Annual Report Swedbank Mortgage

Transcription

1 Annual Report 2008 Swedbank Mortgage

2 Contents Cover Contents 1 Swedbank Mortgage in brief, Highlights and Rating 2 President s statement 3 About Swedbank Mortgage 4 Market trends 4 Mortgage market 6 Loan portfolio 8 Funding 10 Risk management 12 Key financial highlights Five-year summary Income statement 15 Balance sheet 16 Cash flow statement 17 Statement of changes in equity 18 Definitions 19 Notes 34 Signatures of the Board of Directors and the President 35 Auditors report 36 List of bond loans 40 Board of Directors, Auditor and Executive Committee Financial Information 20 July Interim report Q2, January June 2009 While every care has been taken in the translation of this annual report, readers are reminded that the original annual report, signed by the Board of Directors, is in Swedish.

3 Swedbank Mortgage in Brief, Highlights and Rating Swedbank Mortgage Annual Report Swedbank Mortgage in Brief Market Share: Market leader in the Swedish mortgage market Distribution: Access to 680 branches, Sweden s largest bank-owned retail network Loan portfolio: Residential mortgages account for no less than 90 percent Collateral: Average loan-to-value ratio in the loan portfolio is 46 percent Funding: Successful conversion to covered bonds. Highlights Credit risks remain low Market shares for new loans rose during the year Swedbank Mortgage converted its outstanding long-term funding to covered bonds and completed two major public issues of covered bonds. Rating Moody's Standard & Poor s Fitch Short Long Short Long Short Long P 1 Aaa * A 1+ AAA * F1+ AAA P 2 Aa1 A 1 AA+ F 1 AA+ P 3 Aa2 A 2 AA F2 AA- No prime Aa3 A 3 AA- F3 A+ A1 B A+ B A A2 C A C A- A3 D A- D BBB+ Baa1 BBB+ BBB Baa2 BBB BBB- Baa3 BBB- * Covered Bond rating

4 2 Swedbank Mortgage Annual Report 2008 President s statement President s statement Our customers strong ability to repay and collateral with low loan-to-value ratios ensure Swedbank Mortgage s stable development during what is expected to be a weak In 2008, the financial market experienced one of its most turbulent years in many decades. The U.S. subprime crisis that began in 2007 has unleashed a global financial crisis. The lack of risk capital now affecting the entire real economy has resulted in an international recession. The most significant impact of the crisis on Swedbank Mortgage is that our funding costs have risen. Investor demands for higher returns have resulted in higher risk premiums for the entire banking sector. This has adversely affected our results. More stable banking sector in 2009 The guarantee packages for the financial sector that now is being gradually introduced in Sweden and internationally ensure that the financial system will stabilise. Together with the improved solvency of the banks, this means there is probably no longer a systemic risk for Swedish banks. Still, the recession is expected to impact Sweden in 2009, which would indicate slowing conditions for banks as well. The stagnant market for corporate financing throughout the entire western world since September of last year makes economic conditions difficult to predict. On the one hand, the recession should lead to an increase in Swedbank Mortgage s very low levels of non-performing loans. On the other hand, consumers will have an easier time making their interest payments after the Riksbank s sizable rate cuts last fall. A strong foundation and preparedness Swedbank Mortgage is wellprepared for a recession. All lending has been granted on a sound basis where the focus has been on the ability of our customers to repay, and even today our customers are maintaining good cash flow. In addition, the strong local retail network of Swedbank and the savings banks stays in close contact with customers. The Swedish financial crisis in the 1990s gave us valuable experience, which showed that an active approach to problem loans produces dividends. Swedbank has therefore internally increased capacity in this area, giving us a high level of preparedness. Swedbank Mortgage s customers, like those of other Swedish mortgage companies, have a lower loan-to-value ratio than mortgage customers internationally. The Swedish real estate market also has several qualitative strengths. Thanks to a market driven by housing demand rather than speculation, whit no buy to let market, Sweden has not developed the housing bubble many other European markets have. Assured access to capital At the same time, current market conditions underscore the value of all our work last year to prepare for the conversion of a large part of the bond portfolio to covered bonds. The fact that we were able to borrow internationally several times during the year at the market s highest credit rating, AAA and Aaa (S&P and Moody), despite the turbulence, showed that Swedbank Mortgage s access to capital is assured. Together with our very conservative liquidity policy and Swedbank s acceptance in the state s guarantee scheme for banks, this makes me confident that we will continue to develop at a stable rate even in tough times. Market risk remains a challenge The biggest challenge we now face is to reduce the risk premium over the government bond rate which Swedbank Mortgage borrows at. There is still a great risk aversion among investors, who have lost large amounts of money in the last year. The recession will also contribute to an increase in the price of risk. Our efforts will therefore be focused on restoring confidence between us as a mortgage institution and investors in the mortgage bond market. An important part of this will be to provide them with good information on the bonds underlying assets, including on our new website, Another important element is the continuous work being done by the entire staff of the Swedbank Group to maintain a mortgage portfolio of the very highest quality. Stockholm, March 2009 Catrin Fransson President catrin.fransson@swedbank.se

5 Board of Directors Report Swedbank Mortgage Annual Report About Swedbank Mortgage Market leader Swedbank Mortgage s loans are part of the overall offering from Swedbank and the savings banks. Group relationship (publ), with corporate identification number , is a wholly owned subsidiary of Swedbank AB (publ), is the parent company of a group with responsibility for mortgage lending in Sweden. The group comprises and the wholly owned subsidiary Swedbank Skog och Lantbruk AB, On 5 October 2008, Swedbank Mortgage acquired all the loans granted by Swedbank Jordbrukskredit AB, which at the same time changed its name to Swedbank Skog och Lantbruk AB and was deregistered as a credit market company. Lending to the agricultural and forestry sector is now provided directly by Swedbank Mortgage, but under the secondary name Swedbank Jordbrukskredit. The change has no impact on customers. Catrin Fransson, Executive Deputy President of Swedbank AB, was named the new President as of 1 November Swedbank Mortgage in brief Swedbank Mortgage is one of Sweden s leading mortgage lenders. Its more than one million customers include Swedish homeowners, businesses, municipalities and agricultural and forestry businesses. Of Swedbank Mortgage s total lending volume of SEK 615bn* (565), slightly over 80 percent is represented by loans to individuals. More than one of every three single-family homes in Sweden is financed by Swedbank Mortgage, which generally grants loans up to 75 percent of a property s long-term market value. Coordination with Swedbank Swedbank Mortgage s loans are part of the overall offering from Swedbank and the savings banks, and lending is arranged through their Swedish retail network and Internet channels. This is an important reason for Swedbank Mortgage s market-leading position. The 680 branches of Swedbank and the savings banks Business concept By utilising high cost efficiency and low funding costs, Swedbank Mortgage provides customers of Swedbank and the savings banks with competitive loans for the long-term financing of housing, municipal property holdings, agricultural properties and businesses with ties to the agricultural and forestry sector. and Swedbank s growing Internet and telephone banks together make up Sweden s largest bank-owned distribution network. Swedbank Mortgage s functions are largely integrated in Swedbank, which creates economies of scale with the bank s other operations. Products Swedbank Mortgage s products primarily consist of loans secured by underlying collateral in Swedish residential, agricultural and forest properties. Products are continually adapted to customer needs. Sales are made through Swedbank and the savings banks ordinary channels: branches, telephone and Internet bank. In 2008, Swedbank began offering customers non-life insurance in the form of homeowners insurance. This is sold together with Swedbank Mortgage s products, since it fits seamlessly into the bank s mortgage offering. To benefit customers while creating openings for more and better business, the Swedbank Group utilises a number of partners in addition to its subsidiary Swedbank Fastighetsbyrå, including various home builders and other construction companies. Environmental work Environmental issues are part of Swedbank Mortgage s daily work. Most prominent among these is the environment management system Swedbank has developed for the Swedish market and comprises Swedbank Mortgage. Through a structured approach, the system is designed to reduce the bank s environmental impact. Since 2003, the environment management system has been certified according to the international ISO standard. In addition, all companies in the Swedbank Group support sustainable development. The bank is working actively to develop green offerings, one example of which is a wind power loan developed in cooperation with O2. * Refers to nominal amounts. Does not take into account market valuations according to IAS 39. Swedbank Mortgage s lending volume * SEKbn

6 4 Swedbank Mortgage Annual Report 2008 Board of Directors Report Market trends Solvent government finances, a guaranteed banking system and a favourable exchange rate that helps exports make Sweden well-prepared to handle the international recession. Swedish GDP growth 0.2 percent 2008 The strong Swedish economic growth of recent years slowed in Consumer spending and the rate of investment remained at a high level during the first half of the year despite weaker international demand, particularly in the U.S., but also the rest of the OECD zone. Not until the second half of 2008 did the credit crunch in connection with the burgeoning financial crisis effect Swedish economic growth. This has resulted in lower investments, layoffs and declining confidence among households and businesses. Redundancies in the Swedish labour market have been most prominent in the automotive sector and other engineering industry, and indicate that exporters in particular are suffering from the halt in investments. For the full-year 2008, Swedish GDP grew by approximately 0.2 percent. Growth despite rate hikes Against the backdrop of the current financial crisis, Sweden remains strong. Domestic demand was affected only marginally during the first half year. This was despite that interest rates rose due to the U.S. subprime crisis and its consequences for the international financial system, and that the Riksbank continued to tighten its monetary policy for most of the year. Through September, the repo rate was raised by a total of 0.75 percentage points. After that, the Riksbank, like other central banks, cut its key interest rate, and for the full-year it was lowered by 2 percentage points. Looking ahead to 2009, the global economy is distinguished by the recession affecting its three largest economies: the U.S., Europe and Japan. Lower consumer demand on the global market and falling commodity prices are also impacting emerging economies. This is likely to result in a global recession, which will contribute to a real economic slowdown in Sweden throughout 2009 and through part of Sound economic foundation The Swedish economy is built on a sound foundation, however. As such, Sweden should recover more quickly than many other European countries. A budget surplus and a current account surplus are evidence of the Swedish state s solid finances. Exports, which represent half the economy, are likely to benefit from the weaker Swedish krona, which, like all smaller currencies, has been devalued during the financial crisis. Thanks to the Swedish state s guarantee program for bank funding, the domestic banking crisis has probably been settled (see also Funding on page 8). State funding guarantees, in combination with the systemic changes that were made in lending after the domestic financial crisis in the 1990s, make for a fundamentally sound Swedish banking system that in several respects differs from banks in many other countries. The speed of the recovery in the Swedish economy will mainly depend on the rate at which international lending and general lack of capital in the economy are alleviated. Current account balance Percent of GDP and beyond are projections

7 Board of Directors Report Swedbank Mortgage Annual Report The mortgage market A weaker economy has contributed to a levelling off in prices and slower activity in the real estate market. However, good fundamentals point to a stable Swedish housing market. Declining property market After a decade of stable price increases, the Swedish real estate market levelled off in 2008 before seeing falling prices during the latter part of the year. For example, the market for singlefamily homes fell by an average of 5 percent for the full-year. The decline in prices is a result of higher borrowing costs that affected households in 2008, when variable mortgage rates rose by 1.5 percentage points during the first nine months of the year. Moreover, households have been affected by gradually declining confidence in the future as the global financial crisis has impacted the real economy, e.g., through extensive lay-offs by major Swedish companies. The real estate slowdown has primarily been evident in lower activity in the housing market and the high number of unsold properties last autumn. This slower activity did not become noticeable until September, however, and earlier in the year prices rose in metropolitan regions. Temporary downswing in 2009 The expansive monetary policy maintained since September has had minimal impact on mortgage rates and households. At the same time that the Riksbank s cut rates, the risk premium on bank funding has risen. Together with lower credit demand, this has contributed to greater cautiousness among home buyers. This is expected to contribute to a further drop in real estate prices in 2009, at the same time that activity is slower than in previous years. The mortgage market, which grew by approximately 6 percent in 2008, generally follows the real estate market. Weaker economic growth is likely to fully impact spending during the first half of 2009 and contribute to a further decline in mortgage demand. Competition among mortgage institutions has been affected by the financial crisis and will probably continue to change throughout In the fight for solvent customers, perseverance, a local presence and strong commitment are among our most important competitive advantages. Soundly priced properties The Swedish housing market has several important qualities which are likely to limit the price decline. The most important fundamental is the solvency of households, which generally have low loan-to-value ratios in relation to the market value of their properties and which invest in real estate to live in. In Sweden, in contrast to many other European countries, individuals rarely buy properties to rent out. The price increases in recent years have therefore had very little to do with speculation. Instead, the increasing prices of condominiums and singlefamily homes are due to the low number of newly built properties. Compared with the rest of the Nordic region and Europe, Sweden has generally maintained a low rate of new construction since the financial crisis in the early 90s. This has primarily resulted in denser growth in urban areas and has been strongly demand-driven. Large lay-offs in the Swedish construction industry in 2008 point to a continued weak pace of new construction in the year ahead. The rise in real estate prices in recent years has principally been in single-family homes and condominiums in metropolitan regions, which indicates that any price decline would probably be biggest there as well. With the exception of Malmö, which has been affected by both the rise and decline in housing prices in Denmark and by a faster pace of new construction than other major cities, demand is expected to remain stable in urban areas, where the labour market has generally been better than in the rest of the country. Also, households have benefited from the replacement of the property tax in 2007 by a lower municipal fee. Fewer condominium conversions The corporate sector is primarily driven by demand from converted and newly built tenant-owner associations. During the year, demand slowed due to less new construction and fewer tenant-owner conversions as the result of a political opinion. The overwhelming trend in the municipal segment in terms of financing was the reliance on demand loans. Interest rate risk was generally managed with interest rate derivatives, reducing demand for traditional mortgages. Strong agricultural and forestry sector Mortgage demand in the agricultural and forestry sector remains good. Agricultural companies have been affected by major price fluctuations for farming products owing to global changes. This increases opportunities for profitability but also the need for larger, more efficient farms, which also is a driver for credit demand. The forestry sector has for several years benefited from substantial price increases for forest properties owing to the growing interest in owning forests as a long-term investment.

8 6 Swedbank Mortgage Annual Report 2008 Board of Directors Report Loan Portfolio The residential sector accounts for 90 percent of Swedbank Mortgage s lending. Our borrowers are able to repay their debts and maintain close relationships with their bank branch. Peter Stenborn, Chief Loan Officer Continued conservative lending Lending increased by SEK 50bn (53) during the year, contributing to Swedbank Mortgage s total loans to the public of SEK 615bn* billion (565) at year-end 2008, an increase of 9 percent. The overwhelming part of Swedbank Mortgage s loan portfolio consists of lending to the housing sector, i.e., single-family homes, condominiums and multi-family housing, including tenant-owner associations. Together, they represent 90 percent of the institution s total lending. The lending increase during the year is largely due to this segment, mainly to finance condominiums and single-family homes in metropolitan regions. Economic conditions have not caused Swedbank Mortgage to change its requirements regarding the underlying collateral for new loans, which were already conservative and focus in large part on the borrower s ability to repay. As of year-end, the debt service coverage ratio in the underlying single-family homes and condominiums amounted to 46 percent of their market value, which is lower than the industry as a whole. Regularly conducted tests also show that the loan-to-value ratio in the portfolio will remain low even if real estate prices further decline. High level of preparedness and risk monitoring The existing loan portfolio and all new lending are periodically stress tested to verify the long-term ability of borrowers to repay. In these calculations, of how much borrowers have left to live on, several parameters can be adjusted for new market conditions that Swedbank Mortgage considers the most likely. The tests include demographic sensitivity analyses, e.g., lower real wages, as well as general changes such as higher interest rates and rising living and operating costs. As signs have pointed to slower economic growth, Swedbank Mortgage has introduced more stringent requirements on a financial buffer for new borrowers. All new lending has been granted to customers who meet these requirements. An analysis of stress tests on the current loan portfolio points to continued low risk of losses and impaired loans. The figure below (Risk classification Swedbank Mortgage) illustrates how the overall portfolio of loans to homeowners, businesses and agricultural and forestry enterprises is distributed by risk profile. On the scale, 21 represents the lowest risk and 0 the highest risk, with an additional class for defaults. The low risk profile is due to conservative credit requirements, geographical diversification of the loans and close monitoring locally. Loans judged as having higher risks are monitored more closely. Swedbank s local banking network, with 680 branches, gives Swedbank Mortgage an unrivalled ability to minimise risky loans through geographical proximity and familiarity as well as contacts and dialogue with the borrower. All non-performing loans are managed according to the Swedbank Group s method, which emphasises preparedness. Loans are managed using both automated systems and personal contacts in an effort to minimise losses. As a result of economic conditions, the Group has increased its staffing and redistributed resources to proactively identify commitments with higher risks. Experience from the domestic financial crisis in the 1990s showed that focused, proactive measures minimise loss risks. * Refers to nominal amounts. Does not take into account market valuations according to IAS 39. Swedbank Mortgage s portfolio by LTV SEKbn < 30% 30-60% 60-75% 75-85% > 85% Over half of the portfolio value has a loan-to-value (LTV) ratio of less than 30 percent. Loan portfolio in 2008 distributed by collateral Municipalities, etc 3.0% Tenant-owner assoc. 14.1% Corporate, multi-family 4.7% Agriculture 6.1% Corporate, other 0.3% Single-family homes 58.7% Vacation homes 1.9% Condominiums 11.2% Risk classificationswedbank Mortgage Exposure by risk class, % Def

9 Board of Directors Report Swedbank Mortgage Annual Report Stable corporate lending Lending to the corporate sector, which largely consists of municipal housing companies and tenant-owner associations, increased by SEK 11bn. A collaboration between Swedbank and Kommunivest, a Swedish financing co-operative, with a focus on guaranteeing short-term municipal financing strengthens Swedbank Mortgage s market position among municipal housing companies. Strong position in agricultural and forestry sector Loan demand in the agricultural and forest property sector increased in 2008, and lending grew by SEK 2bn (3). The agricultural sector continued to benefit from substantially higher global food prices. The forestry sector remains strongly confident in rising prices. The sector is characterised by good payment records and very low loan losses. Competition in the market has increased, which Swedbank Mortgage is meeting with specialised advisers locally at Swedbank and the savings banks. established loan losses in previous years totalled SEK 4m (33). Provisions for anticipated loan losses resulted in a net reversal of SEK 4m (33). The volume of loans past due by more than 60 days remains at a very low level, although it increased slightly due to higher interest rates as well as rising property prices during the spring. Swedbank s risk classification system and rules serve as the basis of efficient monitoring routines that are designed to minimise future losses. Household loans past due by more than 60 days as a share of the total loan portfolio remain low at around 0.08 percent (0.06). The corresponding figure for corporate loans is 0.04 percent (0.02). The portfolios impaired loans, after deducting provisions of SEK 64m (54), amounted to SEK 121m (57) as of 31 December 2008, corresponding to 0.02 percent (0.01) of total loans. Loans with interest reductions amounted to SEK 0m (0). Provisions for impaired loans and book values are shown in note 18. Stable long-term interest rates The fixed interest term structure of Swedbank Mortgage s portfolio is relatively stable, but is expected to change slightly in the years ahead. A negative yield curve during the year and expectations of falling interest rates have increased customer interest in loans with shorter fixed interest terms. All advice on the choice of interest fixing periods is based, however, on the customer s individual financial buffer. Past due loans > 60 days as percentage of lending volume Percent Private Corporate Continued low loan losses 0.02 In 2008, the effect on profit was SEK 6m ( 43). Established loan losses amounted to SEK 14m (23), while recoveries from Swedbank Mortgage s loan portfolio distributed by remaining interest fixing period 31 Dec Dec 2007 SEKm percent SEKm percent < 1 year, variable 242, , < 1 year, fixed 95, , years 110, , years 61, , years 48, , years 22, ,456 7 > 5 years 34, ,308 7 Change in value 8,178 4,306 Total book value 623, , Loan losses by category Established Anticipated * Total Total mkr Single-family homes Condominiums Multi-family housing Agricultural real estate Write-down of the value of properties taken over Recoveries of previous years established losses Total * Net change in provisions for anticipated loan losses.

10 8 Swedbank Mortgage Annual Report 2008 Board of Directors Report Funding The conversion of long-term funding to AAA-rated covered bonds and the guarantees from the Swedish state ensure that Swedbank Mortgage will maintain good liquidity and substantial access to funding through the capital markets. Good financing opportunities despite crisis The financial crisis that has distinguished the funding market since the summer of 2007 and reached an acute stage in September 2008 contributed during the year to lower liquidity and more expensive funding for all credit institutions was a difficult year for investors as well as issuers and was characterised by risk aversion and investors who sought out safer assets such as treasury bills. Still, Swedbank Mortgage was able to maintain adequate access to funding during the year. Swedbank Mortgage worked actively during the year to ensure access to both the Swedish and international capital market. The financial crisis and turbulent markets make confidence and transparency the keys in order to make investors feel comfortable. A long-term strategic effort is therefore under way to continuously meet and communicate with Swedish and international debt investors. Swedbank Mortgage works actively to manage liquidity risks in its operations and to gradually extend the maturity is in its funding. In 2008, it issued a new, five-year Swedish mortgage bond (maturing in June 2013). In addition, a large part of the amount set to mature in June 2010 was extended as a new Swedish mortgage bond maturing in December Furthermore, Swedbank Mortgage has issued a mortgage bond with a 12-year maturity (maturing December 2020). Covered bonds with credit ratings of AAA/Aaa Covered bonds give holders higher priority to the underlying assets than ordinary bonds. Swedbank Mortgage s covered bonds have the highest credit ratings, AAA/ Aaa according to Standard & Poor s and Moody s, thanks to which it was able to secure its funding at a reasonable cost during the year, despite a steadily increasing difference between the interest rates on treasury bills and credit institutions funding. Swedbank Mortgage transitioned during the second quarter to covered bonds as its main form of funding. The conversion, which was finalised in April 2008, marked the conclusion of a project initiated several years earlier. Practically all * Covered Bond rating outstanding bonds, both Swedish and international, were converted to covered bonds with AAA/Aaa ratings from Standard & Poor s and Moody s. Covered bonds give investors higher priority to the underlying assets than ordinary bonds. The conversion to covered bonds has been critical to our funding work, since it provides access to a partially new, broader base of investors. The opportunity to issue bonds with credit ratings of AAA enabled the institution to secure its funding at a reasonable cost during the year, despite a steadily increasing difference between the interest rates on treasury bills and credit institutions funding. The covered pool is also a major asset for the Group, since its available limit serves as a liquidity reserve because covered bonds are eligible for refinancing with the Riksbank. Swedish covered mortgage bonds continued to serve as the basis of Swedbank Mortgage s funding during the year. The Swedish mortgage bond market, which has been wellestablished among Swedish institutional investors for decades, has functioned comparatively well from an international perspective. When the financial crisis reached an acute stage in mid-september, the market was supported by forceful measures by the Riksbank and National Debt Office, which helped to improve liquidity in the market. In the Swedish market, Swedbank Mortgage s issue volumes were about as high in 2008 as the previous year. The international market for covered bonds has been more difficult than the Swedish. The supply of issues has been high, credit spreads have gradually expanded, and the second-hand market has functioned poorly. However, Swedbank Mortgage Moody's Standard & Poor s Fitch Short Long Short Long Short Long P 1 Aaa * A 1+ AAA * F1+ AAA P 2 Aa1 A 1 AA+ F 1 AA+ P 3 Aa2 A 2 AA F2 AA- No prime Aa3 A 3 AA- F3 A+ A1 B A+ B A A2 C A C A- A3 D A- D BBB+ Baa1 BBB+ BBB Baa2 BBB BBB- Baa3 BBB-

11 Board of Directors Report Swedbank Mortgage Annual Report was able to complete two large public international issues of covered bonds at relatively attractive levels: a 3-year euro issue in May and then a 2-year euro issue in August. As a form of funding, covered bonds place very high demands on the transparency of the underlying security. To provide such transparency, Swedbank Mortgage launched a website for investors during the year with detailed information on the underlying asset base for its covered bonds: State guarantee The Swedbank Group has decided to participate in the Swedish state guarantee scheme, which is designed to strengthen access to the capital markets and increase confidence in the Swedish banking system. Like its parent company, Swedbank Mortgage has signed a guarantee agreement with the National Debt Office and will gradually link its funding programs to the guarantee. While the guarantee scheme remains in effect, Swedbank will be able to issue state-guaranteed commercial paper and bonds with maturities between 91 days and 3 years. For covered bonds, however, the state guarantee applies up to five years. The programme initially extends to 30 April 2009, but may be extended. Swedbank Mortgage s bond and commercial paper programmes comprise: Mortgage bonds in Sweden, SEK Swedish MTN programme Foreign currency bonds (EMTN) Swedish commercial paper programmes Euro market (ECP) U.S. market (USCP) French market (CD).

12 10 Swedbank Mortgage Annual Report 2008 Board of Directors Report Risk management Swedbank Mortgage measures and reports risks in accordance with the guidelines and policies of the Swedbank Group. Swedbank Mortgage s principal risks are credit risks, financial risks and operational risks. CREDIT RISK Credit risk is the risk that a counterparty cannot meet its obligations and that pledged assets will not cover the company s claim. Credit risk also includes concentration risk, i.e., large exposures or concentrations in the loan portfolio to certain regions or industries. Swedbank Mortgage s credit risks primarily arise in its lending to the public (private individuals and companies). The risks are geographically diversified throughout Sweden and largely consist of loans secured by single-family homes and condominiums. Swedbank Mortgage s lending is handled through the distribution network of Swedbank and the savings banks. The right to grant loans has been delegated to Swedbank and the savings banks within specific limits. Decisions of principle regarding credit issues or otherwise of importance (in individual cases or in general) are made by Swedbank Mortgage s Board of Directors. Furthermore, Swedbank Mortgage s Board sets the loan limits for various types of properties. Swedbank Mortgage has delegated the right to establish procedures on the appraisal and management of collateral and for borrowers with financial difficulties to Swedbank. The delegation applies until further notice and can be recalled immediately by Swedbank Mortgage at any time. Swedbank Mortgage s Board regularly receives reports on credit risks in the company and other types of analyses of the loan portfolio. Loan evaluations take into account the customer s ability to re-pay and the value of the collateral. The latter is based on the property s long-term market value as determined by a local appraiser familiar with the local market. Moreover, the customer is carefully analysed in an internal risk classification system and assigned a value on a risk scale. The risk classification system, which is designed in accordance with Basel 2, plays a central role Credit risk exposure SEKm Change Lending to credit institute 106,244 66,838 39,406 Lending to the public 623, ,633 62,768 Derivatives * 20,256 6,034 14,222 Total 749, , ,396 * Outstanding netting agreements reduce credit risk exposure to SEK 11,945m. in the group s day-to-day lending operations. It is used in the preparation of loan applications, as guidance in making decisions and to determine who may grant a loan. The risk classification is also used to measure risks at an aggregate level according to group-wide models. Swedbank Mortgage s loan portfolio has a very high credit quality with low risks. The treasury department also faces counterparty risks, mainly through derivative contracts. In the majority of derivative contracts, the Parent Company is the counterparty. Counterparty risks are also reduced through bilateral agreements, which allow risks to be netted using standardised procedures, as well as through agreements on collateral with certain counterparties. FINANCIAL RISKS Financial risks are divided into two main types: market risk and liquidity risk. Swedbank Mortgage s Board determines comprehensive goals for financial risks. It also sets limits for financial risks as mandated by Swedbank to Swedbank Mortgage. Moreover, the Board retains responsibility for ensuring that the requisite guidelines and procedures for risk management are established and followed. Financial risks that arise in lending are transferred to the treasury department at Swedbank Mortgage, which is assigned specific mandates for financial risks. The department has a risk control function responsible for the day-to-day monitoring and compilation of information on financial risks. Financial risk utilisation is reported to the Board of Swedbank Mortgage and Swedbank s risk control unit on a continual basis. Market risk Market risks refer to the risk that changes in exchange rates and interest rates will lead to a decline in the value of net assets and liabilities, including derivatives. Because Swedbank Mortgage s lending in SEK is financed with funding in SEK as well as other major currencies, a foreign exchange risk arises. This risk is managed through derivatives in the foreign exchange market. Despite extensive funding in foreign currency, Swedbank Mortgage s exposure to foreign currency risks is therefore very limited. Swedbank Mortgage had no open currency positions as of 31 December The interest rate risk in Swedbank Mortgage s operations primarily arises as a result of differences in the average interest fixing periods in the lending portfolio and funding. The risk is mainly managed through Swedbank Mortgage s active work in the funding market, and by using derivatives in the fixed income market, e.g., swaps and forwards. Interest rate risk cannot be completely eliminated since residential mortgages are constantly refinanced at new terms and new loans are granted. The remaining risk that affects Swedbank Mortgage s profit is limited, however, and is kept within an interval approved by the company s Board.

13 Board of Directors Report Swedbank Mortgage Annual Report Liquidity risks Liquidity risks arise because the maturity structures of cash flows from assets and liabilities, including derivatives, do not coincide. Swedbank Mortgage defines liquidity risk as the risk of not being able to fulfil payment commitments on any given due date without significantly raising the cost to fund payments. Swedbank Mortgage s liquidity is relatively easy to forecast, since the maturities and interest payments on its mortgages and funding are known in advance. With the help of accurate forecasts and diversified funding in a large number of capital markets, Swedbank Mortgage minimises the risk of liquidity problems. Liquidity exposure is limited by the company s Board and monitored continuously by both Swedbank Mortgage and the Swedbank Group. In 2008, Swedbank Mortgage s strategy to manage liquidity risks was put to the test in connection with the crisis in the financial markets. Due to the significant impact of the crisis on the ability of the financial markets to broker liquidity and funding between players, opportunities to plan and manage liquidity have changed. Under these conditions, Swedbank Mortgage, together with the Parent Company, has worked actively on planning and managing its liquidity. In 2007, the Financial Supervisory Authority gave Swedbank Mortgage permission to issue so-called covered bonds. Swedbank Mortgage s Swedish and international bond portfolio was converted to covered bonds during the second quarter of 2008, resulting in higher credit worthiness. This improved Swedbank s liquidity by broadening its funding base and strengthening its opportunities to maintain liquidity reserves. During the fourth quarter, covered bonds were issued to the Parent Company in order to utilise the funding facilities the Riksbank and the National Debt Office have made available, which has contributed cost-effective short-term funding. Swedbank Mortgage also decided in November to participate in the Swedish state s guarantee scheme, which guarantees new unsecured funding and covered bonds. By year-end, Swedbank Mortgage had issued SEK 14.7bn in commercial paper under this guarantee to external investors. Through the Parent Company s access to the Riksbank s facilities, access to the state s guarantee scheme, and a well-diversified funding base resting on a covered loan portfolio with an average loan-to-value ratio of 45 percent, Swedbank Mortgage is well-prepared for further problems in the financial markets. OPERATIONAL RISKS Operational risk is defined as the risk of losses due to inadequate or insufficient internal routines, human error and faulty systems, or due to outside circumstances. Swedbank Mortgage s work to minimise these operational risks is based on Swedbank s methods and routines. The Swedbank Group applies both qualitative methods such as self-evaluations and quantitative methods, where reporting is done in an operating loss database. CAPITAL ADEQUACY Swedbank Mortgage s capital adequacy ratio should not fall below the level that at any given time is considered appropriate in order to maintain sustainable financial stability while developing the business. The tier 1 capital ratio should not fall below 8 percent long-term. Basel 2 On 1 February 2007, the new Basel 2 capital adequacy rules were introduced in Sweden. The new rules link capital requirements to risk profile, risk measurement and the assessment of risk capital needs to a greater degree than before. With the approval of the Swedish Financial Supervisory Authority, Swedbank Mortgage primarily bases capital requirements for credit risks on internal risk measurements according to the Internal Ratings Based Method (IRB method) that has been developed by Swedbank. A capital requirement for operational risks has also been added, which, with the approval of the Financial Supervisory Authority, is calculated according to a standardised method. For Swedbank Mortgage, the new rules mean lower equity requirements, as the company focuses on mortgages, which generally involve very low levels of risk. During a transition period ending in 2009, special rules will apply, which will mean a gradual lowering of the capital requirements as a result of the new rules. According to these transitional rules, the minimum capital requirements for 2008 were at least 90 percent of the capital requirements calculated according to the older rules, with exceptions for certain adjustments. For 2009, the corresponding floor is 80 percent.

14 12 Swedbank Mortgage Annual Report 2008 Key financial highlights Key financial highlights swedbank Mortgage group For definitions see page * Profit Investment margin, % ** Return on equity, % Earnings per share, SEK Capital Capital base, SEKm *** 27,005 26,882 26,823 26,116 23,673 Capital adequacy quotient, *** Capital adequacy ratio, % *** Tier 1 capital ratio, % *** No. of shares at start/end of period, million Equity per share, SEK 1, , , Credit qualit Loan loss ratio, % Provision ratio for impaired loans, % Share of impaired loans, % Other Number of employees * Not restated according to IAS 39. ** Calculated as of 2008 as a 12-month average. The previous calculation method used the report period s average. *** Refers to as of Previous years refer to the financial companies group. As of 2007, capital ratios are calculated according to FFFS 2007:1 (Basel 2). Profit analysis Operating profit for the Swedbank Mortgage Group was slightly lower than the previous year and amounted to SEK 3,603m (3,828m). The return on equity was 10.0 percent (10.6). Operating results for the last five years are summarised in the key financial ratios and condensed income statement and balance sheet on pages 14 and 15. Volume growth has remained good, but a lower annual average on lending margins has put pressure on net interest income. This, together with higher funding costs owing to a high liquidity buffer and the fact that maturity periods for short-term lending and funding have not been perfectly matched, has affected net interest income negatively. Net interest income for the year amounted to SEK 3,481m (4,133). Net gains and losses on financial items at fair value was positively affected by major changes in interest rates late in the year and amounted to SEK 617m (86). Commissions paid, primarily to the savings banks for loans they arranged, amounted to SEK 508m (561). Operating expenses were lower than the previous year and amounted to SEK 51m (57). Loan losses amounted to SEK 6m ( 43) for the year. Loan losses and impaired loans are further specified in notes 11 and 18. Proposed distribution of profit The following amounts are at the disposal of the Annual General Meeting SEKm (publ) Retained earnings 9,480 Profit for the year 2,761 Total available 12,240 The Board of Directors proposes that the following amount be carried forward 12,240 Total 12,240

15 Five-year summary Swedbank Mortgage Annual Report Five-year summary swedbank mortgage group, condensed income statement over a five-year period SEKm * Interest income 32,150 25,540 20,121 19,176 20,900 Interest expenses 28,669 21,407 15,970 14,183 15,808 Net interest income 3,481 4,133 4,151 4,993 5,092 Net commission income Other operating income Total income 3,660 3,842 3,817 4,863 4,619 Operating expenses Profit before loan losses 3,609 3,785 3,751 4,797 4,556 Loan losses Operating profit 3,603 3,828 3,759 4,815 4,602 Tax expense 923 1,075 1,053 1,348 1,289 Profit for the year 2,680 2,753 2,706 3,467 3,313 swedbank mortgage group, condensed balance sheet over a five-year period SEKm * Assets Loans to credit institutions 106,244 66,838 47,232 35,921 44,952 Loans to the public 623, , , , ,628 Interest-bearing securities Other assets 26,394 11,464 9,538 10,757 5,251 Total assets 756, , , , ,881 Liabilities Amounts owed to credit institutions 152, ,006 99,238 79,472 70,022 Debt securities in issue 552, , , , ,404 Other liabilities 23,380 22,544 19,363 14,684 15,591 Subordinated liabilities 2,389 2,328 4,240 5,024 Total liabilities 728, , , , ,041 Equity 27,612 24,932 24,771 22,065 18,840 Total liabilities and equity 756, , , , ,881 * Not restated according to IAS 39.

16 14 Annual Report 2008 Income statement Income statement Group SEKm Note Interest income 32,150 25,540 32,007 25,210 Interest expenses 28,669 21,407 28,629 21,377 Net interest income 3 3,481 4,133 3,378 3,833 Dividends received Commission income Commission expenses Net commissions Net gains and losses on financial items at fair value Other operating income Total income 3,660 3,842 4,350 3,619 Staff costs Other general administrative expenses Total general administrative expenses Depreciation/amortisation and impairments of tangible and intangible fixed assets Total expenses Profit before loan losses 3,609 3,785 4,313 3,579 Loan losses, net Operating profit 3,603 3,828 4,307 3,623 Appropriations Tax expense , ,016 Profit for the year 2,680 2,753 2,761 2,607 Earnings per share before and after dilution, SEK

17 Balance sheet Annual Report Balance sheet Group SEKm Note Assets Treasury bills and other bills eligible for refinancing with central banks Loans to credit institutions ,244 66, ,243 98,281 Loans to the public 17, 18, , , , ,164 Shares and participating interests Investments in Group entities ,750 Derivatives 22 20,256 6,034 20,256 6,030 Intangible fixed assets Tangible assets Current tax assets 1,068 1,130 Other assets ,030 Prepaid expenses and accrued Income 26 6,031 3,497 6,031 3,491 Total assets 756, , , ,878 Liabilities and equity Liabilities Amounts owed to credit institutions , , , ,006 Debt securities in issue , , , ,919 Derivatives 22 6,911 4,608 6,911 4,616 Current tax liabilities Deferred tax liabilities Other liabilities , ,750 Accrued expenses and prepaid Income 30 15,514 14,179 15,514 14,118 Subordinated liabilities 31 2,389 2,389 Total liabilities 728, , , ,798 Untaxed reserves Equity Equity attributable to shareholders of the parent 33 27,612 24,932 Share capital 11,500 11,500 Other funds 3,100 3,100 Retained earnings 12,240 9,480 Total equity 27,612 24,932 26,840 24,080 Total liabilities and equity 756, , , ,878 Contingent liabilities 34 1,132 1,132 Pledged assets , ,412 Commitments, nominal amount 34 14,113 11,620 14,113 11,232 Notes not directly related to the income statement, balance sheet, cash flow statement or statement of changes in equity: Note 1 Corporate information Note 2 Accounting policies Note 35 Related parties Note 36 Fair value of financial instruments Note 37 Financial risks Note 38 Credit risks Note 39 Change in value if the market interest rate rises by one percentage point Note 40 Summary of maturities Note 41 Currency distribution Note 42 Capital adequacy analysis

18 16 Annual Report 2008 Cash flow statement Cash flow statement Group SEKm Cash and cash equivalents at beginning of year * 22, , Operating activities Operating profit 3,603 3,828 4,307 3,623 Adjustments for non-cash items 2,620 1,067 4,012 1,029 Taxes paid 997 1,344 1,057 1,243 Increase/decrease in loans to credit institutions 3,752 2,165 36, Increase/decrease in loans to the public 50,284 53,293 86,056 50,403 Increase/decrease in securities holdings Increase/decrease in amounts owed to credit institutions 26,849 26,029 27,649 26,029 Change in other assets and liabilities, net 233 3, ,321 Cash flow from operating activities 12,746 18,213 13,053 18,568 Investing activities Change in fixed assets 1,100 Cash flow from investing activities 1,100 Financing activities Issuance of interest-bearing securities 248, , , ,533 Redemption of interest-bearing securities 232, , , ,195 Increase/decrease in other funding 43,044 12,547 43,044 12,547 Group contributions paid 3,600 3,600 Cash flow from financing activities 55,904 39,885 55,904 39,885 Cash flow for the year 43,158 21,672 43,951 21,317 Cash and cash equivalents at end of year * 65,730 22,572 65,729 21,778 * of which, securities pledged for OMX AB at beginning of year at end of year Comment on consolidated cash flow statement The cash flow statement shows receipts and disbursements during the year as well as cash and cash equivalents at the beginning and end of the year. The cash flow statement is reported using the indirect method and is based on operating income for the period and changes shown in the balance sheet. Operating income is adjusted for changes not included in Cash flow from operating activities. Cash flows are reported separately for receipts and disbursements from operating, investing and financing activities. Operating activities Cash flow from operating activities is based on operating profit for the year. Adjustments are made for income tax paid and items not included in cash flow from operating activities. Changes in assets and liabilities in operating activities consist of items that are part of regular business activities, such as loans to and borrowings from the public and credit institutions, which are not attributable to investing and financing activities. Cash flow includes interest receipts of SEK 29,608m (24,891) and interest payments, including capitalised interest, of SEK 27,403m (18,077). Financing activities The issue and redemption of bond loans with maturities exceeding one year are reported gross. The item Change in other funding includes the net change in funding with shorter maturities and high turnover. Cash and cash equivalents Cash and cash equivalents consist of cash and cash balances with central banks and treasury bills and other eligible bills. Specification of adjustment for non-cash items: Group SEKm Unrealised translation differences bonds in issue 5,611 1,503 5,610 1,503 Prepaid expenses and accrued income 2, , Accrued expenses and prepaid income 1,336 3,366 1,396 3,367 Change in valuation of loans to the public and credit institutions 12,484 3,139 12,467 3,096 Change in valuation of debt securities in issue and derivatives 10,691 3,299 12,012 3,260 Total 2,620 1,067 4,012 1,029