot fulfil his commitments Market risk The risk of price changes in the financial markets Liquidity risk The risk that the company cannot make its payments when due Operational risk The risk of human errors and errors in procedures and systems Business risk The risk of unexpected changes in financial performance that are not related to credit losses or market risks HF s risk management aims to ensure that HF fulfils the strict approach to risk decided by the board and that apply at the rest of the Handelsbanken. Credit risks Handelsbanken Finans s credit policy is established by HF s board and is based on the credit policy established by Handelsbanken s central board. This means that the customer unit is responsible for both the evaluation and processing of credit risks. In this way, any available data on the customer, the local market and the finance company product on offer can be put to good use. This also makes processing rapid and efficient and if necessary, central expertise can be called upon. With regard to credits generated by the branch office operations, the board of Handelsbanken Finans has delegated responsibility for credit decisions to Handelsbanken s branches. These decisions follow the guidelines laid down by the board. The parent company has provided an internal guarantee for these credits. In 2008 this amounted to SEK 53bn of a total of SEK 65bn. In addition to these, there is a guarantee for SEK 16.9bn out of a total of SEK 27.2bn for credit commitments. SEK m Credit risk exposure Credits to credit institutions of which claim on Handelsbanken Credits to the public Shares and participating interests 1 Derivatives 584 Other assets of which claim on Handelsbanken Credit commitments Total Credits for which Handelsbanken Finans bears the risk are generated mainly by the Direct Sales business area, and in the International business area by retail financial services. These are largely card-based credits. Of Handelsbanken Finans s 534,000 or so cards, the majority have been processed in a credit management system developed in-house by Handelsbanken Finans and through which more than one million credit applications have passed since the system was launched. The credit management system has shown stability in performance and has played an important part in the company s efforts to maintain a low level of credit losses. By means of Handelsbanken s and Handelsbanken Finans s internal risk classification system, credit risk in all operations is measured in a reliable and consistent manner. The system is evaluated annually and the result of the evaluation is reported to the board. The way the Bank and HF calculate and classify risks, and quantify and validate methods, was also an important part of the Swedish Financial Supervisory Authority s review in conjunction with approval of the Bank s application of the internal rating approach. The internal auditing department regularly examines the risk classification system and its application. Collateral When Handelsbanken and HF assess the credit risk of a specific customer, the assessment starts with the borrower s repayment capacity. According to the Bank s credit policy, weak repayment capacity can never be accepted because good collateral has been offered to the Bank. Collateral may, however, substantially reduce the Bank s loss if the borrower cannot fulfil his obligations to the Bank. Credits must therefore normally be adequately secured. Credits without collateral occur for small credits to private individuals with good repayment capacity. Since collateral is not generally utilised until a borrower faces serious repayment difficulties, the valuation of collateral focuses on its expected value in the case of insolvency. The value of certain types of asset may change considerably from the period before until the time of a forced sale. Operational risk Operational risk is defined as the risk of loss due to deficient or incorrect routines and systems, errors on the part of the company s own employees or external events. Identification, management and control of operational risks is a clear and integral part of managerial responsibility at all levels at Handelsbanken Finans. The decentralised method of work at Handelsbanken Finans promotes costconsciousness that results in vigilance against potential loss risk in the daily procedures. As an aid to identification, measurement and handling of operational risk, Handelsbanken Finans has a separate reporting system for operational incidents and losses. As a supplement to the day-to-day control of operational risk, all main departments carry out self-evaluation of operational risk. This review is for the purposes of identifying operational risk and quantifying the losses that may arise. In addition, measures are to be proposed and taken to reduce the risks. Funding and financial risks Funds are raised for the most part internally via Handelsbanken and partly on the open market. Financial risks include interest rate risk, liquidity risk and currency risk. The interest rate risk is the impact that changes in market rates have on Handelsbanken Finans and is measured using a gap analysis for assets and liabilities with different interest rate adjustment periods. Interest rate risk and foreign exchange risk (see also other disclosures) are kept to a minimum since the terms for lending largely match the terms for funding. The interest rate risk that is measured and reported at Handelsbanken Finans is mainly created through the interest rate swaps which HF uses to reduce the impact on profit/loss when there are changes in interest rates. The interest rate swaps are only with the parent company and from the perspective of the Handelsbanken, no interest rate risk is created since the risk is hedged with an external counterparty. Interest rate risk is measured as the impact on fair value in the case of an instantaneous parallel shift in all interest rates by 1%. As at 31 December 2008, HF s interest rate risk was 247m (201) of which SEK 224m (164) refers to interest rate swaps. Liquidity risk arises when lending and funding do not coincide in time. Liquidity risk is measured by carrying out a gap analysis of the cash flows for various maturities and all currencies. There is a high level of preparedness for liquidity risk and its management is integrated with Handelsbanken. Financial risks are measured and monitored at a central level in Handelsbanken Finans. Reports are also made to HF s board and Handelsbanken s Central Risk Control unit. Comprehensive risk management using the economic capital model HF applies Handelsbanken s model for calculating economic capital (EC) which is a measure to identify the s overall risks and corresponds to the capital which, with very high probability, will cover unexpected losses or decreases in value. The Central Risk Control function at Handelsbanken is responsible for comprehensive monitoring of the s various risks. The model adopted by the Bank in 2007 for economic capital (EC) is an important tool in this monitoring work. Economic capital is calculated with a time horizon of one year and a confidence level that reflects an acceptable level of risk. HF calculates economic capital with a percent confidence level (the same confidence level has been established by Handelsbanken s central board). The confidence interval implies a worst outcome in only 3 out of 10,000 cases. The capital which forms a buffer that can absorb negative outcomes is called Available Financial Resources (AFR). AFR is an estimate of the size of Handelsbanken Finans s equity and other available financial values on and off the balance sheet, with a one-year time horizon. The board continuously sets the targets for the Bank s capital, for example the Tier 1 capital ratio. The Tier 1 capital ratio must be more than 8.0%. Credit risk is calculated using simulated outcomes of default for all HF s counterparties and exposures. Market risks comprise interest rate risk in the business operations. The non-financial risks comprise operational risk and business risk. Business risk is related to unexpected variations in income and expenses that may arise if, for example, demand or competition changes unexpectedly, resulting in lower volumes and narrower margins. All calculations show that Handelsbanken Finans s capital situation is more than adequate in relation to its risks. Capital planning Handelsbanken Finans s capital planning has the purpose of ensuring that the capital is satisfactory in relation to the existing risk. The capital requirement is a function of an assessment of the performance of the operations, the formal capital adequacy regulations, Handelsbanken s EC model and the outcome of stress tests. For other information concerning risk and capital management in the Handelsbanken, see Handelsbanken s annual report for

13 notes Interest rate risks Interest rate adjustment periods for assets and liabilities, 31 December mths 3-6 mths 6-12 mths 1-5 yrs 5 yrs- Total Credits to credit institutions Loans to the public and lease assets Total interest-bearing assets Due to credit institutions Borrowing from the public Issued securities Total interest-bearing liabilities Off-balance-sheet items, net Difference assets and liabilities including off-balance-sheet items Accumulated difference Accumulated difference as a percentage of total assets 39% 40% 40% 38% 34% -3 mths 3-6 mths 6-12 mths 1-5 yrs 5 yrs- Total Credits to credit institutions Loans to the public and lease assets Total interest-bearing assets Due to credit institutions Borrowing from the public Total interest-bearing liabilities Off-balance-sheet items, net Difference assets and liabilities including off-balance-sheet items Accumulated difference Accumulated difference as a percentage of total assets 41% 41% 41% 39% 35% Bad debts by category Non-performing Bad debts Reserves receivables gross Collective Individual Bad debts net Private individuals Property management Construction Retail Hotels and restaurants Agriculture, hunting, forestry Manufacturing Transport Other Total Credits to the public by category Credit receivables Reserves Koncernen Swedish counterparties Construction Energy Property management Retail Agriculture and forestry Municipalities and county councils Private individuals Manufacturing Transport Other Total Non-Swedish counterparties Total

14 notes Notes to the income statement and balance sheet Amounts in SEK m unless otherwise stated. Note 1 Interest income and interest expense Interest income Credit institutions General public Derivative instruments recognised as hedges Other interest income Total Interest expense Credit institutions General public Derivative instruments recognised as hedges Other interest expense Total Average interest rate on credits to the public 5.8% 4.9% 7.9% 6.2% Net interest income (Interest income+ lease income-interest expenselease depreciation) Interest margin 2.8% 2.7% 2.6% 2.5% Interest income received from companies Interest expense paid to companies Note 2 Lease income Lease income gross Lease depreciation according to plan Total net leases Of which received from companies Lease depreciation is reported under Depreciation and impairments, note 8. Note 3 Fee and commission income and expense Fee and commission income Lending commissions Lease commissions Total fee and commission income Fee and commission expense Payment commissions Lease commissions Total fee and commission expense Net fee and commission income Note 4 Net gains/losses on financial operations Available for sale shares, realised Cash flow hedge ineffectiveness Price difference on hedging foreign net investment Effect of translation difference on received dividend Trading Total Note 5 Other operating income Rental income Services rendered Other operating income Total Note 6 Staff costs Salaries and fees Social security costs Pension costs 1) Other staff costs Total ) The pension cost refers to fees paid to the SHB pensionskassa försäkringsförening (pension fund) for contractual defined contribution pension insurance. Salaries and other remuneration Board, chief executive, other senior management Sweden Finland Denmark Norway Great Britain China -1 Sub-total Other Sweden Finland Denmark Norway Great Britain China -2 Sub-total Total Terms and remuneration of senior management Conditions: Handelsbanken Finans has no agreements on severance pay. The chief executive of Handelsbanken Finans has a retirement age of 60. Other senior managers have a retirement age of 65. Between the ages of 60 and 64, the retirement pension is 65% of their salary. From the age of 65, the pension is 10% of the annual salary up to 7.5 index-linked base amounts. A pension under the general national insurance scheme is also paid. A retirement pension of 65% is paid on the portion of the salary in excess of 7.5 price base amounts. Other senior managers are the chief executives/country managers of subsidiaries and branches and the management group of Handelsbanken Finans. Remuneration: In 2008, remuneration and other benefits amounting to SEK 3.36m (3.0) were paid to the chief executive, of which other benefits were SEK 0.15m (0.2). The chairman of the board has not received any remuneration from the company. The other seventeen (14) senior managers have received remuneration and other benefits amounting to SEK 16.9m (12.0). SEK 1.1m (0.7) of this amount was other benefits. No variable bonuses are paid. Pensions: SEK 1.9m (1.6) of the s pension costs are in respect of the chief executive and SEK 1.8m (1.6) for the other 17 (14) senior managers. The chairman of the board receives no pension from the company. 12

15 notes Note 6 Staff costs (cont.) Number of employees (average during the year) Sweden Finland Denmark Norway Great Britain 6 5 China 4 Total Gender breakdown Men Women Men Women Sweden Finland Denmark Norway Great Britain China Total Gender distribution % Board Chief executive Other senior management Note 8 Depreciation, amortisation and impairments Equipment Lease assets Goodwill Total Note 9 Credit losses, credits to the public Individually valued credit receivables The year s write-off for actual credit losses Write-back of previous provisions for probable credit losses which are reported as actual credit losses in the year s accounts The year s provision for probable credit losses Paid in from actual credit losses in previous years Write-back of provisions for probable credit losses which are no longer necessary Net expense for the year for individually assessed credit receivables Sickness absence rate in the Swedish operations % Age Men Women Total Men Women Total Total Of whom on long-term sick leave, percentage of total sickness absence Total Note 7 Other administrative expenses Cost of premises External IT costs Communication costs Travel and marketing costs Purchased services Procurement of material Other administrative expenses Total Auditing costs Auditing Consulting Auditing Consulting Provision by group for individually assessed credit receivables Allocation to/dissolution of provision by group Collectively assessed homogenous groups of credit receivables The year s write-off for actual credit losses Paid in from actual credit losses in previous years Allocation to/reversal of provision for credit losses Net expense for the year for collectively assessed homogenous groups of credit receivables The year s net expense for credit losses According to the Swedish Financial Supervisory Authority s accounting directives, receivables which individually have been assessed as being posted at the correct value must also be assessed as to whether there may be a requirement for making a provision for probable credit losses for these receivables valued as a group. Over and above the risk assessment of individual credit receivables made quarterly by all units with customer and credit responsibility in the, a requirement for provision for the receivables as a group has been identified by Handelsbanken. The provision as a group was previously in Handelsbanken s accounts but can now be booked by the respective legal entity within the Handelsbanken. Note 10 Appropriations Depreciation in excess of plan, goodwill on the purchase of net assets 3 0 Depreciation in excess of plan, lease assets Total External auditing KPMG AB Internal auditing

16 notes Note 11 Credits to credit institutions Banks in Swedish kronor Banks in foreign currency Total Of which fixed assets Of which claims on companies Information concerning maturities Payable on demand Remaining maturity: maximum three months Remaining maturity: over three months but maximum one year Remaining maturity: between one and five years Total Average remaining maturity (months) Note 12 Credits to the public Public, Swedish kronor Public, foreign currency Total Probable credit losses Total credits to the public Of which fixed assets Of which current assets Repossessed property Provision for probable losses Book value repossessed property Information concerning maturities Payable on demand Remaining maturity: maximum three months Remaining maturity: over three months but maximum one year Remaining maturity: between one and five years Remaining maturity: more than five years Total Average remaining maturity (months) Bad debts etc Credits to credit institutions, the public, lease assets and other assets Bad debts Specific provisions for individually assessed credit receivables Provisions for collectively assessed homogeneous groups of credit receivables with limited value Net bad debts Bad debt reserve ratio 44.7% 48.3% 45.6% 51.0% Proportion of bad debts 0.34% 0.25% 0.20% 0.14% Book value of restructured and reclassified credit receivables Restructured credit receivables before restructuring Restructured credit receivables after restructuring Doubtful credit receivables which during the period have regained the status of normal receivables Disclosures on gross investment and present value of future minimum lease payments Gross investment Present value of future minimum lease payments at balance sheet day Distribution of gross investment and minimum lease payments by maturity Within 1 yr Between 1 and 5 yrs More than 5 yrs Total Distribution of gross investment Distribution of present value minimum lease payments Unearned finance income 6,625 (4,772) Non-guaranteed residual values accruing to the lessor All Handelsbanken Finans s lease agreements have guaranteed residual values. Provision for bad debts referring to minimum lease payments The book value of the provision for bad debts with respect to minimum lease payments is SEK 15.5m (4.2). Variable part of lease charges which are included in the period s resultssek 386m (310), owing to lower interest rates in 2008 than in Major lease contracts At the year-end, there were five lease exposures in the with an individual book value exceeding SEK 1bn. The total value of these was SEK 19.4bn which corresponds to 29.8% of the s total credit volume as at 31 December The largest individual exposure had a book value of SEK 10.4bn (9.4). The average remaining maturity was 11.2 years. These exposures are in the transport and energy sectors. 14