Annual report. a Svenska Handelsbanken company

Transcription

1 Annual report 2005 a Svenska Handelsbanken company

2 PUBLICATION DATES FOR INTERIM REPORTS January March 24 April 2006 January June 18 July 2006 January September 24 October 2006

3 Contents Key figures and definitions 2 Highlights of A word from the chief executive 4 Organisation and human resources 6 Lending 8 Funding operations 12 Risk management, capital adequacy and rating 15 Financial results 18 Sensitivity analysis 19 Income statement 20 Balance sheet 21 Changes in shareholders equity 22 Cash flow statement 23 Accounting policies 24 Notes 27 Recommendation for appropriation of profits 35 Audit report 36 Board, auditors and senior management 37 Five-year summary 38 Stadshypotek, bond tables 39 Facts about the company inside back cover The pages in the annual report which are part of the administration report are separately marked at the bottom of the page. a Svenska Handelsbanken company STADSHYPOTEK ANNUAL REPORT

4 STADSHYPOTEK 2005 Key figures Key figures Profit before loan losses, SEK m 5,466 4,980 4,773 4,551 4,350 Loan losses, SEK m Operating profit, SEK m 5,599 5,150 5,005 4,711 4,543 Total assets, SEK m 455, , , , ,823 Shareholders equity, SEK m 19,049 19,049 19,695 20,149 20,727 Return on shareholders equity,% Cost/income ratio before loan losses,% Cost/income ratio after loan losses,% Net interest margin,% Loan loss ratio,% Bad debt reserve ratio,% Proportion of bad debts,% Capital ratio,% Tier 1 capital ratio,% Return on total assets,% Average number of employees DEFINITIONS BAD DEBTS. Loans where payments will probably not be met according to the conditions of the contract. A loan 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 DEBTS RESERVE RATIO. Provision for probable loan losses as a percentage of gross bad debts. CAPITAL BASE. The capital base is the sum of tier 1 (primary) and tier 2 (supplementary) capital. Tier 1 capital comprises shareholders equity less goodwill plus 72% of untaxed reserves in the parent company. Tier 2 capital includes subordinated loans with some reduction when the residual maturity is under five years. This part of the supplementary capital must not exceed 50% of tier 1 capital. CAPITAL RATIO. Capital ratio or the total 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 it should be at least 8%. COST/INCOME (C/I) RATIO. Total expenses in relation to total income. The C/I ratio is computed before and after loan losses including changes in value of repossessed property. LOAN LOSS RATIO. Loan losses and changes in value of repossessed property as a percentage of the opening balance for loans to the public, loans to credit institutions (excluding banks), repossessed property and credit guarantees. NET INTEREST MARGIN. Net interest income in relation to average total assets. NON-PERFORMING LOANS. Loans where interest, repayments or overdrafts have been due for payment for more than 60 days. PROFITABILITY. See Return on equity. PROPORTION OF BAD DEBTS. Bad debts (net) in relation to total loans to the public and credit institutions (excluding banks). RESTRUCTURED LOAN RECEIVABLES. Loans where some kind of concession has been made due to the borrower s inadequate payment capacity. RETURN ON EQUITY. Earnings for the period after appropriations and tax in relation to average shareholders equity adjusted for rights issues and dividend and also including minority interest. RETURN ON TOTAL ASSETS. Operating profit before tax in relation to average total assets. RISK-WEIGHTED VOLUME. The risk-weighted volume is determined by the assets and off-balance-sheet items being placed in varying risk classes, in accordance with the Act on Capital Adequacy and Large Exposures of Credit Institutions and Securities Companies. The volumes are weighted taking into account the assessed risk such that they are included in the risk-weighted volume by 0%, 20%, 50% or 100%. TIER 1 CAPITAL RATIO. Primary capital in relation to risk-weighted volume. (See Capital base and Risk-weighted volume.) 2 STADSHYPOTEK ANNUAL REPORT 2005 ADMINISTRATION REPORT

5 Highlights of 2005 Operating profits rose by 9% to SEK 5,599m (5,150) Net interest income rose by 1% to SEK 5,237m (5,183) Expenses decreased by 11% to SEK 134m (150) Recoveries exceeded new loan losses Lending increased by 8% to SEK 445bn (413) The most satisfied corporate customers in the mortgage market Largest proportion of satisfied private customers of the major banks mortgage institutions In March 2006, permission was received from the Swedish Financial Supervisory Authority to issue covered bonds ADMINISTRATION REPORT STADSHYPOTEK ANNUAL REPORT

6 STADSHYPOTEK 2005 A word from the chief executive We have added yet another successful year to our records. Profits for 2005 rose by SEK 449m to SEK 5,599m, a 9% increase. The year represented the strongest growth seen for many years in the private market. During the autumn, preparations were stepped up to start issuing covered bonds in Profits have never been higher, and loan volume is also at an all-time high. Growth in private market lending was the strongest seen during an individual year. The profit trend was mainly affected by improved net interest items, administrative costs continuing to fall and low loan losses. GROWTH IN LENDING Lending by Swedish mortgage institutions continued to increase considerably in The entire volume increase is attributable to mortgages for single-family houses and housing co-operative apartments. Private market lending was up by SEK 154.6bn, which is SEK 46.0bn more than in The dramatic rise in housing prices, especially in and around the major cities, has entailed an increased need for loans in the purchase of residential properties. At the same time, many owners of single-family houses and housing co-operative apartments took advantage of the good value growth and favourable interest rates to take out loans to renovate their homes. Besides the historically low interest rates, other fundamental factors, such as rising disposable incomes and many years of low housing production have boosted the increase in the value of properties. In many locations, housing prices have more than doubled in the past ten years. In 2005, the price increase for single-family houses amounted to 13%. For housing co-operative apartments the increase doubled to 22% compared to As lending increases, the competition for mortgage customers has also intensified. Using prices, lenders have aimed to increase their market share. In addition to prices, we can see that the competition for new customers during the year also led to higher mortgage levels and more favourable mortgage repayment terms. Products which have been more or less revamped have been launched for new borrower categories. Loans for senior citizens are one such example. As I see it, this is simply a way of packaging a product that we have offered for a long time at Handelsbanken. In this market Stadshypotek has augmented its private market lending to SEK 283bn; this is SEK 32bn up on the previous year. It is particularly pleasing to note the continued success of the new products that we launched last year. These were above all loans with 3-month fixed interest rates and Loan protection with security capital. In keeping with the previous year, lending by mortgage institutions to the corporate market fell. The decrease for the year was SEK 5.9bn, while our own lending was down only SEK 0.4bn. This reinforces Stadshypotek s position as the dominant lender in this segment, and our market share climbed 0.3 percentage points to 34.5%. SATISFIED CUSTOMERS Our long-standing aim has been to have the most satisfied customers. We achieve this by giving our customers better service than our competitors. With the increasingly tough competition, I believe that the only way to win customers is to ensure customer satisfaction. I am therefore delighted that in 2005, Stadshypotek/Handelsbanken again secured its position in the Swedish Quality Index s annual survey of customer satisfaction in the Swedish mortgage market. As in previous years, Stadshypotek/Handelsbanken has the mortgage market s most satisfied customers among institutional customers, consisting of housing co-operative associations, private property owners and property companies. In the private market, Stadshypotek/Handelsbanken has the highest proportion of satisfied customers among bank-owned mortgage institutions. I am also pleased to note that the proportion of satisfied customers in the institutional market and the private market has risen since last year s survey. I view this as clear confirmation that our decentralised work method leads to better treatment of customers and thereby customer satisfaction. It is proof that the customer is the focus of our operations and that our customers appreciate good service, accessibility and expertise. I would like to repeat what I wrote last year, that the positive results of the customer satisfaction survey should primarily be attributed to the com- Claes Norlén 4 STADSHYPOTEK ANNUAL REPORT 2005 A WORD FROM THE CHIEF EXECUTIVE

7 petence and commitment of all employees at Handelsbanken s branch offices. e-bud The internet is increasingly important to the secondary market for residential properties. Nearly all buyers find the properties they wish to buy on estate agents websites or on one of the joint websites for the Swedish housing market. This increase has spurred increased use of electronic bidding through Stadshypotek s online service for bidding information, e-bud. The service has been continually tailored to meet users requirements. Improvements include giving estate agents the option of customising the service via links from their own websites or to e-bud from their own portals. Acceptance has grown among estate agents, sellers and bidders. The e-bud service plays an increasingly important role in local co-operation between individual estate agents and Handelsbanken s local branch offices. At the end of 2005, a total of 5,088 properties had been sold through bidding. In all, 13,317 bidders were registered, who made 45,542 bids in total. Judging by its extensive use, it is clear that e-bud has become an important tool for many estate agents. The information to both bidders and sellers was simplified further during the year. This saves time for estate agents, who thereby gain more time for additional sales assignments. With these improvements, the electronic bidding service now meets all the requirements for bidding history, etc. that the estate agent organisations stipulate in their ethical guidelines. HIGH QUALITY OF CREDIT The quality of Stadshypotek s loan portfolio remains very high. Recoveries exceeded new loan losses for the seventh year in a row. This is further evidence of how we can achieve good quality in the credit process by basing our operations close to customers and being familiar with the local property market. Low loan-to-property values and a sound repayment capacity create the prerequisites for loan losses remaining low, which is particularly important when issuing covered bonds. Our good credit quality will also be a competitive advantage in the transition to the new Basel II capital adequacy rules. Rising house prices, the dramatic credit expansion and the higher debt of households have led the media and others to warn of a housing bubble. Sweden s central bank, the Riksbank, is monitoring this very closely and makes a partially different assessment of the situation. According to the Riksbank, the households in debt generally have good margins to cope with both a loss of income and rising interest rates. Our analyses of our own loan portfolio have included assessing the priority of the mortgages and our customers repayment capacity and have led us to the same conclusion. Naturally, this does not rule out the possibility that some of our customer households may face problems if, for example, interest rates rise considerably. COVERED BONDS AND FUNDING WITH LONG MATURITIES In September, Stadshypotek submitted an application to the Swedish Financial Supervisory Authority for permission to issue covered bonds. One precondition for Stadshypotek s issuing of covered bonds is that it obtains the highest ranking, AAA. Our goal is to implement our first issue during the second half of the spring. Covered bonds are a form of financing that, primarily in the European market, increasingly appear to be a new standard instrument for long-term financing of loans for residential properties. The opportunity that has now opened for Swedish mortgage institutions to issue covered bonds has given us the same platform as our international competitors. This entails a more even competition and it is a form of financing that gives us new opportunities of extending the diversification of our funding operations. Since covered bonds may lead to a somewhat lower funding cost, in the long run they also entail greater oppportunities for Swedish mortgage customers to obtain lower interest rates on their mortgages. The Swedish bond market has lacked investment opportunities with long maturities. To cater for this need, we introduced nine new bond loans in the spring, with maturities of up to 12 years. The interest shown by our investors has exceeded our expectations. NEW YEAR, NEW MANAGEMENT After nearly five years I am leaving my position to become head of the Southern Sweden regional bank and executive vice president of Handelsbanken. Today, on my final day at Stadshypotek, I would like to wish my successor Frank Vang- Jensen great success in future work with Stadshypotek and the Group s mortgage operations. I was particularly pleased that Frank is the one lucky enough to take over the baton. He has long experience from Handelsbanken s Danish regional bank operations, both as a branch manager and a regional area manager. Frank also has experience of the Danish mortgage market, which I am convinced will be very useful at Stadshypotek. Good luck! I would like to conclude by thanking all my colleagues at Stadshypotek, those in the branch operations and other departments at Handelsbanken for the past five years. Our achievements are the result of your commitment and devoted work. Many thanks! Stockholm, 31 December 2005 Claes Norlén Frank Vang-Jensen A WORD FROM THE CHIEF EXECUTIVE STADSHYPOTEK ANNUAL REPORT

8 STADSHYPOTEK 2005 Organisation and human resources Stadshypotek AB, corporate identity number , is a public credit market company authorised to conduct operations under the Swedish Banking and Financing Business Act. Its core business comprises the financing of housing and also office and commercial buildings. Since 26 February 1997, the company has been a wholly-owned subsidiary of Svenska Handelsbanken AB (publ), corporate identity number GROUP STRUCTURE Stadshypotek AB is the parent company of a sub-group of companies that are responsible for Handelsbanken s mortgage business in Sweden. Following a merger in March 2003 between Stadshypotek AB and the subsidiary Handelsbanken Hypotek AB, the mortgage business has been conducted in Stadshypotek AB only. The Stadshypotek Group consists of the parent company Stadshypotek AB, Stadshypotek Delaware, Inc. and the dormant company Svenska Intecknings Garanti AB Sigab. Stadshypotek Delaware, Inc. has the task of issuing instruments for short-term funding in the US market. INTEGRATION WITH HANDELSBANKEN The business operations of Stadshypotek are strongly decentralised. The basic principle is that organisation and working practices are dictated by the branch offices of the Handelsbanken Group, which have overall responsibility for individual customers. One consequence of this approach is that Stadshypotek s lending operations take place through Handelsbanken s Swedish branches. Stadshypotek s treasury function is integrated with Handelsbanken s treasury department. Functions necessary for the management and control of the company are the only ones that remain within Stadshypotek. Stadshypotek s decentralised method of working has been successfully applied since Handelsbanken s acquisition of the company in 1997; this is the main reason for the strong market position of Stadshypotek. ENVIRONMENTAL ISSUES Work on environmental issues is now a well-established part of Stadshypotek s operations, in terms of internal work, granting credit and other operations. Environmental work is carried out in close co-operation with Handelsbanken and is thereby covered by the agreements and policy decisions that apply within the Handelsbanken Group. The main principle is that Stadshypotek must contribute to achieving long-term environmental sustainability as far as is technically and economically viable. This means that Stadshypotek is to take action to minimise the company s environmental impact as far as is compatible with the company s obligations. Stadshypotek works continually on measures aimed at reducing adverse environmental impact. In 2005, the number of letters posted to customers was reduced. This was achieved by sending Stadshypotek s borrowers one compiled annual statement containing information from both Stadshypotek and Handelsbanken. Invoicing by post has been reduced by increased use of electronic invoicing. Environmental issues associated with granting loans In accordance with the Handelsbanken Group s credit policy, environmental factors are taken into consideration when assessing a customer s repayment capacity. The branch that is responsible for the customer gathers environment-related information and, where deemed necessary, assesses possible environmental effects that may have an impact on the borrower s situation. In order to evaluate the company s focus on environmental risks, an investigation can be carried out to see whether the company has adopted any environmental and quality policies. Stadshypotek s decentralised method of working is the main reason for Stadshypotek s strong market position For property-related credits, it is essential to take into account environmentally harmful factors pertaining to buildings or environmentally harmful activities that are or have been conducted on the property. Environmental factors in the vicinity of the property are also taken into consideration as much as possible. It is always the customer who is responsible for how operations are conducted, but repayment capacity and thus the Bank s credit risk are affected by the customer s willingness or ability to manage these risks. Environmental factors are also considered when determining the market value of a property. HUMAN RESOURCES In 2005, the average number of employees in Stadshypotek was 20 (23). Of these, 33% (36) were women and 67% (64) men. Excluding staff on loan to other units and staff on parental leave, the number of employees at the end of the year was 18 (19). The staff reduction that was continued in 2005 is the result of the rationalisation work carried out in recent years. 6 STADSHYPOTEK ANNUAL REPORT 2005 ADMINISTRATION REPORT

9 BOARD AND CHIEF EXECUTIVE During the year, the board convened ten times, of which twice by correspondence. At the annual general meeting, Björn Börjesson, Lennart Francke, Curt Källströmer, Claes Norlén, Håkan Sandberg and Magnus Uggla were re-elected as members until the annual general meeting is held in At an extraordinary general meeting in August 2005, board member Magnus Uggla resigned from the board due to being stationed abroad. Lars Kahnlund, executive vice president of Handelsbanken, was appointed as a new member of the board. Board member Claes Norlén left his post as chief executive on 31 December and was replaced by Frank Vang-Jensen as chief executive of Stadshypotek AB. The composition of the board altered again at an extraordinary general meeting in January 2006 in that Claes Norlén and Björn Börjesson left the board due to changed duties in the Handelsbanken Group. Olle Lindstrand, executive vice president at Handelsbanken, Yonnie Bergqvist, chief executive of Handelsbanken Finans and Frank Vang-Jensen, chief executive of Stadshypotek AB were appointed new members of the board. A list of members of the board after the extraordinary general meeting in January 2006 in Stadshypotek AB is included on page 37. Information on certain terms of employment for senior executives and on loans to board members and senior executives can be found in Note 4 on page 28. AUDITORS At the annual general meeting in 2004, KPMG Bohlins AB were appointed auditors of Stadshypotek AB, with Stefan Holmström, authorised public accountant, as the auditor in charge until the end of the annual general meeting in The Swedish Financial Supervisory Authority appointed Ulla Nordin Buisman, authorised public accountant from PricewaterhouseCoopers AB, as auditor of the company from the general meeting in 2004 until further notice. ADMINISTRATION REPORT STADSHYPOTEK ANNUAL REPORT

10 STADSHYPOTEK 2005 Lending STADSHYPOTEK S ROLE IN HANDELSBANKEN In the Handelsbanken Group s Swedish operations, mortgage finance is offered principally via Stadshypotek. Lending takes place through Handelsbanken s branch network. As a result of the decentralised method of working in the Handelsbanken Group, the branches have been delegated responsibility for marketing, contact with customers, pricing and processing all mortgage loans. Handelsbanken thus acts as an agent for Stadshypotek, with responsibility for ensuring that credit assessment and collateral valuations are carried out in accordance with the guidelines approved by Stadshypotek s board. The position of the Handelsbanken Group in the Swedish mortgage market has been secured by a customer-oriented range of products, a branch office network that operates close to its customers and a high level of service. THE MARKET IN 2005 Low interest rates in 2005 were a major contributing factor to the continuing high demand for residential property loans. Most of this demand for credit is on the mortgage market. Above all, households are continuing to rapidly increase their debts. Including lending volumes managed on behalf of other parties, mortgage institutions total lending to the public rose by SEK 149bn (100), which was SEK 49bn more than the increase from the previous year. Lending to the private market increased by SEK 155bn (108), of which loans for singlefamily houses accounted for SEK 112bn (75) and loans for housing co-operative apartments for SEK 43bn (33). Lending for multi-family dwellings, commercial properties and office buildings fell by SEK 6bn (-8). At the end of the year, lending by mortgage institutions, including lending volumes managed on behalf of other parties, totalled SEK 1,544bn (1,395), of which lending for single-family houses and housing co-operative apartments represented SEK 1,073bn (918). The continuing tough competition in the Swedish mortgage market led to greater pressure on the institutions lending margins during the year. Higher loan-to-property values and more favourable repayment terms for borrowers have been accepted. New products for new borrower categories have been launched. Mortgages have become increasingly important to banks and their mortgage institutions. A probable reason for this is that mortgages will become increasingly profitable in the transition to the new Basel II capital adequacy rules. Lending takes place through Handelsbanken s branch network. As a result of the decentralised method of working in the Handelsbanken Group, the branches have been delegated responsibility for marketing, contact with customers, pricing and processing all mortgage loans. Since 1997, prices have risen by 97% for single-family houses and 153% for housing co-operative apartments. This development is largely due to traditional product supply and demand factors, where the supply of new housing has been low, while households demand has grown in parallel with the increase in incomes and low levels of interest rates. According to Statistics Sweden, the price level for singlefamily houses rose 13% (10) in In keeping with previous years, there were considerable regional variations in the price increases. Of Sweden s 21 counties, the greatest increase in single-family house prices was noted in the counties of Gävleborg, Värmland and Västernorrland, where it amounted to about 14%. Continued migration to the cities that have a limited supply of housing also meant substantial price increases in these areas in In the Göteborg region, singlefamily house prices rose by 12% (12) and in the Malmö area by 13% (15), while the price increase in the Stockholm region was limited to 9% (10). In December 2005, the average price for single-family houses sold in Sweden stood at SEK 1,581,000 (1,396,000). In eleven counties, the average price for such houses now exceeds SEK 1m. The county of Stockholm has the highest average price: about SEK 2.7m, followed by Halland with about SEK 1.7m. The price of housing co-operative apartments climbed 22% (11) according to statistics issued by the Association of Swedish Real Estate Agents. The largest increases for these properties were also seen in the major cities. In the greater Stockholm region the price of housing co-operative apart- 8 STADSHYPOTEK ANNUAL REPORT 2005 ADMINISTRATION REPORT

11 ments rose by 26% (5), in the Gothenburg area by 32% (15), and the increase in the Malmö region amounted to 18% (18). In December 2005, the average price throughout Sweden for such apartments was SEK 978,000 (804,000). Rising market values of housing properties enable larger mortgages to be raised. In combination with the low level of interest whereby interest payments affect a small proportion of households disposable income this has boosted demand for new residential properties and increased the turnover in the secondary property market. The ever higher mortgaging levels for residential properties have led to an increase in household debt. Following a reduction in the mid-1990s, households debt ratio, i.e. debt measured in relation to disposable income, has once again risen to the level noted in the early 1990s. The rental market for commercial properties remained weak in 2005, with a relatively high number of rental vacancies. Although vacancies in modern and flexible premises in good locations dropped, vacancies remained high in older, less modern properties. The turnover in the secondary property market for commercial premises was relatively high during the year. As in previous years, international property investors have shown interest in this type of property in the Swedish market. The construction of new residential apartments has been at a very low level over the past ten years in historical terms. Although more than half the apartments completed each year during recent years are located in city areas, supply has nowhere near met demand in these areas. In 2005, a total of 21,500 (24,300) new residential apartments were completed and construction of a further 31,100 (27,300) was started. During the same period, re-building work was started on 24,800 apartments (24,650), and rebuilding work on 27,950 (27,900) apartments was completed. INTEREST RATE TREND IN THE MORTGAGE MARKET Expectations of a drop in the Riksbank s repo rate led to a gradual fall in fixed mortgage rates during the first six months of the year. From the start of the year until the fall of the repo rate in June, the lending rate for a five-year mortgage had decreased by 0.71 percentage points. After the first six months, the lending rate for a five-year mortgage was 0.81 percentage points lower than at the start of the year. A two-year mortgage fell 0.72 percentage points during the same period. During the autumn, expectations of a hike in the repo rate led to a gradual increase in the lending rates. From the lowest level for the year in July, 3.49%, the lending rate for a five-year mortgage rose to 4.08% at year-end. A two-year mortgage rose during the same period from 2.72% to 3.44%. The lending rate for variable rate mortgages was lowered in June from 3.65% to 3.15% and remained at that level during the rest of the year. The reduced spread between a fixed and variable rate mortgage does not appear to have had a major impact on borrowers choice of maturity during most of However, it is notable that the demand for variable lending has fallen, benefitting Stadshypotek s new three-month product. During the fourth quarter, an expectation of rising lending rates prompted a substantial increase in demand among borrowers for fixed-rate lending with longer maturities when they took out new loans or amended terms. Mortgage rate for single-family homes % year fixed rate 2-year fixed rate Variable rate Private homes net increase and price index Net increase, SEK bn Single-family housing lending Housing co-operatives lending Single-family house prices Housing co-operative prices Source: Association of Swedish Real Estate Agents, Riksbanken, LMV Price index PRODUCTS The new products launched in 2004 continued to be a success during The new loan with a three-month fixed rate period, launched in 2004, was the product that continued to account for the greatest volume growth in In 2004, the opportunity was also created for Stadshypotek s customers to take out Loan protection with security capital free of charge, provided that they moved all their loans to the Handelsbanken Group. Customers utilised this opportunity to a greater extent in 2005, which contributed to the robust growth of lending operations. In 2005, the option of choosing due dates for repayments and interest on fixed-rate loans was developed. This means that the customer is free to choose the due date and thereby payment dates that they wish for their entire loan portfolio. Several market players launched mortgage products during the year that are aimed at older borrowers with a low level of lending. Stadshypotek together with Handelsbanken have already been able to offer this way for customers to free up capital from their private wealth through solutions that are individually tailored to meet customers specific needs. Stadshypotek s system for electronic bidding in conjunction with property deals (e-bud) underwent further development. The development was influenced by requests from users, who were given the chance to customise the service. This was ADMINISTRATION REPORT STADSHYPOTEK ANNUAL REPORT

12 made possible by giving estate agents links to and from their websites or the option of importing details about properties from their portal Hemnet directly to e-bud. During the year, co-operation was also initiated with a nationwide chain of estate agents that was given the opportunity to use the service under its own name and with its own design. In addition, the functions for monitoring bidding via text messages and were expanded during the year. To get a quick idea of prices, new options of searching for completed bidding procedures were introduced. The modifications made have further increased acceptance of the service among estate agents, sellers and bidders. The electronic bidding service is attracting an ever higher numbers of visitors. During the year 5,088 properties were bid for. In total 13,317 bidders were registered, who made 45,542 bids. STADSHYPOTEK S LENDING Competition for private customers in the mortgage market remained fierce during the year. As in previous years, most mortgage players were aiming to increase their share of the substantial growth in mortgage volumes. Although the mortgage institutions launched new products for new borrower categories during the year and accepted higher loan-to-property values as well as more favourable repayment terms, price remained the most important competitive tool. This is illustrated by the narrower lending margins. In this competitive market, Stadshypotek increased its loans to the public by SEK 32.2bn (27.0) with maintained profitability. Private market lending increased by SEK 32.6bn (22.6), while corporate lending decreased by SEK 0.4bn (4.4). Stadshypotek s lending to the public was SEK 445.4bn (413.2) at the end of the year. Lending by type of property 31 December SEK bn Change Single-family housing Shares in housing-co-operatives Private market Multi-family housing Offices or commercial buildings Corporate market Total Since Handelsbanken s acquisition of Stadshypotek in 1997, there has been a shift towards a greater proportion of private market lending, a trend which continued in At the end of the year, private market lending accounted for 63.5% (60.6) of overall lending. The equivalent share at the year-end before Handelsbanken s acquisition was 38.8%. Since the margins for these loans are larger than those available through other lending, this trend in the composition of lending is very positive for Stadshypotek The breakdown of loan volumes by borrower is given in the following table. Lending by borrower category 31 December SEK bn Change Households Public sector, municipal companies Housing co-operatives Other legal entities Total Stadshypotek s market share of mortgage institutions lending, including lending volumes managed on behalf of third parties, rose to 34.5% (34.2) for the corporate market, while market share for the private market was 26.3% (27.2). Stadshypotek s market share as a lender to housing co-operative associations stood at 34.6% (34.8) at year-end. Stadhypotek s total market share of mortgage institutions lending amounted to 28.8% (29.6) on 31 December LOAN LOSSES The considerable growth of mortgage volumes in Stadshypotek over recent years has not been detrimental to the high quality of the company s loan portfolio. The conditions for the property market in the parts of Sweden where Stadshypotek has most of its lending remain favourable, and the high level of expertise among employees at Handelsbanken s network of branches has helped maintain Stadshypotek s low credit risk level. This good credit quality is mainly maintained through continued strong focus on the principles that govern lending in the Handelsbanken Group. These include individual assessment of each customer, which leads to good insight into the customer s repayment capacity and possibilities of meeting his or her loan obligations with Stadshypotek. Furthermore, a decentralised organisation is an important foundation to enable branch employees with customer responsibility to get to know their local market and make independent decisions that are appropriate in that market. The local knowledge also enables rapid identification of any problems among borrowers, and measures to minimise the effects of such problems can then be implemented at an early stage. Stadshypotek s entire loan portfolio is regularly checked using an analysis tool developed in-house. This ensures that property values and loan-to-property values are on a secure level and comply well with Stadshypotek s guidelines for lending. The system can generate many different presentations of data and can be used to conduct sensitivity analyses. The above-mentioned factors played an important role in ensuring that the recovery rate exceeded new loan losses for the seventh consecutive year. Net loan losses thus had a positive impact of SEK 133m (170) on profits, which corresponds to a loan loss ratio of -0.03% (-0.04) of total lending. Reversed provisions of SEK 81m (99) and amounts recovered from actual loan losses in previous years of 76m (101) exceeded actual loan losses by 16m (12) and probable loan losses by SEK 8m (18). 10 STADSHYPOTEK ANNUAL REPORT 2005 ADMINISTRATION REPORT

13 The largest loan loss attributable to a single customer or customer category was SEK 2m (3). The ten largest loan losses totalled SEK 10m (13). Loan losses are reported in Note 7, page 28. BAD DEBTS As at 31 December 2005, Stadshypotek s bad debts before deduction of the provision for probable loan losses amounted to SEK 600m (958). Of the bad debts, SEK 54m (87) were nonperforming loans and SEK 546m (871) were loans on which the borrowers paid interest and amortisation, but which were considered doubtful in view of the borrowers repayment capacity and uncertainty as to the value of the collateral. In addition, there were non-performing loans of SEK 325m (461) that are not classed as bad debts. After deduction of the provision for probable loan losses, the volume of bad debts was SEK 454m (710). Non-performing loans by borrower 31 December Non-performing loans for which Non-performing loans Non-performing loans for which Non-performing loans interest which are interest which are has been included in has been included in SEK bn accrued bad debts accrued bad debts Households Public sector, municipal companies Housing co-operatives Other legal entities Total Bad debts by borrower 31 December Provision for probable losses Bad debts net Provision for probable losses Bad debts net Bad Bad SEK bn debts debts Households Public sector, municipal companies Housing cooperatives Other legal entities Total The provision for probable losses refers to a specific provision for individually valued claims. Bad debts are also reported in Note 11 on page 29. For a definition of bad debts, etc. see the definitions on page 2. REPOSSESSED PROPERTY As at 31 December 2005, there was no repossessed property. ADMINISTRATION REPORT STADSHYPOTEK ANNUAL REPORT

14 STADSHYPOTEK 2005 Funding operations The treasury department of Stadshypotek AB is integrated with Handelsbanken s treasury department. This organisation offers the best conditions for using the funding source and the instrument that offer the lowest funding cost each time funding is carried out. An integrated treasury department has also made it possible to use the Handelsbanken Group s liquidity efficiently. DEBT INSTRUMENTS Stadshypotek raises funds mainly on the Swedish, European and US money and capital markets and through borrowing in Handelsbanken. The primary source of funding is bond loans in Sweden. Bonds are sold in the company s own name and primarily within the framework of a benchmark loan system aimed at the institutional market. This means that only a small number of separate bond loans are issued, with respective final maturity dates set at intervals of about nine months. Concentrating large volumes into a small number of loans in this manner achieves good market liquidity. In March 2006, Stadshypotek received permission from the Swedish Financial Supervisory Authority to issue covered bonds In previous years, the benchmark loans had been issued with an original maturity of about five years. In 2005, ten new bond loans were opened with maturities exceeding five years. These new loans are due for payment between 2011 and Stadshypotek s bond loans are arranged by six market makers. The company has active commercial paper programmes in Sweden, the US and Europe. The ceiling of the Swedish commercial paper programme is SEK 90bn. The ceilings for the US and the European programmes are USD 5bn and EUR 4bn respectively. INTEREST RATE TREND Stadshypotek s fixed rate lending is mainly funded in the Swedish bond market. Swedish bond yields in 2005 largely followed the trend seen in the eurozone. As a result of the Riksbank going a step further than the European Central Bank, ECB, by lowering the Swedish repo rate to 1.50%, the Swedish long-term rates were lower than the EMU rate for much of the autumn. Another factor that contributed to the record low level of Swedish bond yields was the transition to a new system for monitoring pension management companies. This system is known as the traffic-light model and was implemented in January The transition has entailed greater demand for long-term bonds, because the risk assessment in the new system will take place on the basis of how well the assets match the pension liabilities. Until now, only assets have been subject to risk assessment. Pension management companies have consequently chosen to have shorter average maturities, which has led to much shorter maturities in the portfolios than will be demanded in the new system. As the market is forward-looking, this situation already had an impact on long-term rates during International yields, 5-year government bonds % Source: Reuters. Swedish government US Treasury Euro European bond yields have been largely governed by the American trend. The US central bank continued its normalisation of interest rate policy that was started in the summer of 2004 and raised the key rate by a quarter percent at each meeting, bringing the level up to 4.25% in December. Despite the fact that the short-term rates have thereby been raised 3.25 percentage points since June 2004, the ten-year yields in the US were actually lower in December 2005 than at the start of the cycle of interest rate hikes. Nevertheless, bond yields have varied quite considerably due to shifting expectations of when the central bank would end its increases. During the spring, the US economy appeared to slacken off substantially, which caused a drop in long-term yields. When the global economy picked up speed during the summer, yields rose, but they fell when oil prices soared in conjunction with the severe hurricanes. The economy again displayed great resilience towards the higher energy prices, and the tenyear yield in December was trading at nearly its highest during the year. For 2006, the central bank has indicated that the key rate is approaching a neutral level, and the market expects one or two additional hikes in If these expectations are met, it is probable that US bond yields will level off. 12 STADSHYPOTEK ANNUAL REPORT 2005 ADMINISTRATION REPORT

15 Swedish interest rates % Source: Reuters. Stadshypotek bonds Government bonds Repo rate The European central bank also initiated normalisation of the key rate. Expectations are that the rate will remain well below the US levels. In January 2006, the Swedish Riksbank again raised the repo rate by 0.25 percentage points. Market expectations are that the key rate in Sweden will level off at a higher rate than in the eurozone. This resulted in Swedish bond yields being traded at the end of the year close to German interest levels despite the imminent introduction of the traffic-light model. The difference in yield between Stadshypotek s bonds and Swedish government bonds known as the mortgage spread climbed somewhat during the fourth quarter. This was due to the expanded supply of mortgage bonds, because borrowers chose fixed rates for their mortgages to a greater extent during the fourth quarter than during the rest of the year. FUNDING AND DEBT MANAGEMENT 2005 Lending at variable and short-term fixed rates loans with fixed three-month rates is financed in the Swedish and international capital markets. The size of this lending demands well-diversified funding. This is achieved by spreading it over different geographical markets and different types of funding instruments. Stadshypotek has active commercial paper programmes in its own name in Sweden, the US and the eurozone. With the aim of reducing the liquidity risk, this financing is supplemented by long-term funding which, by means of swap agreements, is adapted in terms of maturity so that it matches the maturity of the lending. A large part of the short-term funding takes place in Handelsbanken s name and is then lent on to Stadshypotek. Handelsbanken has a liquidity surplus in Swedish kronor. Most of this surplus has been transferred daily to Stadshypotek to finance variable rate lending. Long-term lending is mainly funded by issuing benchmark mortgage bonds in Swedish kronor. Part of the long-term lending takes place through funding being lent on from Handelsbanken; the parent company raises this funding in the Swedish and international capital market. Stadshypotek is an active participant in the Swedish swap market. Swap instruments are used both to extend and shorten Stadshypotek s funding and also to create increased availability and liquidity in Stadshypotek s benchmark bonds. Spread between 5-year government bond and 5-year Stadshypotek bond % Source: Reuters Since 1 January 2005, Stadshypotek has applied the new accounting standards according to IAS 39. This means that all derivatives are to be valued using the fair value model. The company s swap portfolio has been adjusted with the aim of minimising the impact on earnings from changes in the market rate. The earnings-related consequences of the new accounting standards have greatly restricted the company s debt management regarding the use of interest rate swaps and exchange of existing debts. At the end of the year, swap agreements in which fixed interest is received totalled SEK 108.8bn (98.0), while interest rate swap agreements paying fixed interest were SEK 81.9bn (98.1). Sales of bonds from Stadshypotek s benchmark series during the year were SEK 113.4bn (116.9). The carrying amount of outstanding benchmark loans was SEK 214.2bn (157.6) at year-end. The increase is due to borrowers choosing fixed rates for their loans to a greater extent during December. In its funding Stadshypotek has also used repos: issues of bonds where Stadshypotek has also contracted a price agreed in advance for the repurchase. These repos, which had an average maturity of one month, have been issued to fund ADMINISTRATION REPORT STADSHYPOTEK ANNUAL REPORT

16 variable-interest lending. At the end of the year the outstanding volume of repos was SEK 20.4bn (25.5). The outstanding volume of commercial papers in Sweden was SEK 21.6bn (33.3) at year-end. Outstanding volume in the US commercial paper programme was SEK 11.4bn (15.9), while outstanding volume in the European equivalent stood at SEK 1.0bn (2.1) at the end of the year. New sales of retail bonds by Stadshypotek were SEK 1.2bn (1.4) in The carrying amount of Stadshypotek s funding via retail bonds continues to fall and was SEK 3.8bn (4.6) at year-end. Stadshypotek s total funding at year-end was SEK 421.7bn (389.2), of which SEK 149.3bn (148.1) came from Handelsbanken. The breakdown of funding by instrument is shown in the table below. Maturity profile for borrowing 31 December Maturity Book value SEK m Share % 2006 Q Q 2 24, Q Stadshypotek s funding 31 December Carrying amount, SEK bn Share % Carrying amount, SEK bn Share % Funding from the parent company of which subordinated loans Commercial paper Bond loans, Sweden Retail bonds Repos Commercial paper - US Commercial paper - ECP Total COVERED BONDS In September, Stadshypotek submitted an application to the Swedish Financial Supervisory Authority for permission to issue covered bonds pursuant to the new law in Sweden on issuing covered bonds (2003:1223), which came into force on 1 July Covered bonds are bonds with priority in the issuing institution s collateral. The collateral in Stadshypotek will mainly consist of loans to private individuals and companies granted against mortgages in real property such as single-family houses, second homes and multi-family dwellings and with a loan-toproperty value within 75% of the market value. Through the structure of its collateral, a covered bond can gain a higher rating, which may entail lower financing costs than those that otherwise apply to issuers funding. The new legislation also gives Swedish mortgage institutions access to an internationally established form of financing. For Stadshypotek, it presents new opportunities of broadening its financing to new markets and new investors. This new type of funding will primarily replace the current form of institutional bond funding in Stadshypotek. However, Stadshypotek s other debt in various commercial paper markets will not be converted into covered bonds. In March 2006, permission was received from the Swedish Financial Supervisory Authority to issue covered bonds. These operations are planned to start during the second quarter of Issuance of covered bonds is conditional on Stadshypotek receiving the highest rating AAA for these bonds. 14 STADSHYPOTEK ANNUAL REPORT 2005 ADMINISTRATION REPORT

17 STADSHYPOTEK 2005 Risk management, capital adequacy and rating Stadshypotek s policy is to conduct its operations with a controlled low level of risk. The main risks are credit risk, financial risks and operational risks. The credit risk is minimised by carrying out a credit assessment of all customers and by demanding adequate collateral for loans. The financial risks are minimised by achieving a good balance between lending and funding. Operational risks are kept to a minimum through good internal control in the form of appropriate instructions and procedures. CREDIT RISKS Stadshypotek s business consists of property financing primarily residential buildings. The borrower base is spread throughout Sweden with a concentration in urban areas. The customers represent all categories of property owners, from individual households to large property companies. In the loan portfolio, single-family houses and housing co-operative apartments represented 63.5% (60.6), multi-family housing accounts for 32.4% (34.7) and offices and commercial property account for 4.1% (4.7). Lending to the largest corporate group corresponded to 0.3% (0.3) of the whole portfolio. There was 1 (5) customer or corporate group with loans of more than SEK 1bn. Credit assessment In the Handelsbanken Group, a joint credit analysis is carried out both for the Bank and its subsidiaries by the branch responsible for the customer, and overall customer and corporate group limits are established. In the credit assessment, both the borrower s repayment capacity and the value of the collateral are taken into account. All customers are also given an internal rating. Counterparty risks The use of derivative agreements in connection with Stadshypotek s funding leads to credit exposure to the banks that are counterparties in the agreements. This type of risk is usually referred to collectively as value change risk. Such a risk arises when Stadshypotek has entered into derivative agreements, such as currency futures, interest rate swaps or options, with a counterparty and there is a risk that this counterparty will not be able to meet its commitments. If such a situation arises, a new equivalent contract must be acquired in the market to replace the old one. This may entail a cost, depending on price trends in the market in question. The risk of this cost arising is calculated for each contract and is regarded as a risk on the counterparty in the contract. Most of Stadshypotek s derivative agreements are entered into with Handelsbanken as the counterparty. Thus it is the parent company in the Handelsbanken Group that bears this type of credit risk. Some of the credit limits available in the parent company are intended to cover any counterparty risks arising from Stadshypotek s trading in derivatives. VALUATION The valuation of properties and housing co-operative apartments is an independent part of the credit assessment. The starting point in valuation of properties that are or will be mortgaged is the market value. The market value is defined as the price at which a property or housing-cooperative apartment can be sold in the open market in normal circumstances. The valuation must be recent. In the case of small multi-family properties, single-family properties and housing co-operative apartments, a simplified valuation carried out at the local bank branch may be sufficient. In other cases, an upto-date, complete valuation must always be made by a valuer approved by Handelsbanken before a loan can be granted. Handelsbanken s branch offices are responsible for ensuring that this is performed. The normal limit for adequate collateral is to be equivalent to 75% of the property s value. In areas where the market for single-family properties is stable, mortgages in single and two family homes as well as second homes are acceptable as collateral for up to 85% of the assessed market value. In areas with a very stable property market, up to 90% of the market value of single-family houses and housing cooperative apartments can be mortgaged. This requires an internal credit guarantee to be issued from Handelsbanken to Stadshypotek, through the branch office responsible for the customer. This guarantee is between 75% and 90% where the normal mortgage level is 75%, and between 85% and 90% in markets where the normally approved mortgage level is 85%. This option has been created for practical reasons and does not entail a change to the credit risk in the Handelsbanken Group, because this mortgaging has been and will continue to be in the Bank instead. FINANCIAL RISKS Interest rate risk lending In Stadshypotek, interest rate risk is defined as the difference that arises in the present value of future cash flows if the yield curve experiences an upward shift of one percentage point. Interest rate risks of this type arise when the rate adjustment periods for financial assets and liabilities or off-balance-sheet items do not coincide. Due to the concentration of the benchmark loans to a small number of final maturity dates, it is not possible to match maturities in a traditional manner. Instead, the general method for achieving risk-neutral matching is based on the use of two different bond loans to finance one lending transaction. Since one of the bond loans has a somewhat shorter maturity than ADMINISTRATION REPORT STADSHYPOTEK ANNUAL REPORT

18 Interest rate adjustment periods for Stadshypotek s assets and liabilities 31 December 2005 SEK m 0 3 mths 3 6 mths 6 12 mths 1 5 yrs 5 yrs Total ASSETS Loans to credit institutions Loans to the public 206,439 16,439 32, ,574 16, ,361 Total assets 207,401 16,439 32, ,574 16, ,323 LIABILITIES Due to credit institutions 168,769 1,408 2,957 3, ,658 Issued securities 41, , ,120 15, ,556 Subordinated liabilities ,500-3,500 Total liabilities 210,354 1,653 34, ,345 16, ,713 OFF-BALANCE-SHEET ITEMS Derivatives -25,576-4,632 3,091 26, Difference between assets and liabilities including off-balance sheet items -28,529 10,154 1,083 41, ,848 Accumulated difference -28,529-18,375-17,292 24,700 24,848 24,848 Accumulated difference as percentage of total assets Average interest rate adjustment period for loans to the public 1.4 years (1.4). Average interest rate adjustment period for funding 1.6 years (1.2). The above table refers to the parent company. The Group has a different allocation in the 0-3 mths interval where Loans to credit institutions are SEK 157,326m and Issued securities are SEK 53,028m. Other intervals agree with the Group. the lending and the other a somewhat longer maturity, interest risks which can balance each other are obtained so that the borrowing is risk-neutral with respect to the lending. Due to this matching of financial assets and liabilities and off-balance-sheet items, changes in interest rates have only a marginal effect on Stadshypotek s profit/loss. Interest rate risks are measured independently on a daily basis, as are follow-ups of the interest rate risk limits that have been set by the board of the company. Interest rate risk equity capital The equity capital is placed in lending with an average rate adjustment period of three years. The daily interest rate risk on equity capital must not deviate from a risk limit specified by the board. The above table shows the interest rate adjustment periods for the company s assets and liabilities in the balance sheet, as well as off-balance-sheet items at the end of Liquidity risk A large part of the lending at variable interest rates is funded by issuing short-term instruments. The maturity structure of this funding is well-diversified and adapted so that Handelsbanken s liquidity at the Group level is in balance. The integration with Handelsbanken s treasury department thereby gives Stadshypotek access to the liquidity reserves in Handelsbanken. Exchange rate risks Stadshypotek has active commercial paper programmes in the US and the eurozone. The company has issued in US dollars, euros and pounds sterling under these programmes. The exchange rate risk in connection with all funding in foreign currencies is eliminated by matching currency forward rate contracts. All other refinancing in the foreign markets is raised through Handelsbanken and is subsequently transferred to Stadshypotek in Swedish kronor. Derivatives The majority of derivative transactions entered into by Stadshypotek are interest rate swaps. By doing so, Stadshypotek aims to hedge the risk in its own balance sheet or to obtain cheaper funding. The latter may be obtained by extending the maturity of short-term borrowing via interest rate swap agreements. Via the interest rate swap market, derivative instruments can also be combined with funding instruments to create attractive short-term and long-term funding solutions. Stadshypotek s capped rate loan offers borrowers protection against future interest rate increases. This is a five-year loan where the interest rate on the loan goes down when shortterm interest rates fall. If short-term interest rates rise, the customer never has to pay more than a pre-determined maximum rate of interest. This commitment is hedged with interest rate options on terms corresponding to this lending. Derivative agreements entered into constitute a hedge against unfavourable changes in value in the mortgage group s lending and borrowing portfolios. Information about Stadshypotek s positions with regard to derivative instruments is provided in Note 13 on page 30. OPERATIONAL RISKS Operational risk refers to the risk of loss due to inadequate internal processes, human error, erroneous systems or external events. As a subsidiary of the Handelsbanken Group, Stadshypotek follows the same policy and guidelines that apply to the Group in its management of operational risks. Most of Stadshypotek s business is conducted within the framework of a co-operation agreement that the company has drawn up with Handelsbanken. Responsibility for the identification, management and control of operational risk in the Handelsbanken Group is an integrated part of managerial responsibility. In all areas where the Bank issues instructions, special attention is always paid to how internal control is organised. It is the duty of managers responsible for specific functions to ensure that appropriate instructions and procedures are drawn up for handling operational risks in their business area. 16 STADSHYPOTEK ANNUAL REPORT 2005 ADMINISTRATION REPORT

19 CAPITAL ADEQUACY As at 31 December 2005, Stadshypotek s capital ratio was 8.8% (8.1). The tier 1 ratio was 7.4% (8.1). The increase in the capital ratio is explained by the company issuing a subordinated loan of SEK 3.5bn in January to strengthen the capital base. Stadshypotek does not have a trading book of financial instruments or any open currency positions. Thus, there is no capital requirement for market risks. A full capital adequacy analysis is presented in Note 27 on page 34. NEW CAPITAL ADEQUACY RULES New capital adequacy rules, known as the Basel II rules, will be introduced on 1 January 2007 and will be fully implemented over a three-year transition period. The fundamental concept of the rules is to create a clearer link between risk and capital requirements in which the relatively rough standard measurements in the current capital adequacy rules will be replaced by more risk-sensitive methods. At Handelsbanken, comprehensive preparatory work has been in progress for nearly four years. Stadshypotek is included as an integral part of this work. Basel II allows the lender to use its own risk assessments for estimating the capital required to cover credit risks. The risk classification system under the new rules will be based on the valuation and internal rating methods that Handelsbanken has successfully applied for the past 25 years. Based on this, the preparatory work has focused on constructing the verification support demanded by the new rules. Harmonisation with the new rules is not expected to lead to any major change in Stadshypotek s credit process. Credit assessments will continue to be based on the local knowledge of Handelsbanken s branches, and the local knowledge of employees and their contacts with customers. For Stadshypotek, the new rules will lead to a reduction in the risk-weighted amounts for credit risks. RATING FOR STADSHYPOTEK S DEBT Stadshypotek has the same rating as its parent company Handelsbanken, which has the highest rating of Swedish and Nordic banks. No change in the company s rating took place in Rating Long-term Short-term Moody s Aa1 P-1 Standard & Poor s AA- A-1+ ADMINISTRATION REPORT STADSHYPOTEK ANNUAL REPORT

20 STADSHYPOTEK 2005 Performance and position PERFORMANCE In 2005, Stadshypotek s results of operating activities rose by 9% to SEK 5,599m (5,150) its highest figure ever. The improvement in profits is due to higher income and somewhat lower expenses. OPERATING INCOME Income amounted to SEK 5,600m, which is 9% higher than in 2004 when net interest income was SEK 5,130m. Of the SEK 470m increase in income, net interest income accounted for an increase of SEK 54m, and the Net result on financial operations item represented a SEK 414m increase, which was entirely attributable to the new accounting standards according to IFRS/IAS. The rise in net interest income to SEK 5,237m (5,183) was mainly due to increased private market lending. This continued shift towards private market lending has compensated for poorer yield as a result of falling market rates and reduced equity during the year. As in previous years, there has been a certain variation in net interest income from quarter to quarter. These variations were mainly caused by a difference in the timing of adjustments of terms for borrowing and lending of the type discussed under the heading Interest rate risk lending on pages EXPENSES AND LOAN LOSSES Expenses, excluding loan losses, decreased to SEK 134m (150). Staff costs dropped by 15% and other administrative costs by 10%. This decrease stemmed from continuing efficiency improvements. Recoveries exceeded new loan losses and the net amount recovered was SEK 133m (170), which corresponds to a loan loss ratio of -0.03% (-0.04) of lending. As at 31 December 2005, Stadshypotek s bad debts before deduction of the provision for probable loan losses were SEK 600m (958). Of the bad debts, SEK 54m (87) were non-performing loans and SEK 546m (871) were loans on which the borrowers pay interest and amortisation but which are considered doubtful in view of the borrowers repayment capacity and due to uncertainty as to the value of the collateral. After deduction of the provision for probable loan losses, the volume of bad debts was SEK 454m (710). TAXES AND NET PROFIT FOR THE YEAR Net profit for the year after taxes of SEK 1,568m (1,442) was SEK 4,031m (3,708). PROFITABILITY The profits corresponded to return on equity of 18.1% (16.0). For a five-year summary of income statements and balance sheets, see page 38; and for key financial figures and ratios, see page 2. TOTAL ASSETS AND SHAREHOLDERS EQUITY Stadshypotek s total assets stood at SEK 455,074m (421,126) and shareholders equity was SEK 19,049m (19,049). GROUP CONTRIBUTION A Group contribution of SEK 4,703m (6,047) has been provided to Handelsbanken. EVENTS AFTER THE BALANCE SHEET DATE In March 2006, permission was received from the Swedish Financial Supervisory Authority to issue covered bonds. These operations are planned to start during the second quarter of Issuance of covered bonds is conditional on Stadshypotek receiving the highest rating AAA for these bonds. Quarterly performance SEK m Q 4 Q 3 Q 2 Q 1 Q4 Net interest income 1,250 1,308 1,282 1,397 1,302 Net result on financial operations Other operating income Total income 1,360 1,546 1,328 1,366 1,288 General administrative expenses Profit before loan losses 1,329 1,512 1,292 1,333 1,250 Loan losses Operating profit 1,387 1,532 1,318 1,362 1, STADSHYPOTEK ANNUAL REPORT 2005 ADMINISTRATION REPORT

21 STADSHYPOTEK 2005 Sensitivity analysis The factors which have the greatest impact on Stadshypotek s operating profit are the interest rate margin in the loan portfolio and the investment yield on own funds. Changes in the volume of lending and the amount of administrative costs and loan losses are also important. The table below shows the effect of changes in each one of these factors upon the result, assuming that all other parameters remain unchanged. The table is based on the balance sheet as at 31 December For the effect of a variation in loan volume, an interval is specified, since a loan volume which is added or deducted from the loan portfolio may have a different margin from the portfolio on average. The calculations comprise interest rate margins of 0.5% and 1.0% respectively. It should be emphasised that changes in the interest rate level only gradually affect a portfolio of fixed rate loans. If the margin for new lending changes or if the general interest rate level changes, it will be a long time before the full impact is seen on the average lending margin and on the average investment yield in the whole portfolio. Relatively large changes in the volume of lending or other investments are required in order to have a more significant impact on the capital ratio. For example, with the same risk weight spread as for Stadshypotek s loan portfolio on average, a volume increase of some SEK 59bn would be required in order to reduce the capital ratio by one percentage point. A corresponding decrease would result if there is a reduction in the capital base of SEK 2.6bn. The following table shows how the capital ratio is affected by changes in different forms of investment. Changing factor Increase, SEK m Effect on capital ratio,%-points Investments Due to financial institutions 1, Loans secured by Residential property 1, Offices or commercial buildings 1, Capital base 1, Changing factor Change Effect on result, SEK m Average nominal lending margin 0.01%-point 45 Average interest level for own funds invested 1.0%-point 190 Volume of lending 1.0% Administrative expenses 1.0% 1 Loan loss level 0.01%-point 41 ADMINISTRATION REPORT STADSHYPOTEK ANNUAL REPORT

22 STADSHYPOTEK 2005 Income statement GROUP PARENT COMPANY SEK m Interest income 16,989 18,412 16,989 18,412 Interest expense -11,752-13,229-11,752-13,229 Net interest income Note 1 5,237 5,183 5,237 5,183 Net result on financial operations Note Fee and commission income Fee and commission expense Net fee and commission income Note Other operating income Total operating income 5,600 5,130 5,600 5,130 General administrative expenses - Staff costs Note Other administrative expenses Note Depreciation according to plan Note Total expenses before loan losses Profit before loan losses 5,466 4,980 5,466 4,980 Net loan losses Note Operating profit 5,599 5,150 5,599 5,150 Appropriations Note Profit before taxes 5,599 5,150 5,599 6,047 Taxes Note 9-1,568-1,442-1,568-1,693 Profit for the year 4,031 3,708 4,031 4,354 Net earnings per share, SEK STADSHYPOTEK ANNUAL REPORT 2005 INCOME STATEMENT

23 STADSHYPOTEK 2005 Balance sheet 31 December GROUP PARENT COMPANY SEK m ASSETS Loans to credit institutions Note , ,270 Loans to the public Note , , , ,233 Shares and participations in Group companies Note Derivatives Note 13 3,004 1,601 3,004 1,601 Tangible assets Note Other assets Note 15 4,126 2,378 4,126 2,378 Prepayments and accrued income Note 16 1,621 1,644 1,621 1,644 Total assets 455, , , ,126 of which Group claims Note 23 3,945 3,567 3,945 3,567 LIABILITIES, PROVISIONS AND EQUITY Due to credit institutions Note , , , ,442 Issued securities, etc. Note , , , ,779 Derivatives Note 13 4,893 2,041 4,893 2,041 Other liabilities Note 19 4,890 6,117 4,890 6,117 Accruals and deferred income Note 20 4,529 4,698 4,528 4,698 Subordinated liabilities 3,500-3,500 - Total liabilities and provisions 436, , , ,077 Equity Note 21 - Share capital 4,050 4,050 4,050 4,050 - Statutory reserves 8,106 8,106 8,106 8,106 - Unrestricted reserves 2,862 3,185 2,862 2,539 - Profit for the year 4,031 3,708 4,031 4,354 Total equity 19,049 19,049 19,049 19,049 Total liabilities, provisions and equity 455, , , ,126 of which Group liabilities Note , , , ,425 Pledged assets none none none none Contingent liabilities none none none none Other commitments Note , , , ,139 BALANCE SHEET STADSHYPOTEK ANNUAL REPORT

24 STADSHYPOTEK 2005 Changes in shareholders equity GROUP SEK m Share capital Statutory reserves Unrestricted reserves Total Shareholders equity 31 December ,050 8,752 6,893 19,695 Transfer between unrestricted and restricted equity Profit for the year 3,708 3,708 Group contribution -6,047-6,047 Tax on paid Group contribution 1,693 1,693 Shareholders equity 31 December ,050 8,106 6,893 19,049 Net effect of transition to recognition at fair value under IAS Opening equity after adjustment 4,050 8,106 6,248 18,404 Profit for the year 4,031 4,031 Group contribution -4,703-4,703 Tax on paid Group contribution 1,317 1,317 Shareholders equity 31 December ,050 8,106 6,893 19,049 PARENT COMPANY Restricted equity SEK m Share capital Statutory reserves Retained earnings Total Shareholders equity 31 December ,050 8,106 6,893 19,049 Profit for the year 4,354 4,354 Group contribution -6,047-6,047 Tax on paid Group contribution 1,693 1,693 Shareholders equity 31 December ,050 8,106 6,893 19,049 Net effect of transition to recognition at fair value under IAS Opening equity after adjustment 4,050 8,106 6,248 18,404 Profit for the year 4,031 4,031 Group contribution -4,703-4,703 Tax on paid Group contribution 1,317 1,317 Shareholders equity 31 December ,050 8,106 6,893 19, STADSHYPOTEK ANNUAL REPORT 2005 CHANGES IN SHAREHOLDERS EQUITY

25 STADSHYPOTEK 2005 Cash flow statement GROUP PARENT COMPANY SEK m OPERATING ACTIVITIES Operating profit 5,599 5,150 5,599 5,150 Adjustment for items in the operating result which do not affect the cash flow: Loan losses Unrealised changes in value Depreciation, amortisation and write-downs Paid income tax Change in the assets and liabilities of operating activities Loans to credit institutions Loans to the public -32,235-26,940-32,235-26,940 Due to credit institutions -7,358 48,907 4,085 38,190 Issued securities 36,604-18,834 25,161-8,116 Other -1,264-1,822-1,264-1,822 Cash flow from operating activities 1,508 6,612 1,508 6,612 INVESTING ACTIVITIES Change in tangible fixed assets Cash flow from investing activities FINANCING ACTIVITIES Subordinated loans issued 3,500-3,500 - Dividends paid -6,047-5,664-6,047-5,664 Cash flow from financing activities -2,547-5,664-2,547-5,664 Cash flow for the year -1, , Liquid funds at beginning of year 2,001 1,053 2,001 1,053 Cash flow from operating activities 2,153 6,612 2,153 6,612 Cash flow from investing activities Cas flow from financing activities -3,192-5,664-3,192-5,664 Liquid funds at end of year 962 2, ,001 CASH FLOW STATEMENT STADSHYPOTEK ANNUAL REPORT

26 STADSHYPOTEK 2005 Accounting policies The accounting in the parent company and Group follows the regulations of the Annual Accounts Act for Credit Institutions and Securities Companies (ÅRKL) and the directives issued by the Swedish Financial Supervisory Authority (FFFS 2004:20). These directives mean that the Swedish Financial Accounting Standards Council s recommendation 32 is applied and that the accounting complies with IFRS through what is known as statutory IFRS. Stadshypotek is a subsidiary of Svenska Handelsbanken AB. The parent company prepares consolidated accounts which include Stadshypotek. The currency used for reporting is Swedish kronor. CHANGED ACCOUNTING POLICIES From 1 January 2005, listed companies in the EU must harmonise their consolidated accounts with the accounting standards of the IASB (International Accounting Standards Board). Swedish legislation includes an opportunity for parent companies that, like Stadshypotek, only have securities noted on stock exchanges, to postpone the transition to international accounting standards according to IAS/IFRS until To achieve uniform accounting in the Handelsbanken Group, Stadshypotek has chosen to adapt its consolidated accounts to the accounting standards of the IASB as from 1 January IFRS 7 and changes in other standards as a result of applying IFRS 7 are not applied in advance. The accounting policies applied have been harmonised where relevant with the accounting recommendations (IAS or IFRS) which the IASB has issued and the EU has adopted. This mainly applies to IAS 39, Financial Instruments Recognition and Measurement, and IAS 21 The Effects of Changes in Foreign Exchange Rates. The impact on opening shareholders equity was SEK -645m on 1 January According to IFRS 1, IAS 39 and IFRS 4 classification and valuation rules do not have to be applied retroactively. Balance sheet and income statement entries for financial instruments have been reclassified without revaluation for 2004, because the books of original entry and the documentation of hedging packages for previous years were adapted to previous accounting policies. IAS 39 has different rules concerning documentation and valuation and therefore restatement would not give a fair presentation of the results for the restated years. The most relevant view of the results is instead achieved by applying the valuation rules forwards. CONSOLIDATED ACCOUNTS Stadshypotek is a parent company in a parent group that prepares consolidated accounts. Such companies are exempt, according to Chapter 7 of the Annual Accounts Act for Credit Institutions and Securities Companies, from the obligation of preparing consolidated accounts unless the company has issued securities that are registered on a stock exchange within the EU. Stadshypotek is a company with listed securities; therefore, it prepares consolidated accounts. The Stadshypotek Group consists of the parent company Stadshypotek AB, the wholly-owned subsidiaries Stadshypotek Delaware, Inc. and Svenska Intecknings Garanti AB Sigab, the latter being dormant. Stadshypotek Delaware, Inc. has the task of issuing instruments for short-term borrowing on the US market. The company sells on this borrowing to the parent company on the same terms as those that applied for Stadshypotek Delaware, Inc. s borrowing. Subsidiaries are consolidated in accordance with the purchase method. RECOGNITION AND MEASUREMENT RULES FOR FINANCIAL ASSETS AND LIABILITIES The EU-harmonised version of IAS 39 has been adopted. The recommendation is applicable as from 1 January 2005; the effect of revaluing financial assets and liabilities has been recorded directly in equity. IAS 39 has the following categories for valuation of financial assets: 1. Loans and receivables. 2. Held-to-maturity investments. 3. Financial assets at fair value through the income statement. 4. Available-for-sale financial assets. The measurement of categories 1 and 2 corresponds to the measurement policies applied to date for loans classified as non-current assets (formerly fixed assets) as well as financial assets held in the long term or held to maturity. The measurement takes place using the asset s amortised cost. In simplified terms, this means that the individual instrument s effective interest rate is used as a basis for calculating the carrying amount. Measurement is supplemented by impairment testing when there are indications of needs for impairment. The impairment is recorded in the income statement. According to the standards, assets in category 3 comprise financial instruments held for trading purposes. Stadshypotek does not have any such assets. Category 4, Available-for-sale assets, contains all financial instruments that do not fit into any of the other categories. This category is approximately the same as what has until now been classified as current assets. Stadshypotek has no such assets. In addition, Stadshypotek applies the category titled Derivatives and hedged items at fair value. Items under this heading are not intended for trading and are therefore reported in a separate column in Note 26. REPORTING OF LENDING In the balance sheet, lending is reported, depending on the counterparty, as either Loans to the public or Loans to credit institutions. Lending is classed in the category Loans and receivables because the intention is not to sell the asset immediately or in the near future. Assets in this category are reported in the balance sheet on the settlement date at their cost of acquisition. The above applies with the exception of 24 STADSHYPOTEK ANNUAL REPORT ACCOUNTING POLICIES

27 the lending that is included in hedging packages, which is reported at fair value. Lending is recorded as before at amortised cost. Undrawn loans (including the risk related to fixed advance interest rates) are regarded as an off-balance-sheet commitment until the settlement date. When borrowers renegotiate the terms of loans or redeem fixed-rate loans before the scheduled maturity, Stadshypotek previously distributed the early redemption charge received over the remaining life of the redeemed loan. A changed accounting policy means that this early redemption charge is now recognised as income when received. Lending is reported net after deductions for probable loan losses. Provision for probable loan losses complies with the policies stated under the heading Loan losses below. Provisions as a group As before, an assessment of the need for provisions as a group is made for events that have occurred but are not yet known but which, had they been known, would have led to an individual provision. In addition, provisions as groups are also made for observable data which suggest that there is a measurable decrease in expected future cash flows for a homogenous group of loan receivables in relation to the initially expected cash flows, despite the fact that the decrease cannot be traced to an individual receivable. FINANCIAL LIABILITIES In the balance sheet, Financial liabilities are recorded under the items Due to credit institutions, Issued securities, and Subordinated liabilities. The Issued securities item includes issued securities that are listed on stock exchanges in the EEA. Liabilities are, as previously, measured at amortised cost. For repurchased bonds, the realised price difference was previously distributed over the life of the repurchased bond in those cases where it was part of a package which was subject to hedge accounting. A changed accounting policy means that this price difference is now recorded as income in its entirety at the time of repurchase. VALUATION OF ASSETS AND LIABILITIES IN FOREIGN CURRENCY Receivables and liabilities in foreign currency that are economically hedged with derivatives and that were previously valued at the acquisition cost of the currency, are valued as from 2005 at the current rate at the time of closing on the accounting date. Changes in value are reported in the income statement. DERIVATIVE INSTRUMENTS Derivative instruments consist of financial derivative contracts. All derivative contracts are carried in the balance sheet at fair value. Where the fair value is positive, it is reported as an asset. When the fair value is negative, it is reported as a liability. TRADE DATE OR SETTLEMENT DATE ACCOUNTING Purchases and sales of money market and capital market instruments on the spot market are subject to trade date accounting. The same applies to derivative instruments. Other financial assets and liabilities are normally reported on the settlement date. HEDGE ACCOUNTING Stadshypotek s derivative instrument transactions mainly constitute a hedging of balance sheet items and were reported until 2005 using the accounting policies that applied to these balance sheet items. This was mainly at amortised cost. From 2005 in compliance with IAS 39, for hedge accounting, both the hedged item and the hedging instrument are recognised at fair value. Changes in value are recorded directly in the income statement. This accounting policy is used in cases where the purpose of the hedge is to protect Stadshypotek against unfavourable changes in market rates. 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. INTEREST INCOME AND EXPENSE Interest income and interest expense for the period on spot instruments are reported in net interest income. Also reported under net interest income is interest attributable to derivative instruments used as formal or economic hedges of hedged items that have interest flows reported in net interest income. This means that interest attributable to financial assets and liabilities carried at fair value is reported under net interest income. Interest is allocated based on the effective interest rate of each instrument. NET RESULT ON FINANCIAL OPERATIONS The item Net result on financial operations comprises all items affecting income that arose when carried at fair value as well as capital gains from financial assets and liabilities. Specifically, the following items are reported here: Unrealised changes in fair value of those assets and liabilities that are subject to fair value hedging, excluding the component of change in value reported as interest. Realised and unrealised changes in value on derivative contracts that are not used as hedging instruments. Unrealised and realised changes in fair value on derivative contracts used as formal or economic hedges of other financial assets and liabilities in addition to the component of changes in value reported as interest. Early redemption charges received for loans redeemed before maturity. Capital gain/loss from the repurchase of financial liabilities. ACCOUNTING POLICIES STADSHYPOTEK ANNUAL REPORT

28 STAFF COSTS Staff costs consist of all direct staff costs, including various forms of social security costs and other payroll overheads. Pension costs Premiums for contractually agreed pension insurance paid to SHB Pensionskassa Försäkringsförening are recorded as pension costs. Pension costs also include payroll tax paid on pension premiums paid. OTHER EXPENSES The item Other expenses consists of other administrative expenses, excluding staff costs and depreciation. DEPRECIATION, AMORTISATION AND WRITE-DOWNS OF PROPERTY AND EQUIPMENT Depreciation and amortisation All assets that have been classified as Property and equipment are depreciated over an estimated useful life. A linear depreciation plan is applicable. The property and equipment that consist of components with different estimated periods of useful life are divided into different categories with separate depreciation plans. Personal computers are depreciated over three years. Other equipment is depreciated over five years. Write-downs Write-downs of property and equipment and intangible assets, as well as of shares in subsidiaries are reported where the recovery value is less than the carrying amount. The recovery value is calculated as the higher of an asset s value in use or net realisable value. The recovery value is determined when there is an indication that the asset has fallen in value. LOAN LOSSES Actual loan losses for the year and write-downs in respect of probable loan losses for loan receivables and other receivables are reported as Loan losses, after an individual assessment has been made. A loan loss is reported in cases in which the estimated value that can be recovered is less than the carrying amount. Any part of the receivable for which 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. Impairment for probable loan losses is made for bad debts if the value of the collateral together with other payments from the counterparty do not cover the carrying amount of the receivable. Write-downs are made down to the amount which is expected to be realised, taking into account the value of the collateral and the present value of expected payments from the customer. If the collateral is a listed asset, the valuation of the collateral is based on the list price; otherwise the valuation is based on the yield value or the market value estimated in some other manner. If the collateral consists of property mortgages, the underlying collateral valuation is made in the same way as for repossessed properties. An estimate of recovery value through discounting future cash flows entails an increase in the recovery value when the time for the payment from the customer approaches. The difference thus arising in the carrying amount is recorded as interest income. Apart from the risk assessment for individual loan receivables made quarterly by all units in the Group that are responsible for customers and loans, a central assessment of homogeneous groups of loan receivables is made at the central level. This assessment takes into account whether there have been loan losses in these groups of loan receivables that cannot yet be allocated to an individual loan. If necessary, a group provision is made for these loan receivables. As soon as the receivable can be individually identified, the provision is transferred to probable loan losses. 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 value of an asset or liability in the accounts and its taxable value. SEGMENT REPORTING No breakdown by product or geographical segment level is made in the company s internal income accounting. This is because the products and the geographical areas in which the company operates are judged to display a similar financial trend. The company s operations are therefore reported in one segment only. CRITICAL ASSESSMENTS The critical assessments made by the company management when applying the accounting policies are stated in the relevant notes or in the administration report. MISCELLANEOUS Reported income is entirely attributable to the Swedish market. The company does not administer, in its own name, any funds on behalf of a third party. 26 STADSHYPOTEK ANNUAL REPORT 2005 ACCOUNTING POLICIES

29 STADSHYPOTEK 2005 Notes Amounts in SEKm unless otherwise stated. The parent company is reported in the following notes in those cases where the figures are different from the Group. NOTE 1 NET INTEREST INCOME Group Parent company Interest income Loans to the public 16,268 18,261 16,268 18,261 Loans to credit institutions Derivatives Total interest income 16,989 18,412 16,989 18,412 Interest expense Due to credit institutions Commercial paper and other short-term borrowings ,450-1,127-1,705 Bond loans and other long-term borrowings -2,335-2,179-2,335-2,179 Issued securities Commercial paper and other short-term borrowings , Bond loans and other long-term borrowings -5,962-8,246-5,962-8,246 Subordinated loans Derivatives -1, ,648 - Other Other interest expenses Total interest expense -11,752-13,229-11,752-13,229 Net interest income 5,237 5,183 5,237 5,183 During the year the average rate on loans to the public was 4.0% (4.6). During the year, the average funding rate (due to credit institutions, issued securities and subordinated loans) was 2.9% (3.5). NOTE 2 NET RESULT ON FINANCIAL OPERATIONS Amounts refer to both Group and parent company Capital gain/loss - interest-bearing securities Unrealised changes in value - interest-bearing securities other financial instruments Changes in exchange rates 21 - Debt redemption -240 Total net result on financial operations The net result on financial operations shows the earnings related to the items which are wholly or partly dependent on changes in market value. Capital gains/losses on interest-bearing securities refer to loans redeemed ahead of time. Unrealised changes in value comprise changes in value for hedged items in hedge accounting, while value changes on derivatives are reported as Unrealised changes in value other financial instruments. Changes in exchange rates refers to all realised and unrealised changes in value which are attributable to changes in exchange rates. NOTE 3 NET FEE AND COMMISSION INCOME Amounts refer to both Group and parent company Fee and commission income Comission on lending Other fee and comission income 1 2 Total fee and commission income Fee and commission expense Commission on payments -1-1 Commission on securities Other fee and comission income Total fee and commission expense Net fee and commission income NOTE 4 STAFF COSTS Amounts refer to both Group and parent company Salaries and other remuneration Social security costs -3-4 Pension premiums paid -2-3 Provision to profit-sharing foundation 0-1 Other staff costs -3-2 Total staff costs NOTES STADSHYPOTEK ANNUAL REPORT

30 NOTE 4 CONTINUED During the year, the average number of employees in the Group was 20 (23), of whom 20 (23) were employed by the parent company. Of the employees in the Group, 33% (36) were women and 67% (64) were men, with the same proportions in the parent company. Pension premiums paid refer to premiums paid to the SHB Pension Fund for contractual pension insurance. The company has a defined-contribution pension plan. Terms and remuneration of senior management Stadshypotek has no agreements on severance pay. The chief executive, Claes Norlén has a retirement age of 60. His retirement pension is 10% of his salary up to 7.5 index-linked base amounts. His pension is 65% on salary amounts between 7.5 and 20 base amounts, and 32.5% on amounts between 20 and 30 base amounts. For the Group, salaries and remuneration to the board members and chief executives of the companies are SEK 1.9m (1.7) of which SEK 89,000 (73,000) in benefits, and SEK 1.9m (1.7) in the parent company, of which SEK 89,000 (73,000) in benefits. At the end of 2005, the following loans were outstanding at Stadshypotek with respect to senior management of the company: Chief executives in the parent company and subsidiaries: SEK 0m Other board members in parent company and subsidiaries: SEK 7m Chief executives or EVPs at other companies in the Handelsbanken Group: SEK 40m The loans in question are distributed among 19 individuals and are all secured by pledged collateral. Pension premiums paid for present and former chief executives and executive vice presidents of the company are SEK 0.2m (0.5). Sickness absence Total absence due to illness was 2.6% of employees total working hours. Sickness absence broken down by gender and age group refers to fewer than ten employees, so information is only given for total absence. Gender distribution Men Women Chief executive 100% - Board of directors 100% - NOTE 5 OTHER ADMINISTRATIVE EXPENSES Amounts refer to both Group and parent company IT costs Cost of premises -3-3 Consultancy fees Other administrative expenses -8-8 Auditing costs External auditing: KPMG Bohlins AB PricewaterhouseCoopers AB Internal auditing Consultation: PricewaterhouseCoopers Operating lease contracts Leasing payments for the period -3-2 NOTE 6 DEPRECIATION AND WRITE-DOWNS OF PROPERTY AND EQUIPMENT Amounts refer to both Group and parent company Depreciation, equipment NOTE 7 LOAN LOSSES Amounts refer to both Group and parent company A. Specific provision for individually assessed loan receivables: This year s write-off for actual loan losses Write-back of previous provisions for probable loan losses which are reported as actual loan losses in the year s accounts The year s provision for probable loan losses Paid in from actual loan losses in previous years Write-back of provisions for probable losses which are no longer necessary Net expense for the year B. Provision by group for individually assessed loan receivables: Allocation to/dissolution of provision by group - - C. Collectively assessed homogeneous groups of loan receivables with limited value and similar credit risk: The year s write-off for actual loan losses - - Paid in from actual losses in previous years - - Allocation to/dissolution of reserve for loan losses - - Net expense for the year for collectively assessed homogeneous loan receivables - - D. Transfer risk: Allocation to/dissolution of reserve for transfer risks - - Net expense for the year for loan losses All written-down and recovered losses refer to loans to the public. 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 loan losses for these receivables valued as a group. Over and above the risk assessment of individual loan receivables made quarterly by all units with customer and credit responsibility in the Handelsbanken Group, no such requirement for provision for the receivables as a group has been identified. NOTE 8 APPROPRIATIONS Amounts refer to the parent company Change in tax allocation reserve STADSHYPOTEK ANNUAL REPORT 2005 NOTES

31 NOTE 9 TAXES NOTE 11 LOANS TO THE PUBLIC Amounts refer to both Group and parent company Tax paid Tax cost for the period -1,568-1,693 Adjustment of tax relating to previous years 0 0-1,568-1,693 Nominal tax rate in Sweden, % Deviations Adjustment of tax relating to previous years, % Effective tax rate, % NOTE 10 LOANS TO CREDIT INSTITUTIONS Amounts refer to both Group and parent company Loans in Swedish kronor Banks 962 2,001 Other credit institutions ,270 Information concerning maturities Payable upon demand 962 2,001 Remaining maturity: maximum three months - 0 Remaining maturity: over three months but maximum one year Remaining maturity: over one year but maximum five years - 0 Remaining maturity: over five years - - Total 962 2,270 Average remaining maturity (years) Average balance loans credit institutions Amounts refer to both Group and parent company Loans in Swedish kronor Loans at cost value 432, ,481 Provision for probable loan losses Loans at fair value 12,862 - Book value 445, ,233 Information concerning maturities Payable upon demand 10,239 3,158 Remaining maturity: maximum three months 191, ,711 Remaining maturity: over three months but maximum one year 49,635 43,664 Remaining maturity: over one year but maximum five years 177, ,611 Remaining maturity: over five years 16,678 14,089 Total 445, ,233 Average remaining maturity (years) Average balance loans - the public Non-performing loans, etc Bad debts Provision for probable loan losses Bad debts, net Bad debt reserve ratio % Proportion of bad debts % Non-performing loans which are not bad debts Book value of loan receivables restructured during the year before restructuring 10 4 after restructuring 13 5 Bad debts which have been reclassified during the year NOTE 12 SHARES AND PARTICIPATING INTERESTS IN GROUP COMPANIES Amounts refer to the parent company Shares in Group companies 0 0 Name Registered office Corp. identity no. Number of shares Nom value, SEK '000 Proportion of share capital, % Carrying amount, SEK '000 Stadshypotek Delaware, Inc. Delaware Svenska Intecknings Garanti AB Sigab Stockholm , The holdings consist exclusively of unlisted shares. NOTES STADSHYPOTEK ANNUAL REPORT

32 NOTE 13 DERIVATIVE INSTRUMENTS Nominal amount/maturity Amounts refer to both Group and parent company up to 1 year more than 1 year up to 5 years more than 5 years Total 2005 Positive market values Negative market values DERIVATIVES Interest-rate related contracts Options 825 3,465-4, Swaps 76,893 91,784 22, ,722 2,971 4,698 Currency related contracts Futures 13, , Total derivatives 90,883 95,249 22, ,177 3,004 4,893 No derivatives have been cleared. Currency distribution of market values SEK 2,984 4,698 USD Stadshypotek mainly uses interest rate swaps as instruments to hedge against changes in value due to changes in market interest rates. Hedge accounting is applied for these hedges in accordance with the company s accounting policies. Interest rate swaps, currency futures and interest rate options are also used as hedges for fair value changes without hedge accounting being applied. As at 31 December 2005, interest-rate related derivatives have a nominal amount of SEK 195.0bn. The fair value of these derivatives was SEK 3.0bn in positive market values and SEK 4.7bn in negative market values. The year s value change on these derivatives has reduced profits by SEK 263m and is reported in Note 2 Net result on financial operations. NOTE 14 PROPERTY AND EQUIPMENT NOTE 15 OTHER ASSETS Amounts refer to both Group and parent company Opening cost of acquisition Cost of acquisition of new assets Cost of acquisition of assets sold during the year Total cost of acquisition Amounts refer to both Group and parent company Settlement claims in respect of own securities 4,110 2,351 Tax claims 1 0 Other ,126 2,378 Accumulated depreciation according to plan, opening balance Depreciation for the year Accumulated depreciation on assets sold during the year Total depreciation Residual value according to plan NOTE 16 PREPAYMENTS AND ACCRUED INCOME Amounts refer to both Group and parent company Accrued interest 1,592 1,619 Other accrued income Prepayments 2 1 1,621 1, STADSHYPOTEK ANNUAL REPORT 2005 NOTER NOTES

33 NOTE 17 DUE TO CREDIT INSTITUTIONS Group Parent company Due in Swedish kronor Banks 165, , , ,284 Due in foreign currency Banks 492 5, ,288 Other credit institutions ,443 15, ,288 11,935 21,158 Total due to credit institutions 166, , , ,442 Information concerning maturities Payable upon demand Remaining maturity: maximum three months 88,242 73,372 99,685 89,242 Remaining maturity: over three months but maximum one year 49,605 70,459 49,605 70,459 Remaining maturity: over one year but maximum five years 21,789 29,150 21,789 29,150 Remaining maturity: over five years 6, , Total 166, , , ,442 Average remaining maturity (years) Average balance due to credit institutions 163, , , ,627 NOTE 18 ISSUED SECURITIES, ETC. Group Parent company Commercial paper 1) 34,047 51,301 22,604 35,431 Bonds 2) 217, , , ,348 Total issued securities 251, , , ,779 Commercial paper 1) Commercial paper in Sweden 21,576 33,299 21,576 33,299 Foreign commercial paper 12,471 18,002 1,028 2,132 Carrying amount commercial paper 34,047 51,301 22,604 35,431 Bonds 2) Bond loans in Sweden 201, , , ,852 Retail bonds 3,891 4,743 3,891 4,743 Total nominal value of bonds 205, , , ,595 of which at amortised cost 165, , , ,595 of which for fair value hedges 39,750-39,750 - Price differences 12,802 5,753 12,802 5,753 Fair value of items valued using fair value option Carrying amount bonds 217, , , ,348 Information concerning maturities Remaining maturity: maximum one year 84,953 73,543 73,510 57,673 Remaining maturity: over one year but maximum five years 151, , , ,870 Remaining maturity: over five years but maximum ten years 14, , Remaining maturity: over ten years Total 251, , , ,779 Average remaining maturity (years) Average balance issued securities SEK 218, , , ,519 Average balance issued securities in foreign currency 18,659 25,556 5,674 8,089 See pages for a list of bonds. NOTER NOTES STADSHYPOTEK ANNUAL REPORT

34 NOTE 19 OTHER LIABILITIES Amounts refer to both Group and parent company Settlement liabilities in respect of own securities issued 1 1 Other liabilities 4,889 6,116 4,890 6,117 NOTE 20 ACCRUALS AND DEFERRED INCOME Amounts refer to both Group and parent company Accrued interest 4,525 4,350 Other accruals 3 6 Deferred income NOTE 21 EQUITY 4,528 4,698 On the balance sheet date, the share capital comprised 162,000,000 shares with a nominal value of SEK 25 each. There have been no changes during the year. Changes in shareholders equity are shown on page 22. NOTE 22 OTHER COMMITMENTS NOTE 23 GROUP CLAIMS/GROUP LIABILITIES Amounts refer to both Group and parent company BALANCE SHEET Group claims Loans to credit institutions 925 1,925 Derivatives 2,985 1,601 Other assets 8 17 Prepayments and accrued income Total 3,945 3,567 Group liabilities Due to credit institutions 157, ,000 Derivatives 4,699 2,045 Other liabilities 4,705 6,049 Accruals and deferred income Subordinated liabilities 3,500 - Total 170, ,425 INCOME STATEMENT Interest income Interest expenses -3,452-3,487 Commission expenses Other administrative expenses Total -3,495-3,557 Inter-company transactions are reported under the above headings in the balance sheet and income statement, either between the companies in the Stadshypotek Group or between these and other companies in the Handelsbanken Group. Amounts refer to both Group and parent company Nominal amount Interest rate-related and currency-related contracts Interest rate swaps 190, ,117 Interest rate options 4,290 4,734 Currency forwards 13,165 24,015 Hedge loans 3,174 1,273 Total commitments 211, ,139 Interest rate swaps have been made in order to obtain a matching in terms of the risk between borrowing and lending. Currency forward contracts are used to hedge currency exposures when funding in foreign currency. Interest rate options are used to hedge commitments related to capped rate loans. Contracted future operating lease charges distributed by the year in which they fall due for payment Total 2.6 NOTE 24 ASSETS AND LIABILITIES IN FOREIGN CURRENCY The total value in SEK of assets and liabiities in foreign currencies is specified below. Loans raised in USD EUR GBP Total Assets Loans to credit institutions Liabilities Due to credit institutions 11, ,935 Issued securities 1, ,028 Issued securities 13, ,165 Net foreign currency positions The principal and interest amounts for loans in foreign currencies are hedged against exchange risk. The distribution above refers to the parent company. In the Group, the distribution is: Due to credit institutions SEK 492m, and Issued securities SEK 12,471m. 32 STADSHYPOTEK ANNUAL REPORT 2005 NOTES

35 NOTE 25 DISCLOSURES CONCERNING FAIR VALUE Amounts refer to the Group ASSETS Carrying amount Adjustment to fair value Carrying amount Adjustment to fair value Loans to credit institutions ,270 7 Loans to the public 445,361 4, ,223 8,167 Other assets 8,751-5,623 2,432 Total assets 455,074 4, ,116 10,606 LIABILITIES Due to credit institutions 166, , Issued securities 251,999 2, ,649 5,328 Other liabilities 14,312-12,855 4,196 Subordinated liabilities 3, Total liabilities 436,025 2, ,076 9,139 Total surplus/deficit 2,456 1,467 In accordance with IAS 32, a comparison is to be made between fair value and carrying amount for both assets and liabilities in the balance sheet and for financial items which are not reported in the balance sheet. The regulations allow scope for choice of method and various calculation assumptions. Thus, the methods applied and the assumptions made may vary among the credit institutions. Information concerning fair value is not a corporate valuation and therefore cannot constitute the basis of a comparison between credit institutions. For means of payment, current receivables and liabilities as well as for receivables and liabilities with a variable interest rate, the fair value is considered to be the same as the carrying amount. Receivables and liabilities with final maturity or date for next interest rate fixing within 30 days are considered to be short-term. Assets and liabilities which are traded on liquid markets have been valued at the average price on the balance sheet day. Market-listed off-balance sheet items are valued in the same way. Items which are not traded on liquid markets have been valued at the average price on the balance sheet day. Market-listed off-balance sheet items are valued in the same way. Items which are not traded on liquid markets, irrespective of whether these are current assets, non-current assets, issued liabilities or off-balance-sheet financial items are valued at the current market rate for the corresponding maturity adjusted to take into account the credit and liquidity risk. The credit and liquidity risk premium by which the market rate has been adjusted when making the valuation is assumed to be the same as the average margin for new lending at the time of the measurement. With the method applied, the gap in the balance sheet which corresponds to the shareholders equity gives rise to surplus values if short-term rates are falling, and losses if interest rates are rising. A surplus value also occurs when margins decrease and a loss occurs when margins increase. NOTE 26 CLASSIFICATION OF FINANCIAL INSTRUMENTS Amounts refer to the Group Financial items recorded at fair value Derivatives designated as hedging instruments held to maturity Investments Loans and other receivables Other financial instruments Non-financial instruments Total assets ASSETS Loans to credit institutions Loans to the public 12, , ,361 Shares and participating interests in Group companies Derivatives - 3, ,004 Equipment Other assets ,126 4,126 Prepayments and accrued income , ,621 Total assets 12,862 3, ,053-4, ,074 LIABILITIES Due to credit institutions , ,214 Issued securities 39, , ,999 Derivatives - 4, ,893 Other liabilities ,890 4,890 Prepayments and accrued income , ,529 Subordinated liabilities ,500-3,500 Total liabilities 39,860 4, ,379 4, ,025 NOTES STADSHYPOTEK ANNUAL REPORT

36 NOTE 27 CAPITAL ADEQUACY ANALYSIS On-balance sheet commitments requiring capital cover Amounts refer to both Group and parent company Risk weight, % On-balance sheet items Risk-weighted amounts , , , ,816 75, ,983 OTHER DISCLOSURES Handelsbanken is currently pursuing a number of legal disputes in various tax courts. For Stadshypotek, the total amounts in dispute in relation to the tax authorities are approximately SEK 23m. Off-balance sheet commitments requiring capital cover Risk weight, % Nominal amounts Converted amounts Risk-weighted amounts ,012 3, , Total risk-weighted amounts, credit risks Risk weight, % , , ,816 66,392 Total risk-weighted amount 257, ,667 CAPITAL BASE Tier 1 capital Taxed equity 19,049 19,049 19,049 19,049 Tier 2 capital Subordinated borrowings 3,500 0 Total capital base 22,549 19,049 Capital adequacy Capital ratio, % Tier 1 ratio, % STADSHYPOTEK ANNUAL REPORT 2005 NOTES

37 STADSHYPOTEK 2005 Recommendation for appropriation of profits In accordance with the balance sheet for Stadshypotek, profits totalling SEK 6,893m are at the disposal of the annual general meeting. The board recommends that the profits be distributed as follows: Balance carried forward Profit for the year 2,862 m 4,031 m 6,893 m When assessing the amount of the company s paid group contribution, account has been taken of the nature of operations, their scope, consolidation requirements and risk-taking. Our assessment is that the above distribution of profits is prudent and well-adapted to the operations as a going concern. Unrealised changes in value of assets and liabilities at fair value have had a net impact of SEK 1,444m on shareholders equity. The capital base of the financial corporate group and parent company exceeded the statutory capital requirement by SEK 1,988m at year-end. STOCKHOLM, 15 MARCH 2006 Curt Källströmer Chairman Yonnie Bergqvist Lennart Francke Lars Kahnlund Olle Lindstrand Håkan Sandberg Björn Sjöberg Employee representative Frank Vang-Jensen Chief executive ADMINISTRATION REPORT STADSHYPOTEK ANNUAL REPORT

38 STADSHYPOTEK 2005 Audit report To the general meeting of the shareholders of Stadshypotek AB (publ) Corporate identity number We have audited the annual accounts, the consolidated accounts, the accounting records and the administration of the board of directors and the chief executive of Stadshypotek AB (publ) for the year The board of directors and the chief executive are responsible for these accounts and the administration of the company as well as the application of the Annual Accounts Act for Credit Institutions and Securities Companies when preparing the annual and consolidated accounts. Our responsibility is to express an opinion on the annual accounts, the consolidated accounts and the administration based on our audit. We conducted our audit in accordance with generally accepted auditing standards in Sweden. Those standards require that we plan and perform the audit to obtain a high but not absolute level of assurance that the annual and consolidated accounts are free of material misstatement. During the year, the auditing department of Handelsbanken has continuously examined the internal controls and accounts. We have received the reports that have been prepared. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the accounts. An audit also includes assessing the accounting policies used and their application by the board of directors and the chief executive and assessing significant estimates made by the board of directors and the chief executive when preparing the annual accounts and consolidated accounts, as well as evaluating the overall presentation of information in the annual accounts and the consolidated accounts. As a basis for our statement on discharge from liability, we examined significant decisions, actions taken and circumstances of the company in order to be able to determine the liability, if any, to the company of any board member or the chief executive. We also examined whether any board member or the chief executive has, in any other way, acted in contravention of the Companies Act, the Annual Accounts Act for Credit Institutions and Securities Companies or the Articles of Association. We believe that our audit provides a reasonable basis for our opinions set out below. The annual accounts have been prepared in accordance with the Annual Accounts Act for Credit Institutions and Securities Companies, and give a true and fair view of the company s results of operations and financial position in accordance with generally accepted accounting policies in Sweden. The administration report is consistent with the other parts of the annual accounts and the consolidated accounts. We recommend to the annual general meeting of shareholders that the income statement and balance sheet of the parent company and the Group be adopted, that the profit of the parent company be dealt with in accordance with the proposal in the administration report and that the members of the board of directors and the chief executive be discharged from liability for the financial year. STOCKHOLM, 16 MARCH 2006 KPMG Bohlins AB Stefan Holmström Authorised public accountant Ulla Nordin Buisman Authorised public accountant Appointed by the Swedish Financial Supervisory Authority 36 STADSHYPOTEK ANNUAL REPORT 2005 AUDIT REPORT

39 STADSHYPOTEK 2005 Board, auditors and senior management THE BOARD OF STADSHYPOTEK AB SENIOR MANAGEMENT Members Curt Källströmer, Vice President of Handelsbanken. Chairman of the board since Board member since Yonnie Bergqvist, Chief Executive of Handelsbanken Finans. Board member since January Lennart Francke, Executive Vice President of Handelsbanken. Board member since Frank Vang-Jensen, Chief Executive. Employed since 1 January Bengt Edholm, Head of Treasury. Employed at Handelsbanken. Ralf Gustavsson, Head of Accounting and Control. Employed since Mats Molander, Head of Credits. Employed since Lars Kahnlund, Executive Vice President of Handelsbanken. Board member since August Olle Lindstrand, Executive Vice President of Handelsbanken. Board member since January Håkan Sandberg, Executive Vice President of Handelsbanken. Board member since Frank Vang-Jensen, Chief Executive since 1 January Board member since January Björn Sjöberg, Employee Representative. Board member since Auditors KPMG Bohlins AB Chief auditor: Stefan Holmström, Authorised public accountant, Täby. Auditor of the company since the annual general meeting Ulla Nordin Buisman, PricewaterhouseCoopers AB Authorised public accountant, Sollentuna. Auditor of the company since the annual general meeting 2004, appointed by the Swedish Financial Supervisory Authority. ADMINISTRATION REPORT STADSHYPOTEK ANNUAL REPORT

40 STADSHYPOTEK 2005 Five-year review Income statement SEK m Interest income 16,989 18,412 19,801 20,525 19,969 Interest expense -11,752-13,229-14,815-15,677-15,329 Net interest income 5,237 5,183 4,986 4,848 4,640 Net result on financial operations Other operating income Total income 5,600 5,130 4,939 4,810 4,673 Administrative expenses Profit before loan losses 5,466 4,980 4,773 4,551 4,350 Loan losses Operating profit 5,599 5,150 5,005 4,711 4,543 Tax -1,568-1,442-1,381-1,314-1,289 Minority interests Profit for the year 4,031 3,708 3,624 3,386 3,232 Balance sheet SEK m ASSETS Loans to credit institutions 962 2,270 1,542 1,972 2,297 Loans to the public 445, , , , ,884 Property and equipment Other assets 7,130 3,979 2,495 5,228 4,766 Prepayments and accrued income 1,621 1,644 1,762 1,921 1,875 Total assets 455, , , , ,823 LIABILITIES, PROVISIONS AND EQUITY Due to credit institutions 166, , , , ,848 Issued securities 251, , , , ,899 Other liabilities 9,783 8,158 7,762 7,948 7,827 Accruals and deferred income 4,529 4,698 5,168 3,882 3,531 Provisions Subordinated liabilities 3, Minority interests Equity 19,049 19,049 19,695 20,149 20,727 Total liabilities, provisions and equity 455, , , , , STADSHYPOTEK ANNUAL REPORT 2005 ADMINISTRATION REPORT

41 STADSHYPOTEK 2005 Stadshypotek bond tables Bond loans for major funding Loan no. Interest rate, % Loan date Due dates for interest Maturity date Outstanding amount, SEK , , ,611, ,750, ,934, ,854, ,690, ,837, ,950, ,651, , , , , , ,107, , ,000 Total 201,349,000 SUPPLEMENTARY DISCLOSURES STADSHYPOTEK ANNUAL REPORT

42 STADSHYPOTEK 2005 Bond tables Retail bonds 1) Loan no. Interest rate, % Loan date Due dates for interest Interest adjustment date Maturity date Outstanding amount, SEK , , , , , 06-01, , , 06-01, 09-01, , Zero coupon , Zero coupon , Zero coupon , Zero coupon , Zero coupon , , , , , , Zero coupon , Zero coupon , Zero coupon , Zero coupon , Zero coupon , Zero coupon , Zero coupon , Zero coupon , Zero coupon , Zero coupon , Zero coupon , , , , , , , , , , , ,481 Total 3,890,644 1 ) Holders of Stadshypotek Retail Bonds can sell them back to Stadshypotek during the life of the bond. Stadshypotek quotes daily repurchase prices. Stadshypotek quotes the current repurchase prices on a daily basis. Total bonds SEK 000 Change during 2005 Outstanding amount Issued by Stadshypotek AB Bond loans for major funding 49,029, ,349,000 Older series of bonds -1,532,100 - Retail bonds -852,001 3,890,644 Total 46,644, ,239, STADSHYPOTEK ANNUAL REPORT 2005 SUPPLEMENTARY DISCLOSURES

43 STADSHYPOTEK 2005 Facts about the company Registered name: Stadshypotek AB (publ). Corporate identity number: Date of registration: 23 December Registered office: Stockholm. Share capital: SEK 4,050,000,000, registered 22 December The lowest and highest permissible share capital, according to the Articles of Association, is SEK 2,000,000,000 and SEK 8,000,000,000. Number of shares: 162,000,000 shares with a nominal value of SEK 25 per share. Number of votes per share: Each share carries one vote. Convertible debt, etc: The company has not issued any debt instruments which can be converted into or exchanged for shares or which are linked with options for a subscription of new shares. Ownership: A subsidiary of Svenska Handelsbanken AB (publ), registered no The Bank publishes consolidated annual accounts in which Stadshypotek AB is included. ADDRESSES Stadshypotek AB Street address: Kungsträdgårdsgatan 2 Postal address: SE Stockholm Phone: Fax: Web: PRODUCTION: Narva PHOTOS: Håkan Flank, Bengt Wanselius and Johnér PRINTING: Ekotryck Redners ADMINISTRATION REPORT 41

44 a Svenska Handelsbanken company