Swedbank AS Annual report 2011

Transcription

1 Swedbank AS Annual report 2011

2 Swedbank Consolidated Financial Statements for the year ended 31 December Contents 3 Management report 5 Members of Supervisory Council of the Bank 5 Members of Management Board of the Bank 6 Statement of Management's Responsibilities 7 Independent Auditors Report 8 Consolidated Financial Statements 8 Consolidated Statement of comprehensive income 9 Consolidated Balance sheet 10 Consolidated Statement of changes in equity 11 Consolidated Statement of cash flows 12 Notes to the Consolidated Financial Statements 57 Registered offices

3 Swedbank Consolidated Financial Statements for the year ended 31 December Management Report 2011 has been yet another year of volatility and uncertainty in global markets. It started with a positive sentiment on worldwide economic recovery but the global environment changed considerably already in second part of the year. Growth in GDP, industrial production, and exports dampened, especially in the euro zone, as well as in many of the emerging markets. The financial crisis has changed its focus from private to public debt. Global uncertainty has risen, and global growth is now expected to slow down more sharply than previously forecast. However, Latvian economic growth was stronger than expected in 2011 GDP grew by 5.3 per cent compared to previous year. The rebound in 2011 owed mostly to swift growth in exporting sectors, such as manufacturing, tourism, and transport and storage. It resulted in soaring investments. Over the last years the economic structure has become more balanced, shifting from domestic consumption towards exports. However, Latvia s GDP growth is expected to slow in 2012 due to the deteriorating global outlook. Slower growth in the main trading-partner countries will cut into Latvian exports, uncertainty and stress in the financial markets will hurt investments, and weaker confidence will weigh on consumption. The Latvian government finished 2011 with a budget deficit substantially less than the initial plan, mostly owing to stronger-than-expected economic growth. The IMF/EC-supported bailout programme was successfully completed in late During the programme s three years, both public and private sectors have done a great job in reducing internal and external imbalances. However, we see it crucial to continue improving competitiveness, promoting medium-term growth, and balancing government finances. Structural reforms addressing these issues are of particular importance, taking into account the worsening of the external environment (especially in the euro zone) in the second half of At the end of 2011 Latvia s banking sector performance was materially affected by the loss reported by the Latvijas Krajbanka which operations where suspended in November. It resulted that the banking sector posted a loss of LVL 179 million in However, majority of banking sector has returned to profit making during the last year. In 2011, Swedbank Latvia earned a profit of LVL 82.4 million, compared to a LVL 46.8 million loss in The improved result was mainly due to net recoveries. Profit before impairments has increased by 2 per cent to LVL 73.9 million. Total income remained flat in 2011, while total expenses decreased by 2 per cent compared to the previous year. Net interest income increased by 9 per cent compared with The increase was in large part driven by higher Euribor rates of the first half of the 2011 and lower costs for deposits. The cost-income ratio was During 2011 Swedbank issued LVL 276 million in new loans, LVL 229 million of which was made available to businesses. However, our net loan portfolio continued to decrease by 13% last year compared to the end of This was mainly due to portfolio amortisation and diminishing new loan demand. Swedbank s net loan portfolio was LVL at the end of Gross impaired loans continued to decline throughout the year and amounted to LVL 605 million, down from LVL 890 million at the end of We expect this trend to continue. Net recoveries for 2011 amounted to LVL 26.3 million (compared to LVL million in credit impairments for the previous year), mainly in corporate credit portfolio. Total deposits from public decreased 4 per cent in Decrease was driven by time deposits, in the same time demand deposits increased by 3 per cent compared to end of Private persons deposits increased more than corporate deposits over the year. The net loan-to-deposit ratio continued to improve, reaching 163 per cent by the end of the year, compared to 181 per cent last year. During the fourth quarter the EU agreed to require banks to maintain a core Tier 1 capital ratio of at least 9 per cent. The banks will have to meet this requirement by 30 June 2012 at the latest. Swedbank Group already meets the new capital requirement by a wide margin and does not expect any restriction on its capital planning. Also Swedbank s Latvia regulatory Tier 1 capital ratio was high - 19 per cent and total capital adequacy ratio was 23 per cent, but our liquidity ratio was 52 per cent at the end of the year. Last year we developed our customer oriented business model moving towards to becoming a long-term relationship bank. Through better understanding the needs of customers, we seek to offer sound and sustainable solutions and support for customers. Our aim is to provide great service and solutions for our customers needs. This year we continued to develop electronic services, as it is one of the future directions of development of financial systems and services, and customer relations. Several improvements have been implemented in Swedbank internetbank to make its use even more convenient and faster. To assist customers in more efficient and convenient management of their personal finances, a new-generation budgeting tool My Finance Manager has been launched in Swedbank s internetbank in Swedbank internetbank continues to evoke not only as a

4 Swedbank Consolidated Financial Statements for the year ended 31 December tool for making payments, but also as individual financial advise center where clients can receive advise and assistance in daily budget planning and management. In order to promote sustainability of Latvia s business environment, a higher proportion of small and medium sized enterprises, as well as exchange of experience and competitiveness, Swedbank has set up the Entrepreneurship competence center in March It has been developed to emphasize the bank s financial advisory role and to create a better dialogue with corporate clients. The website of Swedbank Entrepreneurship competence center is a source of daily business reference that covers all the areas required for a sustainable and competent business development. We are pleased that the number of customers who chose Swedbank as their main bank increased by more than 45 thousand in Clients also appreciated regular finance consultations. These indicators show that our chosen model of long-term relationship is the right direction to further development. In 2012, Swedbank s focus will be on further strengthening a customer-centric business model based on long-term relationships with customers, whilst maintaining efficiency. Our work on customer relations is also starting to earn external recognition. In 2011, the international finance magazine Global Finance named Swedbank the best bank in Latvia and Estonia, and Swedbank s personal Internet banking service as the best in the Baltics. Swedbank ranked 7th in the Most Loved Brands Top study conducted by the business magazine Kapitāls and the agency TNS Latvia and was the only financial institution in the Top 10. In Diena s and Porter Novelli s Company Reputation Top 2011, Swedbank ranked 1st among financial sector companies and moved from 9th to 5th position in the overall ranking of Latvia s companies. In my name and in the name of my colleagues I would like to express gratitude to all our clients who chose Swedbank as their main partner in the financial world. We highly evaluate your trust and loyalty to the bank. As well, I would like to thank all employees for their endurance and contribution throughout this year. Māris Mančinskis Chairman of the Board of Swedbank Riga, 2 March 2012

5 Swedbank Consolidated Financial Statements for the year ended 31 December Members of the Supervisory Council of the Bank As at the date of signing of the financial statements Appointed: Birgitte Bonnesen Chairperson of the Council Toms Siliņš Deputy Chairman of the Council Tiina Sepa Member of the Council Johan Hakan Rosen Member of the Council Erik Štarkov Member of the Council During the period since 1 January 2011 Appointed: Birgitte Bonnesen Chairperson of the Council Toms Siliņš Deputy Chairman of the Council Tiina Sepa Member of the Council Johan Hakan Rosen Member of the Council Reappointed: Erik Štarkov Member of the Council Resigned: Håkan Berg Chairman of the Council Erkki Raasuke Deputy Chairman of the Council Members of the Management Board of the Bank As at the date of signing of the financial statements Appointed: Māris Mančinskis Chairman of the Board Ansis Grasmanis Member of the Board Ģirts Bērziņš Member of the Board Irīna Pīgozne Member of the Board Daniils Ruļovs Member of the Board During the period since 1 January 2011 Appointed: Ģirts Bērziņš Member of the Board Irīna Pīgozne Member of the Board Resigned: Oksana Sivokobiļska Member of the Board Toms Siliņš Member of the Board

6 Swedbank Consolidated Financial Statements for the year ended 31 December Statement of Management's Responsibilities The Management of Swedbank AS ( the Bank ) is responsible for preparing Consolidated Financial Statements of the Bank and its subsidiaries (the Group) as well as for preparing the Financial Statements of the Bank. The Consolidated Financial Statements are prepared in accordance with the source documents and present fairly the state of affairs of the Group at the end of 31 December 2011 and the results of its operations and cash flows for the year ended 31 December 2011; as well the state of the affairs of the Bank at the end of 31 December 2011 and the results of its operations and cash flows for the year ended 31 December The management confirms that suitable accounting policies have been used and applied consistently and reasonable and prudent judgments and estimates have been made in the preparation of the Consolidated and Bank Financial Statements on pages 8 to 56 for the year ended 31 December The management also confirms that applicable International Financial Reporting Standards as adopted by EU have been followed and that the Consolidated and the Bank Financial Statements have been prepared on a going concern basis. Swedbank AS management is also responsible for keeping proper accounting records, for taking reasonable steps to safeguard the assets of the Group and the Bank and to prevent and detect fraud and other irregularities. They are also responsible for operating the Bank in compliance with the Law On Credit Institutions, regulations of the Financial and Capital Market Commission (FCMC) and other legislation of the Republic of Latvia. On behalf of the management Māris Mančinskis Ansis Grasmanis Birgitte Bonnesen Chairman of the Board Chief Financial Officer Chairperson of the Council Riga, 2 March 2012

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8 Swedbank Consolidated Financial Statements for the year ended 31 December Consolidated Statement of comprehensive income (thous. LVL) Note Group 2011 Group 2010 Bank 2011 Bank 2010 Interest income Interest expenses Net interest income Commission income Commission expenses Net commissions Net gains and losses on financial items at fair value Other income Total income Staff costs Other general administrative expenses Total general administrative expenses Depreciation/amortisation of tangible and intangible fixed assets Total expenses Profit before impairments Impairments of non financial assets Credit impairments Impairment of financial fixed assets Operating profit/(loss) Income tax Profit/(loss) for the year Other comprehensive income for the year Total comprehensive income/(loss) for the The accompanying notes are an integral part of these financial statements. The financial statements and notes on pages 12 to 56 were approved by the Management of the Bank and signed on its behalf by: Māris Mančinskis Ansis Grasmanis Birgitte Bonnesen Chairman of the Board Chief Financial Officer Chairperson of the Council Riga, 2 March 2012 y:

9 Swedbank Consolidated Financial Statements for the year ended 31 December Consolidated Balance sheet (thous. LVL) Note Group 2011 Group 2010 Assets Cash and balances with central banks Treasury bills and other bills eligible for refinancing with central banks, etc Loans to credit institutions Loans to public Bonds and other interest-bearing securities Investments in Group entities Derivatives Intangible fixed assets Tangible assets Current tax assets Deferred tax assets Other assets Prepaid expenses and accrued income Total assets Bank 2011 Bank 2010 Liabilities and equity Liabilities Amounts owed to credit institutions Amounts owed to other financial organisations Deposits and borrowings from the public Derivatives Current tax liabilities Deferred tax liabilities Other liabilities Accrued expenses and prepaid income Provisions Subordinated liabilities Total liabilities Equity Share capital Other reserves Retained earnings/(accumulated losses) Total equity Total liabilities and equity Off-balance sheet items Contingent liabilities Commitments The accompanying notes are an integral part of these financial statements. The financial statements and notes on pages 12 to 56 were approved by the Management of the Bank and signed on its behalf by: Māris Mančinskis Ansis Grasmanis Birgitte Bonnesen Chairman of the Board Chief Financial Officer Chairperson of the Council Riga, 2 March 2012

10 Swedbank Consolidated Financial Statements for the year ended 31 December Consolidated Statement of changes in equity Group (thous. LVL) Share capital Reserves Retained earnings/ (accumulated losses) Total equity Opening balance, 1 January Total comprehensive loss for the year Closing balance, 31 December Opening balance, 1 January Total comprehensive income for the year Closing balance, 31 December Bank (thous. LVL) Share capital Reserves Retained earnings/ (accumulated losses) Total equity Opening balance, 1 January Total comprehensive loss for the year Closing balance, 31 December Opening balance, 1 January Total comprehensive income for the year Closing balance, 31 December The accompanying notes on pages 12 to 56 are an integral part of these financial statements.

11 Swedbank Consolidated Financial Statements for the year ended 31 December Consolidated Statement of cash flows (thous. LVL) Group 2011 Group 2010 Bank 2011 Bank 2010 Profit /(loss) for the year Income tax (income)/expense recognised in profit or loss Credit impairments Interest (income) Interest expense Impairment of investment Depreciation and amortisation Loss/(profit) from sales of tangible and intangible assets Book value of tangible assets written-off Total adjustments to loss for the year Changes in operating assets and liabilities Net change in loans to other credit institutions Net change in financial assets held for trading and designated at fair value through P/L Net change in prepayments and accrued interest Net change in loans Net change in accrued liabilities Net change in other assets Net change in short-term due to credit institutions Net change in deposits Net change in other financial liabilities Net change in other liabilities Total adjustments to operating assets and liabilities Interest received Interest (paid) Income tax received/(paid) Net cash provided by operating activities Cash from investing activities (Acquisition) of tangible assets Sale of tangible assets (Acquisition) of intangible assets Net cash used in investing activities Cash from financing activities Net change in long-term loans from credit institutions and other financial organisations Net cash used in by financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period Specification of cash and cash equivalents Cash Balances with Central Bank Placements with other banks Total The accompanying notes on pages 12 to 56 are an integral part of these financial statements.

12 Swedbank Consolidated Financial Statements for the year ended 31 December Notes 1 Corporate information Swedbank AS (hereinafter referred to as the Bank) is a member of Swedbank Group. On 17 March 2009 Hansabanka AS changed its legal name to Swedbank AS. The Bank s Head Office address is Balasta dambis 1a, Riga, LV-1048, Latvia. As of 31 December 2011 following entities comprise the Group: Swedbank AS Swedbank Līzings SIA Swedbank Atklātais Pensiju Fonds AS Swedbank Īpašumi SIA Swedbank Autoparku Vadība SIA The consolidated financial statements and the annual report for Swedbank AS for the financial year 2011 are approved by the Board and the Council and are presented for final approval to the shareholders. 2 Accounting policies BASIS OF ACCOUNTING The consolidated financial statements are prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU and interpretations of them. The standards are issued by the International Accounting Standards Board (IASB) and the interpretations by the International Financial Reporting Interpretations Committee (IFRIC). The standards and interpretations become mandatory for banks consolidated financial statements in Latvia concurrently with their approval by the EU. The consolidated financial statements are presented in thousands of lats, unless indicated otherwise. The Group measurement currency is Latvian lat. The consolidated financial statements have been prepared under the historical cost convention as modified by the remeasurement to fair value of available for sale securities, financial assets and financial liabilities held at fair value through profit or loss and all financial derivatives. CHANGES IN ACCOUNTING POLICIES Swedbank previously presented derivative interest as interest income or interest expense depending on whether the contracts net interest was positive or negative. As of 2011 interest for pure trading derivatives are recognised as interest income, regardless of whether the contracts net interest was positive or negative. The revision affects both interest income and interest expenses, but not net interest income in its entirety. Comparative figures have been restated; see the table below. Group New reporting of interest Previous reporting of interest Note 5, Net interest income Total interest income incl. derivatives interest income Total interest expenses incl. derivatives interest expenses Total net interest income Bank New reporting of interest Previous reporting of interest Note 5, Net interest income Total interest income incl. derivatives interest income Total interest expenses incl. derivatives interest expenses Total net interest income As of the financial year 2011 the following revisions and interpretations will apply. Amendment to Related Party Disclosures (IAS 24), which clarifies the definition of related parties to facilitate the identification of such relationships and eliminate inconsistencies in its application. Amendment to Financial Instruments: Presentation (IAS 32), which pertains to the classification of warrants that a company issues, where the subscription amount is determined in a currency other than the company s functional currency. They must be equity instruments issued pro rata to existing shareholders. Amendment to Prepayments of a Minimum Funding Requirement (IFRIC 14), which provides guidance on calculating the recoverable amount of a net pension asset. Extinguishing Financial Liabilities with Equity Instruments (IFRIC 19), which explains how a company recognises renegotiated terms for a financial liability that results when it issues equity instruments to a creditor to extinguish the financial liability wholly or in part. Improvements to IFRS Standards (Annual Improvements), a collection of additions and amendments to current standards in order to remove inconsistencies between different standards, clarify formulations and to some extent make it easier for users of the financial reports. None of the above amendments have had a significant effect on the Group s financial reports. EVENTS AFTER THE BALANCE SHEET DATE Subsequent events that provide additional information about the Group s position at the balance sheet date (adjusting events) are reflected in the financial statements. Subsequent events that are not adjusting events are disclosed in the notes if material. SIGNIFICANT ACCOUNTING POLICIES Presentation of financial statements (IAS 1) Financial statements provide a structured representation of a company s financial position and financial results. The purpose is to provide information on the company s financial position, financial results and cash flows useful in connection with financial decisions. The financial statements also indicate the results of management s administration of the resources entrusted to them. Complete financial statements consist of a balance sheet, statement of comprehensive income, statement of changes in equity, cash flow statement and notes. Swedbank presents the statement of comprehensive income in the form of one statement. Consolidated financial statements (IFRS 3, IAS 27) The consolidated financial statements comprise the Bank and those entities in which the Bank has control, i.e., the power to govern a company s financial and operating strategies to obtain economic benefits. These entities, subsidiaries, are included in the consolidated financial statements in accordance with the purchase method, which means that the acquired unit s identifiable assets, liabilities and contingent liabilities that satisfy the recognition criteria are recognised and valued at fair values upon acquisition. The surplus between the cost of the business combination and the fair value of the acquired share of the identifiable assets, liabilities and reported contingent liabilities is recognised as goodwill. For business combinations achieved in stages, the size of the goodwill is determined at the time of

13 Swedbank Consolidated Financial Statements for the year ended 31 December each transaction. Subsidiaries are consolidated when control is obtained and until control is ceased, which normally coincides with the disposal date. A subsidiary s contribution to equity includes only the equity that arises between acquisition and disposal. All intra-group transactions and intra-group gains are eliminated. Investments in subsidiaries and associates in parent s single financial statements are presented at cost less impairment. An impairment test is performed at least once per year. Assets and liabilities in foreign currency (IAS 21) The consolidated financial statements are presented in LVL, which is also the Bank s functional currency and presentation currency. Functional currency refers to the main currency used in an entity s cash flows. Transactions in a currency other than the functional currency (foreign currency) are initially recorded at the exchange rate prevailing at the transaction day. Monetary assets and liabilities in foreign currency and non-monetary assets in foreign currency measured at fair value are translated at the rates prevailing at the closing day. All gains and losses on the translation of monetary items and non-monetary items measured at fair value are recognised through profit or loss as changes in exchange rates in Net gains and losses on financial items at fair value. The following are official exchange rates applied at the applicable balance sheet dates: Reporting date EUR USD SEK Financial instruments (IAS 32, IAS 39) The large part of the Group s balance sheet items refers to financial instruments. A financial instrument is any form of agreement which gives rise to a financial asset in one company and a financial liability or equity instrument in another. Cash is an example of a financial asset, while financial liabilities might include an agreement to pay or receive cash or other financial assets. Financial instruments are classified on various lines of the balance sheet such as loans to the public or credit institutions depending on the counterparty. If the financial instrument does not have a specific counterparty when it is listed on the market, it is classified on the balance sheet among various types of securities. Financial liabilities where the creditor has a lower priority than others are classified on the balance sheet as Subordinated liabilities. A derivative is a financial instrument that is distinguished by the fact that its value changes, for example, due to exchange rates, interest rates or share prices, at the same time that little or no initial net investment is required. The agreement is settled on a future date. Derivatives are reported on separate lines of the balance sheet, either as assets or liabilities depending on whether the contract has a positive or negative fair value. Contractually accrued interest is recognised on separate lines on the balance sheet. Financial assets are recognised on the balance sheet on the trade day when an acquisition agreement has been entered into, with the exception of loans and receivables, which are recognised on the settlement day. Financial assets are derecognised when the right to obtain the cash flows from a financial instrument has expired or essentially been transferred to another party. Financial liabilities are removed from the balance sheet when the obligation in the agreement has been discharged, cancelled or expired. Repos A genuine repurchase transaction (repo) is defined as a contract where the parties have agreed on the sale of securities and the subsequent repurchase of corresponding assets at a predetermined price. In a repo, the sold security remains on the balance sheet and the payment received is recognised as a financial liability on the balance sheet based on who the counterparty is. Sold securities are also recognised as a pledged asset. The proceeds received for acquired securities, so-called reverse repos, are recognised on the balance sheet as a loan to the selling party. Financial instruments, recognition (IAS 39) The Group s financial instruments are divided into the valuation categories financial instruments at fair value through profit or loss, loans and receivables and other financial liabilities. All financial instruments are initially recognised at fair value, which corresponds to cost. For financial instruments that subsequently are not valued at fair value through profit or loss, supplementary entries are made for direct transaction expenses to acquire the financial instrument. Subsequent measurements depend on the valuation category to which the financial instrument is attributed. Notes to items in the balance sheet with financial instruments indicate how the carrying amount is divided between valuation categories. Valuation category at fair value through profit or loss Financial instruments at fair value through profit or loss comprise instruments held for trading and all derivatives, excluding those designated for hedge accounting according to the method for cash flow hedges or according to the method for hedging investments in foreign operations. Financial instruments held for trading have been acquired for the purpose of selling or repurchasing in the near term or are part of a portfolio for which there is evidence of a pattern of short-term profit-taking. In the notes to the balance sheet, these financial instruments are classified at fair value through profit or loss, Trading. This category also includes other financial instruments that upon initial recognition have irrevocably been designated as at fair value, the so-called fair value option. Financial assets designated at fair value comprise instruments that are measured and their performance is evaluated on a fair value basis because the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group's documented risk management or investment strategy, and information about the grouping is provided internally on that basis. The Group has chosen to categorise holdings of shares and participating interests that are not associates or intended for trading at fair value through profit or loss since they are managed and evaluated based on fair value. In the notes to the balance sheet, these financial instruments are classified at fair value through profit or loss, Other. The fair value of financial instruments is determined based on quoted prices on active markets. When such market prices are not available, generally accepted valuation models such as discounting of future cash flows are used. The valuation models are based on observable market data, such as quoted prices on active markets for similar instruments or quoted prices for identical instruments on inactive markets. Changes in value are recognised through profit or loss in Net gains and losses on financial items at fair value. For financial instruments in trading operations, the Group s profit or loss item also includes share dividends. Changes in value owing to changes in exchange rates are recognised as changes in exchange rates in the same profit or loss item. Changes in the value of financial liabilities owing to changes in the Group s credit worthiness are also recognised separately when they arise. Decreases in value attributable to debtor insolvency are attributed to Loan losses, net. Valuation category loans and receivables Loans to credit institutions and the public, categorised as loans and receivables, are recognised on the balance sheet on the settlement day. These loans are measured at amortised cost as long as there is no objective evidence indicating that a loan or Group of loans is impaired.

14 Swedbank Consolidated Financial Statements for the year ended 31 December Loans are initially recognised at cost, which consists of the loan amount paid out less fees received and any costs that constitute an integral part of the return. The interest rate that produces the loan s cost as a result of the calculation of the present value of future payments is considered the effective interest rate. The loan s amortised cost is calculated by discounting the remaining future payments by the effective interest rate. Interest income includes interest payments received and the change in the loan s amortised cost during the period, which produces a consistent return. On the closing day, it is determined whether there is objective evidence to indicate an impairment need for a loan or Group of loans. If, after the loan is initially recognised, one or more events have occurred that negatively impact estimated future cash flows, and the impact can be estimated reliably, impairment is made. The impairment is calculated as the difference between the loan s carrying amount and the present value of estimated future cash flows discounted by the loan s original effective interest rate. The Group determines first whether there is objective evidence for impairment of each individual loan. Loans for which such evidence is lacking are included in portfolios with similar credit risk characteristics. These portfolios are subsequently measured collectively in the event objective evidence of impairment exists. Any impairment is then calculated for the portfolio as a whole. Homogenous groups of loans with limited value and similar credit risk that have been individually identified as having objective evidence of impairment are measured individually based on the loss risk in the portfolio as a whole. If the impairment decreases in subsequent periods, previously recognised impairment losses are reversed. Loans are never recognised at a value higher than what the amortised cost would have been if the write-down had not occurred, however. Loan impairments are recognised through profit or loss as Loan losses, net, which is done either as provisions for individually impaired loans, portfolio provisions or write-offs of impaired loans. Repayments of write-offs and recovery of provisions are recognised within loan losses. The carrying amount of loans is amortised cost less writeoffs and provisions. Provisions for assumed losses on guarantees and other contingent liabilities are recognised on the liability side. Impaired loans are those for which it is likely that payment will not be received in accordance with the contract terms. A loan is not impaired if there is collateral that covers the principal, unpaid interest and any late fees by a satisfactory margin. Valuation category held-to-maturity Certain financial assets acquired to hold to maturity have been categorised as held-to-maturity investments. They have fixed maturities, are not derivatives and are quoted on an active market. These investments are initially recognised on their trade day at cost and subsequently at amortised cost less any impairment. Measurements are made in the same way as for loans and receivables. Reclassification of financial assets Financial assets, excluding derivatives, which no longer meet the criteria for trading, may be reclassified as of 1 July 2008 from the valuation category Financial instruments at fair value to valuation category Held-to-maturity, provided extraordinary circumstances exist. The Group has not made such reclassifications of financial instruments. Valuation category other financial liabilities Financial liabilities that are not recognised as financial instruments at fair value through profit or loss are initially recognised on the trade day at cost and subsequently at amortised cost. Amortised cost is calculated in the same way as for loans and receivables. Financial assets Valuation categories Group Fair value through profit or loss (thous. LVL) Trading Other Loans and receivables Total Cash and balances with central banks Treasury bills and other bills eligible for refinancing with central banks Loans to credit institutions Loans to the public Bonds and other interest-bearing securities Derivatives Other financial assets Total Financial liabilities Valuation categories Group Fair value through profit or loss (thous. LVL) Trading Other Other financial liabilities Total Amounts owed to credit institutions Amounts owed to other financial organisations Deposits and borrowings from the public Derivatives Subordinated liabilities Other financial liabilities Total

15 Swedbank Consolidated Financial Statements for the year ended 31 December Financial assets Valuation categories Bank Fair value through profit or loss (thous. LVL) Trading Other Loans and receivables Total Cash and balances with central banks Treasury bills and other bills eligible for refinancing with central banks Loans to credit institutions Loans to the public Bonds and other interest-bearing securities Derivatives Other financial assets Total Financial liabilities Valuation categories Bank Fair value through profit or loss (thous. LVL) Trading Other Other financial liabilities Total Amounts owed to credit institutions Amounts owed to other financial organisations Deposits and borrowings from the public Derivatives Subordinated liabilities Other financial liabilities Total Leases (IAS 17) The Group s leasing operations consist of finance leases and are therefore recognised as loans and receivables. This means that lease payments received are recognised in part as interest income and in part as installments. In a finance lease, the economic risks and benefits associated with ownership of an asset are essentially transferred from the lessor to the lessee. When the lessor bears the economic risks and benefits, the lease is classified as operating. The Group is the lessee in operating leases. Lease payments for these agreements are expensed linearly over the lease term. The Group is also the lessor in a few operating leases of insignificant amount. Intangible assets (IAS 38) Other intangible assets Intangible assets are initially measured at cost. The cost of intangible assets in a business combination corresponds to fair value upon acquisition. They are subsequently measured at cost less accumulated amortisation and accumulated impairment. The useful life of an intangible asset is considered either finite or indefinite. Intangible assets with a finite useful life are amortised over their useful life and tested for impairment when impairment needs are indicated. Useful life and amortisation methods are reassessed and adapted when needed in connection with each closing day. Intangible assets with an indefinite useful life are tested for impairment in the same way as goodwill rather than amortised systematically. The decision that a useful life is indefinite is reassessed annually to establish whether it is still indefinite. If it instead is finite, amortisation begins. Development expenses whose cost can be calculated in a reliable way and for which it is likely that future economic benefits attributable to the assets will accrue to the Group are recognised in the balance sheet. In other cases, development is expensed when it arises. Tangible assets (IAS 2, 16, 40) For own use Tangible fixed assets such as equipment and operating properties are initially recognised at cost. They are subsequently measured at cost less accumulated depreciation and impairments. Depreciation begins when an asset is ready for use and is reported systematically over each component s useful life down to its estimated residual value. The depreciation method reflects how the asset s value is gradually consumed. The useful life and depreciation method are periodically reassessed and changed when needed in connection with each closing day. The carrying amount is tested for impairment when events or circumstances indicate a lower recoverable amount. Land and paintings are not depreciated. Depreciation on other tangible assets is calculated on a straight-line basis at annual rates of 2-8 per cent on buildings and of per cent on other tangible assets. For protection of claims Tangible assets acquired or recovered to protect claims are recognised as inventory and classified under Other assets. Inventories are valued at the lower of cost and net realisable value. Cost includes all expenses for purchasing and/or manufacturing and other costs to bring the goods to their current location and condition. Net realisable value refers to the amount that is expected to be realised from a sale. Borrowing costs (IAS 23) Borrowing costs are capitalised when directly attributable to the purchase, construction or production of a qualified asset. Borrowing costs refer to interest and other costs that arise in obtaining a loan. A qualified asset is one that takes considerable time to finish and is intended for use or sale. Qualified assets can be intangible assets or investment properties. Other borrowing costs are expensed in the period in which they arise.

16 Swedbank Consolidated Financial Statements for the year ended 31 December Provisions (IAS 37) A provision is recognised in the balance sheet when the Group has a legal or constructive obligation arising from past events and it is likely that an outflow of resources will be required to settle the obligation. In addition, a reliable estimation of the amount must be made. Estimated outflows are calculated at present value. Provisions are tested on each closing day and adjusted when needed, so that they correspond to the current estimate of the value of the obligations. Revenues (IAS 18) The principles of revenue recognition for financial instruments are described in a separate section, Financial instruments, recognition (IAS 39). Interest income and interest expenses for financial instruments calculated according to the effective interest method are recognised as Net interest income. Changes in value and dividends on shares in the valuation category Financial instruments at fair value through profit or loss as well as all changes in exchange rates between functional and other currencies are recognised in Net gains and losses on financial items at fair value. Fees for various services provided to customers are recognised as income when the services rendered. Such income is recognised in both Commission income and Other income. Commission income includes payment processing, asset management and brokerage commissions. Commission expenses are transaction-dependent and are directly related to income in Commission income. Other income includes capital gains and losses on the sale of ownership interests in subsidiaries and associates to the extent they do not represent an independent service line or a significant business conducted within a geographical area. Other income also includes capital gains and losses on the sale of tangible assets. Share-based payment (IFRS 2) Since the Group receives services from its employees and assumes an obligation to settle the transactions with equity instruments, this is recognised as share-based payment. This means that the fair value of the services that entitle the employees to an allotment of equity instruments is expensed at the time the services are rendered. At the same time a corresponding increase in liabilities is recognised. For sharebased payment to employees settled with equity instruments, the services rendered are valued with reference to the fair value of the allotted equity instruments. The fair value of the equity instruments is calculated as per the allotment date for accounting purposes, i.e., the valuation date. The valuation date refers to the date when a contract was entered into and the parties agreed on the terms of the share-based payment. On the allotment date, the employees are allotted rights to share-based payment. Since the allotted equity instruments are not vested until the employees have fulfilled a period of service, it is assumed that the services are rendered during the vesting period. This means that the cost and corresponding increase in liabilities are recognised over the entire vesting period. Non market based vesting terms, such as a requirement that a person remain employed, are taken into account in the assumption of how many equity instruments are expected to be vested. At the end of each reporting period the Group reassesses its judgments of how many shares it expects to be vested based on the non market based vesting terms. Any deviation from the original judgment is recognised through profit or loss and a corresponding adjustment is recognised in liabilities. Related social insurance charges are recognised as cash-settled share-based payment, i.e., as a cost during the corresponding period, but based on the fair value that at any given time serves as the basis for a payment of social insurance charges. Impairment (IAS 36) For assets that are not tested for impairment according to other standards, the Group periodically determines whether there are indications of diminished value. If such indications exist, the asset is tested for impairment by estimating its recoverable amount. Assets with indefinite useful life are periodically assessed for impairment regardless of whether or not there are indications that they have decreased in value. An asset s recoverable amount is the higher of its selling price less costs to sell and its value in use. If the carrying amount exceeds the recoverable amount, the asset is reduced to its recoverable amount. When estimating value in use, estimated future cash flows are discounted using a discount rate before tax that includes the market s estimate of the time value of money and other risks associated with the specific asset. An assessment is also made on each reporting date whether there are indications that the need for previous impairments has decreased or no longer exists. If such indications exist, the recoverable amount is determined. Previous impairment losses are reversed only if there were changes in the estimates made when the impairment was recognised. Goodwill impairment is not reversed. Impairments are recognised separately through profit or loss for tangible or intangible assets. Tax (IAS 12) Current tax assets and tax liabilities for current and previous periods are measured at the amount expected to be obtained from or paid to tax authorities. Deferred taxes refer to tax on differences between the carrying amount and the tax base, which in the future serves as the basis for current tax. Deferred tax liabilities are tax attributable to taxable temporary differences and must be paid in the future. Deferred tax liabilities are recognised on all taxable temporary differences with the exception of the portion of tax liabilities attributable to the initial recognition of goodwill or to certain taxable differences owing to holdings in subsidiaries. Deferred tax assets represent a reduction in future tax attributable to deductible temporary differences, tax loss carry-forwards or other future taxable deductions. Deferred tax assets are tested on each closing day and recognised to the extent it is likely on each closing day that they can be utilised. As a result, a previously unrecognised deferred tax asset is recognised when it is considered likely that a sufficient surplus will be available in the future. Confirmed tax rates on the closing day are used in the calculations. The Group s deferred tax assets and tax liabilities are estimated at nominal value using tax rate in effect in subsequent years. Deferred tax assets are netted against deferred tax liabilities for Group entities that have offsetting rights. All current and deferred taxes are recognised through profit or loss as Tax with the exception of tax attributable to items recognised directly in Other total comprehensive income or Equity. Cash and cash equivalents (IAS 7) Cash and cash equivalents comprise cash, balances with the Central Bank, correspondent accounts and overnight deposits in other banks with maturities of less than 3 months. Cash and cash equivalents amount is reduced by dues to the Central Bank and other financial institutions with the remaining maturity less than 3 months. NEW STANDARDS AND INTERPRETATIONS The International Accounting Standard Board (IASB) and IFRS Interpretations Committee (IFRIC) have issued the following standards, amendments to standards and interpretations that apply in or after The IASB permits earlier application. These standards, amendments and interpretations should be approved also by EU before Swedbank could apply them. Consequently, Swedbank has not applied the following amendments in the 2011 annual report.