Swedbank AS Annual report 2015

Transcription

1 Swedbank AS Annual report 2015

2 Swedbank AS, Annual Report Contents 3 Management report 5 Proposal of the Board for distribution of profit 6 Members of the Supervisory Council of the Bank 6 Members of the Management Board of the Bank 7 Statement of Management's Responsibilities 8 Independent Auditors Report 9 Consolidated and Bank s Financial Statements 9 Consolidated and Bank s Statement of comprehensive income 10 Consolidated and Bank s Balance sheet 11 Consolidated and Bank s Statement of changes in equity 12 Consolidated and Bank s Statement of cash flows 13 Notes 65 Registered offices

3 Swedbank AS, Annual Report Management Report The year 2015 has been a milestone in that for the first time since the economic crisis there was positive development in bank s loan portfolio, supported by both economic growth in Latvia and the low interest rates. Given that the economy keeps developing at the current pace and with the European structural fund money becoming available, market s demand for corporate financing and retail lending will continue to grow. In 2015, Swedbank Latvia earned a consolidated profit of 121 million euros, as compared to a consolidated profit of 116 million euros in the previous year. Affected by the low interest rates, total income in 2015 declined by 4% in a year-on-year comparison. At the same time, total costs have shrunk by 3%, owing to decreased expenses on premises, IT and consultancy services. As a result, the cost/income ratio in 2015 remained flat at Last year the demand for financing increased considerably both among individuals and companies. Many companies have consolidated their market position, have started or plan to start exporting, and they need higher production capacity. A rise in salaries, a marginal increase in consumer prices and a gradual decrease in unemployment, in turn, benefit the financial situation of households which boosts confidence about the future and fuels demand for finance, mostly for purchasing a home for the family. The amount of Swedbank s new financing reached 741 million euros, up by 27%. Thanks to the stronger growth in new lending, the total net credit portfolio has increased by 0.1% compared to 31 December The volume of credit portfolio stood at 3,108 million euros at the end of Impaired loans, gross, continued to decline throughout the year and dropped to 113 million euros by the end of the year (compared with 154 million euros as at 31 December 2014). The volume of customer deposits continued to rise during the last year, with the deposit portfolio having grown by 7 per cent on year-on-year basis. As a result, the net loan-to-deposit ratio continued to decrease, down to 76% at the end of the year (as compared with 82% a year ago). Increasing clarity over implementation of regulatory requirements in the Baltic countries (CRD IV/CRR) has consequently enabled Swedbank AB (publ) to consider optimisation of capital structure of its Baltic subsidiaries. Following years of solid performance Swedbank AS (Latvia) is very well capitalized with total capital adequacy ratio at 39.28% as of December 31st, 2015 compared to total regulatory requirement of 12.8%, whereas our dividend policy (60% pay-out of consolidated profit applied since 2014) is expectedly leading to capital ratios growing even higher. Thus, Swedbank AS (Latvia) has received a consent from ECB for one-time actions to reduce excess capitalization. Decision will be proposed for an approval at the regular AGM in March Management have determined the possible amount of the own funds reduction in Swedbank AS (Latvia) based on the capital forecast and the necessity to ensure a solid safety buffer over capital adequacy ratio requirements and regulatory buffers set by the competent authorities. Reduction would be achieved via reduction of share capital by cancelling ordinary shares with a total amount million euros and dividend pay-out in amount of million euros (60% pay-out of consolidated profit in amount of 72.5 million euros and additional dividend pay-out of million euros). The total capital adquacy ratio of 39.28% as of December 31st, 2015, would decrease to 22.59% if the proposed own funds reduction actions (including audited profit for the year 2015) is pro-forma taken into consideration. Actual effects on bank s captial adequacy ratios will take place only after formal shareholder s decisions approving the proposed own funds reduction measures. In 2015, Swedbank signed an agreement with Danske Bank on transferring the retail banking business to Swedbank in Latvia and Lithuania. This will affect some 7000 Danske Bank retail customers in Latvia with the combined loans of roughly 116 million euros. The acquisition is subject to regulatory approval in both Lithuania and Latvia and is scheduled to close in the first halfyear Along with a shift in customer habits, this year we continued working to increase the accessibility of banking services to ensure a 24-hour support for daily financial services for our customers both in the regions of Latvia and in Riga. Support to non-central parts of Latvia and boosting economic activity in Latvia s regions is one of Swedbank s priorities. Therefore, in April 2015 Swedbank came out with the Programme for Development of the Regions of Latvia, signing a memorandum of cooperation with the Union of Local Governments of Latvia on increasing availability of financial services in the regions of Latvia. According to the memorandum, in addition to improving the physical availability of the bank, Swedbank supports revival of economic activity in the different regions of Latvia by offering lending services tailored to suit the needs of businesses and people in the regions. Last year as part of the programme, a total of 16 ATMs were installed in Latvia s regions, thereby ensuring availability of cash in nearly 400 Swedbank ATMs throughout Latvia and each region. Cash withdrawal in shops over the counter, in turn, is currently available at already 113 retail locations across Latvia. In a continued effort to improve the availability of financial services in Latvia s regions, Swedbank plans to open five new branches in Valka, Līvāni, Ludza, Krāslava and Balvi in 2016, thereby ensuring coverage of Swedbank branches in all towns of regional importance in Latvia. In the course of the year, customers habit of doing their day-to-day banking digitally has gained foothold the use of cards, online banking and smart phones has been on the rise, whereas the number of visits to branches continues to decline. It is increasingly commonplace for people to deal with everyday financial matters via smart phones. Swedbank s mobile app is used on a regular basis by already more than 90,000 customers, having connected to the Internet Banking through their phones more than 4 million times. The most popular service in the mobile app was checking account balance by simply giving their smartphone a shake last year this feature was used more than 22 million times. Since the launch of the service sending money without code it has been used 204,000 times. Swedbank actively invested in development of the mobile app by rolling out a number of new features in 2015 sending a request for money directly from the mobile app, as well as checking balances of all accounts and credit card repayment without code.

4 Swedbank AS, Annual Report Swedbank strives to be the most convenient bank in the day-to-day running of business, hence we regularly add to our range of remote banking services for companies, including the possibility to handle banking matters faster and more conveniently via Swedbank Internet Banking, using the eid card with the embedded e-signature. Also in 2015, Swedbank introduced a new service for corporate customers a multi-functional payment portal, having no equal in the Baltics, for e-commerce environment which comprises several online payment acceptance solutions card acceptance over the Internet, payments via several online banking facilities and the use of the PayPal system. Swedbank s contribution to society continues to be aimed at enhancing the quality of education, developing business acumen and promoting charity. Striving to create demand for good teachers in society, which will bring about change in appreciation, prestige and pay in teacher s profession, we engaged in the social campaign The Future Profession of Teacher. In gratitude to the leaders of children and youth folk art collectives for their contribution to passing on the song and dance festival traditions to the next generations, Swedbank, as a general sponsor of the XI Latvian School Youth Song and Dance Festival, granted festival stipends to 50 teachers last year. Since April, in order to develop an awareness in children of what finances are, why they are necessary, how money is earned and how to spend it wisely, the Children s University established by the parents organization Mammamuntetiem.lv offers, in cooperation with Swedbank, free classes Money Studies for Kids with Swedbank. Also in 2015, Swedbank supported the creation and operation of 1700 student companies in order to give school-age youths a chance to get their first experience in business. The traditional end-of-the-year festive atmosphere passed under the sign of Poga, meaning button in Latvian, where in cooperation with the charity organization Ziedot.lv we invited customers and employees to become ambassadors of the children rehabilitation centre Poga. In the annual Most Loved Brand survey of 2015 Swedbank takes 4th place in the Baltics, having the highest score among all financial institutions, keeping the same strong position as in Locally, Swedbank has been named as the 3rd Most Loved Brand in Latvia - up from 8th last year. In the annual Reputation Top conducted by the newspaper Dienas Bizness and the agency Porter Novelli, Swedbank was once again found to have the best reputation in the financial sector. In the annual Sustainability Index ranking, Swedbank has retained its place in the Golden category, demonstrating itself as a company whose corporate social responsibility strategy comprises clear and measurable targets and which communicates all the key sustainability aspects publicly. Also in October Swedbank joined the Bank Social Charter, elaborated by the Association of Commercial Banks of Latvia, which is aimed at building a reliable, responsible and sustainable banking system in Latvia. I d like to thank all our customers, partners and employees together with you, this year we have accomplished great deeds, experienced stirring moments and started promising initiatives. Māris Mančinskis Chairman of the Board of Swedbank Riga, 4 March 2016

5 Swedbank AS, Annual Report Proposal of the Board for distribution of profit The Board confirms the 121 million euros consolidated profit of Swedbank Latvia. In accordance with the audited financial results, the Board recommends the annual shareholders meeting that the Swedbank Latvia 2015 profit of 131 million euros and retained earnings from previous financial periods of 121 million euros, all totalling to million euros, to be distributed as shown below: 2015 Swedbank profit for the financial year of Retained earnings from previous periods Total retained earnings To be paid as dividends (60% of consolidated profit) Proposed additional dividends Balance of undistributed profit

6 Swedbank AS, Annual Report Members of the Supervisory Council of the Bank As at the date of signing of the financial statements Appointed: Priit Perens Chairman of the Council Tiina Sepa Deputy Chairperson of the Council Birgitte Bonnesen Member of the Council Annika Charlotte Elsnitz Member of the Council Jan Michael Fecko Member of the Council Jonny Jakob Belchatowski Member of the Council Helo Meigas Member of the Council Jonas Filip Eriksson Member of the Council During the period since 1 January 2015 Appointed: Priit Perens Chairman of the Council Helo Meigas Member of the Council Jonny Jakob Belchatowski Member of the Council Jonas Filip Eriksson Member of the Council Reappointed: Tiina Sepa Deputy Chairperson of the Council Birgitte Bonnesen Member of the Council Jan Michael Fecko Member of the Council Annika Charlotte Elsnitz Member of the Council Priit Perens Chairman of the Council Tiina Sepa Deputy Chairperson of the Council Birgitte Bonnesen Member of the Council Jan Michael Fecko Member of the Council Annika Charlotte Elsnitz Member of the Council Resigned: Jens Claes Gustav Skaring Member of the Council Members of the Management Board of the Bank As at the date of signing of the financial statements Appointed: Māris Mančinskis Ansis Grasmanis Ģirts Bērziņš Reinis Rubenis Chairman of the Board Member of the Board Member of the Board Member of the Board During the period since 1 January 2015 Appointed: Ģirts Bērziņš Member of the Board Reappointed: Māris Mančinskis Chairman of the Board Ansis Grasmanis Member of the Board Resigned: Irīna Pīgozne Member of the Board Guntars Reidzāns Member of the Board

7 Swedbank AS, Annual Report 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 Group s Consolidated and Bank s 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 2015 and the results of its operations and cash flows for the year ended 31 December 2015; as well the state of the affairs of the Bank at the end of 31 December 2015 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 Group s Consolidated and Bank s Financial Statements on pages 9 to 64 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 Group s Consolidated and Bank s 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 Group and 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 Priit Perens Chairman of the Board Chief Financial Officer Chairman of the Council Riga, 4 March 2016

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9 Swedbank AS, Annual Report Consolidated and Bank s Statement of comprehensive income Note Group 2015 Group 2014 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/reversals of non financial assets Reversals of credit impairments, net Reversals of impairment of other financial assets Operating profit Income tax Profit for the year Other comprehensive income for the year Total comprehensive income for the year Bank 2015 Bank 2014 The accompanying notes are an integral part of these financial statements. The financial statements and notes on pages 13 to 64 were approved by the Management of the Bank and signed on its behalf by: Māris Mančinskis Ansis Grasmanis Priit Perens Chairman of the Board Chief Financial Officer Chairman of the Council Riga, 4 March 2016 y:

10 Consolidated and Bank s Balance sheet Assets Note Group 2015 Swedbank AS, Annual Report Group 2014 Cash and balances with central banks Treasury bills and other bills eligible for refinancing with central banks, etc Loans to credit institutions Loans to the public Bonds and other interest-bearing securities Shares and participating interests 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 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 Total liabilities Equity Share capital Other reserves Retained earnings Profit for the year Total equity Total liabilities and equity Off-balance sheet items Contingent liabilities Commitments Bank 2015 Bank 2014 The accompanying notes are an integral part of these financial statements. The financial statements and notes on pages 13 to 64 were approved by the Management of the Bank and signed on its behalf by: Māris Mančinskis Ansis Grasmanis Priit Perens Chairman of the Board Chief Financial Officer Chairman of the Council Riga, 4 March 2016

11 Swedbank AS, Annual Report Consolidated and Bank s Statement of changes in equity Group Share capital Other reserves Retained earnings Profit for the year Total equity Opening balance 1 January Transfer of profit of the previous year to retained earnings Profit for the year Share based payments to employees Deferred tax related with share based payments to employees Income transfer to individual accounts of pension scheme participants (Swedbank Open Pension Fund AS, according law On Private Pension Funds Closing balance 31 December Opening balance 1 January Transfer of profit of the previous year to retained earnings Profit for the year The dividend paid to Swedbank AB (publ) Share based payments to employees Deferred tax related with share based payments to employees Current tax on share related compensation Income transfer to individual accounts of pension scheme participants (Swedbank Open Pension Fund AS, according law On Private Pension Funds Closing balance 31 December Bank Share Other Retained Profit for (thous.eur) capital reserves earnings the year Total equity Opening balance 1 January Transfer of profit of the previous year to retained earnings Profit for the year Share based payments to employees Deferred tax related with share based payments to employees Closing balance 31 December Opening balance 1 January Transfer of profit of the previous year to retained earnings Profit for the year The dividend paid to Swedbank AB (publ) Share based payments to employees Deferred tax related with share based payments to employees Current tax on share related compensation Closing balance 31 December The accompanying notes on pages 13 to 64 are an integral part of these financial statements.

12 Swedbank AS, Annual Report Consolidated and Bank s Statement of cash flows Group 2015 Group 2014 Profit for the year Income tax expense recognised in profit or loss Reversals of credit impairments Interest (income) Interest expense Reversals of impairment of other financial assets Depreciation and amortisation Loss from sales of tangible and intangible fixed assets Loss from write-offs of tangible and intangible fixed assets Total adjustments to operating profit 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 profit or loss Net change in prepayments and accrued income Net change in loans to the public Net change in accrued liabilities and prepaid income Net change in other assets Net change in short-term due to credit institutions Net change in deposits and borrowings from the public Net change in other financial liabilities Net change in other liabilities Total adjustments to operating assets and liabilities Interest received Interest (paid) Income tax (paid) Net cash from operating activities Cash from investing activities (Acquisition) of tangible assets Paid for shares and participating interests (Acquisition) of intangible fixed assets Net cash used in investing activities Cash from financing activities Income transfer to individual accounts of pension scheme participants Share based payments to employees The dividend paid to Swedbank AB (publ) Net change in long-term loans from credit institutions and other financial organisations Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Specification of cash and cash equivalents Cash Balances with Central Bank Total Bank 2015 Bank 2014 The accompanying notes on pages 13 to 64 are an integral part of these financial statements.

13 Financial statements and notes Swedbank AS, Annual Report Notes 14 Note 1. Corporate information 56 Note 20. Investments in Group entities 14 Note 2. Accounting policies 57 Note 21. Derivatives 22 Note 3. Risk and risk control 58 Note 22. Tangible and intangible fixed assets 44 Note 4. Capital 59 Note 23. Other assets 47 Note 5. Net interest income 59 Note 24. Prepaid expenses and accrued income 48 Note 6. Net commissions 60 Note 25. Amounts owed to credit institutions 49 Note 7. Net gains and losses on financial items at 60 Note 26. Amounts owed to other financial fair value organisations 50 Note 8. Staff costs 60 Note 27. Deposits and borrowings from the public 52 Note 9. Other general administrative expenses 60 Note 28. Other liabilities 52 Note 10. Operating lease and premises rent 60 Note 29. Accrued expenses and prepaid income commitments 52 Note 11. Depreciation/amortisation of tangible and 60 Note 30. Compulsory reserve in the Central Bank intangible fixed assets 61 Note 31. Share capital 52 Note 12. Impairments/reversals of non financial 61 Note 32. Other reserves assets 53 Note 13. Reversals of credit impairments 61 Note 33. Off-balance sheet items 53 Note 14. Reversals of impairment of other financial 61 Note 34. Assets under management assets 53 Note 15. Income tax 62 Note 35. Fair value of financial instruments 54 Note 16. Treasury bills and other bills eligible for 63 Note 36. Related parties refinancing with central banks, etc. 55 Note 17. Bonds and other interest-bearing securities 55 Note 18. Loans to credit institutions 55 Note 19. Loans to the public

14 Swedbank AS, Annual Report Notes 1 Corporate information Swedban AS (Latvia) is a fully-owned subsidiary of Swedbank AB (publ), Sweden. Throughout this annual report the Group refer to the consolidated financial statements of Swedbank AS (Latvia) and its subsidiaries. Swedbank AS is hereinafter referred to as Bank or Swedbank. Swedbank Group refers to Swedbank AB (publ) and its subsidiaries. The Bank s Head Office address is Balasta dambis 15, Riga, LV-1048, Latvia. As of 31 December 2015 following entities comprise the Group: Swedbank AS Swedbank Līzings SIA Swedbank Atklātais Pensiju Fonds AS Swedbank Īpašumi SIA HL Līzings SIA The Bank s and Group s consolidated financial statements and the annual report for Swedbank for the financial year 2015 are approved by the Board and are presented for final approval to the shareholders. On 4 November 2014 Europe s Single Supervisory Mechanism (SSM) for banks started up, and the European Central Bank took on direct supervision of the most significant banks in the euro area. Also Swedbank in Latvia is now under the direct supervision of the European Central Bank. 2 Accounting policies BASIS OF ACCOUNTING The Bank s and Group s 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 Bank s and Group s consolidated financial statements in Latvia concurrently with their approval by the EU. Complete financial reports refer to: balance sheet as at the end of the period, statement of comprehensive income for the period, statement of changes in equity for the period, statement of cash flows for the period, and notes, comprising a summary of significant accounting policies and other explanatory information. The financial statements are based on the historical cost basis. Subsequent measurements of financial instruments are mainly made at fair value. The Bank s and Group s consolidated financial statements are presented in thousands of Euro, unless indicated otherwise. The Bank s and Group s measurement currency is Euro. CHANGES IN ACCOUNTING POLICIES The following adoption of accounting pronouncements and changes are applied in the financial reports during Annual Improvements On 1 January 2015, the Group adopted amendments to several IFRS standards, resulting from the Annual Improvements. This comprises amendments to a number of current IFRS standards for changes in presentation, recognition or measurement and terminology or editorial. The amendments did not have a material impact on the Group s financial statements. Levies (IFRIC 21) The Group adopted the interpretation from 30 June Levies refer to fees paid to government agencies and similar bodies in accordance with laws and regulations. The interpretation clarifies that a liability for a levy should only be recognised when the activity that triggers payment occurs, as specified in the relevant legislation. IFRIC 21 did not have an impact on the Group s financial position, results or cash flows. Other IFRS changes No new or amended IFRS and interpretations aside from those above have been applied or have had a significant effect on the Group s financial statements. 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, IFRS 10) The consolidated financial statements comprise the Bank and those entities over which the Bank has control. The Bank has control when it has power and is capable of managing the relevant activities of another entity, is exposed to a variable return and is able to use its power to affect that return. These entities, subsidiaries, are included in the consolidated financial statements in accordance with the acquisition method from the day that control is obtained and are excluded from the day that control ceases. According to the acquisition method, 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, transferred consideration measured at fair value on the acquisition date and the fair value of the acquired share of the identifiable assets, liabilities and reported contingent liabilities is recognised as goodwill. If the amount is less than the fair value of the acquired company s net assets, the difference is recognised directly in the income statement as bargain purchase within Other income. The transferred consideration (purchase price) includes the fair value of transferred assets, liabilities and shares which, in applicable cases, have been issued by the Group as well as the fair value of all assets or liabilities that are the result of an agreement on contingent consideration. Acquisition-related costs are recognised when they arise. For each acquisition, the Group determines whether all non-controlling holdings in the acquired company should be recognised at fair value or at the holding s proportionate share of the acquired subsidiary s net assets. 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. Transactions with non-controlling owners are recognised as equity transactions with the Group s shareholders in their capacity as owners. In the case of acquisitions of interests from non-controlling owners, the difference between the price paid for the interests and the acquired share of the carrying amount of the subsidiary s net assets is recognised in equity attributable to the parent company s shareholders as retained earnings. The carrying amounts of holdings with and without control are adjusted to reflect the changes in their relative holdings. Gains and losses on the sale of interests to non-controlling owners are also recognised in equity. If, following a sale of its interests, the Group no longer has control, its remaining holding is remeasured at fair value and the change is recognised in its entirety in the income statement. This fair value subsequently serves as the cost of the remaining holding in the former subsidiary for reporting purposes. All amounts

15 Swedbank AS, Annual Report related to the divested unit that were previously recognised in other comprehensive income are recognised as if the Group directly divested the related assets or liabilities, due to which amounts previously recognised in other comprehensive income may be reclassified as profit or loss. If the interest in an associate is reduced but a significant influence is retained, the proportionate share of the amount previously recognised in other comprehensive income is reclassified to profit or loss. 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 Bank s and Group s consolidated financial statements are presented in EUR, which is also the Bank s and Group 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 nonmonetary 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 for main foreign currencies: Reporting date USD SEK Financial instruments (IAS 32, IAS 39) The large part of the Group s balance sheet items represent 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 relevant lines of the balance sheet depending on the nature of the instrument and the counterparty. If the financial instrument does not have a specific counterparty ot it is listed on the market, the instrument 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, it requires little or no initial net investment and it is settled on a future date. Derivatives are reported on separate lines of the balance sheet, as assets or liabilities depending on whether the contract has a positive or negative fair value. Contractually accrued interest is recognised among prepaid or accrued income or expenses in 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 has 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. Embedded derivatives An embedded derivative is a component of a hybrid instrument that includes a non- derivative host contract, with the effect that some of the cash flows varies in a manner similar to a stand-alone derivative. An embedded derivative is separated from the host contract and recognised separately within derivatives on the balance sheet when its financial features are not closely related to the host contract s, provided that the combined financial instrument is not recognised at fair value in the income statement. 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, since the Group is exposed to the risk that the security will fluctuate in value before the repo expires. The payment received is recognised as a financial liability on the balance sheet based on respective counterparty. The securities sold 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. Offsetting Financial assets and financial liabilities are offset and recognised net in the balance sheet if there is a legal right of set-off both in the normal course of business and in the event of bankruptcy, and if the intent is to settle the items with a net amount or simultaneously realise the asset and settle the liability. Financial instruments, recognition (IAS 39) The Group s financial instruments are divided into the following 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. The best evidence of fair value at initial recognition is the transaction price, for financial instruments that subsequently are not valued at fair value through profit or loss, supplementary entries are made for additions or deductions of direct transaction expenses to acquire or issue the financial instrument. Subsequent measurement of financial instruments depends 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. 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

16 Swedbank AS, Annual Report similar instruments or quoted prices for identical instruments on inactive markets. Differences that arise at initial recognition between the transaction price and the fair value according to a valuation model, so called day 1-profits or losses, are recognised in the income statement only when the valuation model entirely has been based on observable market data. In all other cases the difference is amortised during the financial instrument s remaining maturity. 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 credit impairments. 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. 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. However, loans are never recognised at a value higher than what the amortised cost would have been if the write-down had not occurred. Loan impairments are recognised in profit or loss as credit impairments. Credit impairments include provisions for individually impaired loans, portfolio provisions or write-offs of impaired loans. Write-offs are recognised as credit impairments when the amount of loss is ultimately determined and represent the amount before the utilisation of any previous provisions. Provisions utilised in connection with write-offs are recognised on a separate line within credit impairments. Repayments of write-offs and recovery of provisions are recognised within credit impairments. Individual provisions and portfolio provisions are recognised in a separate provision account in the balance sheet, while write-offs reduce the amount of outstanding loans. 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 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 Group Fair value through profit or loss Trading Loans and receivables 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 Group Other Fair value through profit or loss Trading Other financial liabilities Amounts owed to credit institutions Amounts owed to other financial organisations Deposits and borrowings from the public Derivatives Other financial liabilities Total Other Total Total

17 Swedbank AS, Annual Report Financial assets Bank Fair value through profit or loss Trading Loans and receivables 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 Other Total Financial liabilities Bank Fair value through profit or loss Trading Other financial liabilities Amounts owed to credit institutions Amounts owed to other financial organisations Deposits and borrowings from the public Derivatives Other financial liabilities Total Other Total Leases (IAS 17) The Group s leasing operations consist of finance leases and are therefore recognised as loans and receivables. The carrying amount corresponds to the present value of future leasing payments. The difference between all future leasing payments, the gross receivable, and the present value of future leasing payments constitutes unearned income. Consequently, lease payments received are recognised in part in profit or loss as interest income and in part in balance sheet as installments, such that the financial income corresponds to an even return on the net investment. In a finance lease, the economic risks and benefits associated with ownership of an asset are essentially transferred from the lessor to the lessee. The Group is the lessee in operating leases, when the lessor bears the economic risks and benefits, the lease is classified as operating lease. Lease payments where the Group acts as the lessee 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 and subsequently at cost less accumulated amortisation and accumulated impairment. The cost of intangible assets in a business combination corresponds to fair value upon acquisition. 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. Development expenses are capitalised and recognised in the balance sheet when such 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. In other cases, development is expensed when it arises. Tangible assets (IAS 2, 16) For protection of claims Tangible assets acquired or recovered to protect claims are recognised as inventory, provided they do not relate to investment properties, and are classified under Other assets. Inventories are valued at the lower of cost and net realisable value. Cost includes all expenses for purchasing, manufacturing and to otherwise bring the goods to their current location and condition. Net realisable value represents the amount that is expected to be realised from a sale. For own use Tangible fixed assets, such as equipment and owneroccupied properties, are initially recognised at cost and subsequently measured at cost less accumulated depreciation and impairments. The cost consists of the purchase price or the fair value, if a purchase price is unavailable, as well as expenses directly attributable to the purchase. 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. Useful lives, residual values and depreciation methods are reassessed and changed when necessary in connection with each closing day. The carrying amount is tested for impairment when events or circumstances indicate a lower recoverable amount. The recoverable amount represents the higher of the asset s fair value 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. 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.

18 Swedbank AS, Annual Report Borrowing costs (IAS 23) Borrowing costs are capitalised when they are 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, such as intangible assets or investment properties. Other borrowing costs are expensed in the period in which they arise. 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. A reliable estimation of the amount must be made and 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. Provisions are recognised for restructurings. Restructurings are extensive organisational changes which may require the payment of employee severance for early termination or branches to be shut down. For a provision to be recognised, a restructuring plan must be in place and announced, so that it has created a valid expectation among those affected that the company will implement a restructuring. A provision for restructuring includes only direct expenses related to the restructuring and not to future operations, such as of the cost of severance. 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 on 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. Service fees are recognised as income when the services are rendered as Commission income or Other income. Commission income includes payment processing, asset management and brokerage commissions. Commission expenses are transaction-dependent and are directly related to the transactions for which income is recognised 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. 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 and at the same time a corresponding increase in liabilities is recognised. For share-based payment to employees settled with equity instruments, the services rendered are valued with reference to the fair value of the granted equity instruments. The fair value of the equity instruments is calculated as per the grant date for accounting purposes, i.e., the measurement date. The measurement 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 grant date, the employees are granted rights to share-based payment. Since the granted 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 cashsettled 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. 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. Tax rates which have been enacted or substantively enacted as of the reporting date 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 comprehensive income or equity. Cash and cash equivalents (IAS 7) Cash and cash equivalents consist of cash and balances with the Central Bank. Balances refer to funds that are available at any time. This means that all cash and cash equivalents are immediately available. NEW STANDARDS AND INTERPRETATIONS The international Accounting Standard board (IASB) and IFRS interpretations Committee (IFRIC) have issued the

19 Swedbank AS, Annual Report following standards, amendments to standards and interpretations that apply in or after The IASB permits earlier application. For Swedbank to apply them also requires that they have been approved by the EU if the amendments are not consistent with previous IFRS rules. Consequently, Swedbank has not applied the following amendments in the 2015 annual report. Annual improvements and The annual improvements amend the current standards for presentation, recognition or measurement and other editorial corrections. The EU has approved the improvements for application to the financial years beginning on 1 February 2015 and improvements for application to the financial years begining on 1 January Adoption is not expected to have a significant effect on the Group s financial position or results. Revenue from Contracts with Customers (IFRS 15) IFRS 15 was issued in May 2014 and establishes the principles for reporting useful information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer. The standard introduces a five-step model to determine how and when to recognise revenue, but it does not impact the recognition of income from financial instruments in the scope of IAS 39. The standard also establishes new disclosures to provide more relevant information. The standard is applicable from 1 January 2018 and has not yet been approved by the EU. The impacts on the Group s financial reports are still being assessed by the Group. Financial instruments (IFRS 9) IFRS 9 is the replacement of IAS 39 Financial Instruments: Recognition and Measurement and was issued on 24 July The standard includes requirements for recognition, classification and measurement, impairment, derecognition and general hedge accounting. The major changes from IAS 39 relate to classification and measurement, impairment and general hedge accounting. IFRS 9 is applicable from 1 January 2018 and has not yet been approved by the EU. The impacts on the Group s financial reports are still being assessed by the Group but are expected to be significant, particularly from adopting the new impairment requirements. Classification and measurement At initial recognition, financial assets will be classified as fair value through profit or loss, amortised cost or fair value through other comprehensive income. The classification assessment for debt instruments will be based on two criteria: (a) an entity s business model for managing a financial asset and (b) whether the contractual cash flows of the instrument represent solely payments of principal and interest. The introduction of the contractual cash flow assessment in IFRS 9 also resulted in removal of the embedded derivative separation requirements where the instrument is a financial asset. The classification of equity instruments is fair value through profit or loss, except where an entity elects to present such instruments as fair value through other comprehensive income. Such an election results in only dividends from such investments recognized in profit or loss and no recycling of fair value gains or losses to profit or loss. The classification and measurement requirements for financial liabilities remain largely unchanged from IAS 39. The primary change permits the presentation of fair value changes due to own credit risk on financial liabilities designated as at fair value through profit or loss in other comprehensive income, rather than in profit or loss. Impairment IFRS 9 introduces an expected credit loss model for the measurement of impairment on financial assets measured at amortised cost and fair value through other comprehensive income. IFRS 9 removes the requirement is IAS 39 to identify an incurred loss event. The new impairment model establishes a three stage approach based on whether there have been significant increases in credit risk from initial recognition of the instrument. For financial assets with no significant increase in credit risk since initial recognition, impairment provisions reflect a 12-month expected credit loss. For financial assets with a significant increase in credit risk and those which are credit impaired, impairment provisions reflect a lifetime expected credit loss. Hedge accounting The IFRS 9 hedge accounting requirements allow entities to better reflect their risk management activities in the financial statements and introduce a less rules-based approach to assessing hedge effectiveness. Amendments to IAS 1: Disclosure Initiative The amendments to IAS 1 Presentation of Financial Statements were issued in December 2014 as part of an initiative to improve the presentation and disclosures in financial reports. The amendments clarify that materiality is applicable to the entire financial statements and that the inclusion of immaterial information reduces the effectiveness of disclosures. The amendments will be applicable for annual periods beginning on or after 1 January 2016 and were endorsed by the EU on 18 December The amendments will only have a disclosure impact on the Group. Leasing (IFRS 16) IFRS 16 was issued in January 2016 and significantly changes the way lessee entities should account for leases. For lessees, the standard eliminates the distinction between finance and operating leases and requires entities to recognize assets and liabilities arising from most leases on the balance sheet. For lessors, the requirements remain largely unchanged and maintain the distinction between finance and operating leases. IFRS 16 is applicable from 1 January 2019, with early adoption permitted if IFRS 15 has been applied, and has not yet been approved by the EU. The impacts on the Group s financial reports are still being assessed by the Group. OTHER CHANGES TO IFRS Additional new or amended standards have been issued by the IASB but not yet adopted by the Group. Such changes to IFRSs have been assessed as not applicable to the Group or having no impact on the Group s financial reports. No impact on Swedbank The specific standards are listed below for reference. Amendments to IFRS 11 Accounting for Acquisitions of Interests in Joint Operations (effective 1 January 2016 and EU endorsed 24 November 2015) Amendments to IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortisation (effective 1 January 2016 and EU endorsed 2 December 2015) Amendments to IAS 27 Equity Method in Separate Financial Statements (effective 1 January 2016 and EU endorsed 18 December 2015) Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (deferred indefinitely by the IASB and EU endorsement is on hold) Amendments to IAS 12 Income Taxes - Recognition of Deferred Tax Assets for Unrealised Losses (effective for annual periods beginning on or after 1 January 2017) Not applicable to Swedbank The specific standards are listed below for reference. Amendments to IAS 19 Defined Benefit Plans: Contributions (effective 1 February 2015 and EU endorsed on 17 December 2014)

20 Swedbank AS, Annual Report Amendments to IAS 16 and IAS 41 Agriculture: Bearer Plants (effective 1 January 2016 and EU endorsed 23 November 2015) IFRS 14 Regulatory Deferral Accounts (effective 1 January 2016 and not yet EU endorsed) Amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception (effective 1 January 2016 and not yet EU endorsed) CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES Presentation of consolidated financial statements in conformity with IFRS requires management to make judgments and estimates that affect the recognised amounts for assets, liabilities and disclosures of contingent assets and liabilities as of the closing day as well as recognised income and expenses during the report period. Management continuously evaluates these judgments and estimates, including those that affect the fair value of financial instruments, provisions for impaired loans, impairments of intangible and tangible assets and deferred taxes. Management bases its judgments and assumptions on previous experience and several other factors that are considered reasonable under the circumstances. Actual results may deviate from judgments and estimates. JUDGMENTS INVESTMENT FUNDS Entities in the Group have established investment funds for their customers savings needs. The Group manages the assets of these funds on behalf of customers in accordance with predetermined provisions approved by the Latvian Financial Supervisory Authority. The return generated by these assets accrues to customers. Within the framework of the approved fund provisions, the Group receives management fees as well as in certain cases application and withdrawal fees for the management duties it performs. Because decisions regarding the management of an investment fund are governed by the fund s provisions, the Group is not considered to have the opportunity to control or dominate decision-making in the investment funds in order to obtain economic benefits. The Group s compensation and risk are limited to fee charges. In certain cases, Group entities also invest in investment funds to fulfill their obligations to customers. Shares in the investment funds do not represent any influence, regardless of whether the holding exceeds 50 percent or not. Taken together, the above-mentioned conditions are the basis for not consolidating the investment funds. FINANCIAL INSTRUMENTS When financial instruments are valued at fair value, quoted prices on active markets are primarily used. When quoted prices on active markets are not available, various valuation models are used instead. The Group determines when the markets are considered inactive and when quoted prices no longer correspond to fair value, requiring valuation models to be used. The Group determines which valuation model and which pricing parameters are most appropriate for the individual instrument. All the valuation models Swedbank uses are generally accepted and are subject to independent risk control. ESTIMATES The Group uses various estimates and assumptions about the future to determine the value of certain assets and liabilities. PROVISIONS FOR LOAN LOSSES Receivables measured at amortised cost are tested if loss events have occurred. Individual loans are tested initially, followed by groups of loans with similar credit terms and which are not identified individually. A loss event refers to an event that occurred after the loan was paid out and which has a negative effect on projected future cash flows. Determining loss events for groups of loans carries greater uncertainty, since a number of different events, such as macroeconomic factors, may have had an impact. Loss events include late or non-payments, concessions granted due to the borrower s financial difficulties, bankruptcy or other financial restructurings, and local economic developments tied to non-payments, such as an increase in unemployment or decreases in real estate or commodity prices. Where a loss event has occurred, individual loans are classified as impaired loans. The Group feels that loans whose terms have been significantly changed due to the borrower s economic difficulties and loans that have been non-performing for more than 90 days should automatically be treated as impaired. Such a loan is not considered impaired if there is collateral which covers the capital, accrued and future interest and fees by a satisfactory margin. When a loss event has occurred, a determination is made when in the future the loan s cash flow will be received and its probable size. For impaired loans, interest is not considered to be received, only capital or portions thereof. For groups of receivables, estimates are based on historical values and experience-based adjustments to the current situation. Provisions for impaired loans are made on the difference between estimated value, i.e., projected future cash flows discounted by the loan s original effective interest rate, and carrying amounts according to contractual cash flows. Assumptions about when in time a cash flow will be received as well as its size determine the size of the provisions. Decisions on provisions are therefore based on various calculations and management s assumptions of current market conditions. Management is of the opinion that provision estimates are important because of their significant size as well as the complexity of making these estimates. IMPAIRMENT TESTING OPERATING PROPERTIES Operating properties are measured at cost less depreciation. When there is an indication of diminished value, impairment is tested. The test is done by calculating the recoverable amount, i.e., the higher of value in use and realisable value. The value in use of operating properties has been determined by internal appraisers. NET REALISABLE VALUE OF PROPERTIES RECOGNISED AS INVENTORY Properties recognised as inventory are valued at the lower of cost and net realisable value. Net realisable value has been determined by internal appraisers. VALUATION OF DEFERRED TAX ASSETS Deferred tax assets represent a reduction in future tax attributable to temporary differences, tax losses carried forward or other unused tax deductions. Deferred tax assets can be recognised only to the extent they can be offset against future tax liabilities. Management therefore makes assumptions of the size of this future taxable income. The assumptions affect the Group s results and financial position. SHARE-BASED PAYMENT In calculating the cost which is recognised as employee benefits ultimately settled in the form of common shares in Swedbank AB (publ), management estimates how many common shares will be settled. Employees are allotted contingent rights to receive common shares, which require, for example, that they remain employed on the settlement date; otherwise the rights expire. Management also estimates the fair value of the rights allotted to employees and which gives them the conditional right to receive common shares in Swedbank AB (publ) at no cost. The estimation is based on the quoted price of the common share, since the right essentially has the same terms as a common share. The estimated costs associated with Programme 2015 total EUR 2.2m, of which EUR 0.5m was recognised in The recognized expense for all

21 Swedbank AS, Annual Report outstanding programmes amounted to EUR 3.1m. This is in addition to social insurance charges, any other payroll expenses and income tax, which will be calculated based on the estimated number of settled shares and their estimated fair value EVENTS AFTER THE BALANCE SHEET DATE In 2015, Swedbank signed an agreement with Danske Bank on transferring the retail banking business to Swedbank in Latvia and Lithuania. This will affect some 7000 Danske Bank retail customers in Latvia with the combined loans of roughly 116 million euros. The acquisition is subject to regulatory approval in both Lithuania and Latvia and is scheduled to close in the first half-year Increasing clarity over implementation of regulatory requirements in the Baltic countries (CRD IV/CRR) has consequently enabled Swedbank AB (publ) to consider optimisation of capital structure of its Baltic subsidiaries. Following years of solid performance Swedbank AS (Latvia) is very well capitalized with total capital adequacy ratio at 39.28% as of December 31st, 2015 compared to total regulatory requirement of 12.8%, whereas our dividend policy (60% pay-out of consolidated profit applied since 2014) is expectedly leading to capital ratios growing even higher. Thus, Swedbank has received a consent from ECB for onetime actions to reduce excess capitalization. Decision will be proposed for an approval at the regular AGM in March Management have determined the possible amount of the capital reduction in Swedbank based on the capital forecast and the necessity to ensure a solid safety buffer over capital adequacy ratio requirements and regulatory buffers set by the competent authorities. Reduction would be achieved via reduction of share capital by cancelling ordinary shares with a total amount million euros and dividend pay-out in amount of million euros (60% pay-out of consolidated profit in amount of 72.5 million euros and additional dividend pay-out of million euros). The total capital adquacy ratio of 39.28% as of December 31st, 2015, would decrease to 22.59% if the proposed capital reduction actions (including audited profit for the year 2015) is pro-forma taken into consideration. Actual effects on bank s captial adequacy ratios will take place only after formal shareholder s decisions approving the propsed capital reduction measures.

22 Swedbank AS, Annual Report Risk and risk control All financial operations entail risks. Managing them well is crucial to Swedbank s operations. The basis of efficient risk management and a good risk-adjusted return is a strong common risk culture with delegated responsibility and decision-making close to the customer. Swedbank s risk management is built on three lines of defence, clear goals and strategies, policies and guidelines, an efficient operating structure, and a simple, transparent reporting structure. A well-developed risk process is in place for how we operate and how credit is approved, reviewed and managed if e.g. a borrower incurs payment problems. The Group risk policy details the risk management framework, roles and responsibilities as well as guidelines on the size of the capital buffer the Group maintains as protection against major economic downturns. Swedbank s business units and subsidiaries bear full responsibility for risks that arise in their operations. By delegating responsibility, the organisation can quickly react if problems occur. The risk organisation, which is independent of the business operations, is responsible for identification, quantification, analysis and reporting of all risks. It upholds the principles and framework for risk management to facilitate risk assessments while conducting independent analyses and stress tests of how events in the market and economy could impact Swedbank. The risk organisation also contributes expert advice and serves as an advisor in the executive management s decision-making to ensure that the decisions taken are aligned with the bank s risk appetite and risk tolerance. Every large business unit has a credit risk function as well as compliance and operational risk functions. The latter identify, monitor and report operational risks. In addition, they provide management with expertise in risk management issues. Compliance is also a controlling function, identifying, monitoring and reporting on compliance risks and handling compliance related issues. Special areas of compliance responsibility include customer protection, market conduct and prevention of money laundering and financing of terrorism. The Group s risk function has special units for problem loans, which work with companies that have incurred, or are expected to incur, financial problems to find a solution as early as possible that helps the customer and reduces Swedbank s risk. Three levels of risk management Business operations First line of defence: Risk management by business operations Risk and control functions Second line of defence: Independent risk control and compliance Risk Internal audit Third line of defence: Internal audit First line of defence risk management by operations Swedbank s business units and subsidiaries bear full responsibility for the risks that arise in their operations. Their employees have the best understanding of the customers and specific market. The customer s cash flow, solidity and collateral are always the decisive factors in the loan approval process. Standardised risk classification tools are in place to support the lending process. Second line of defence Independent risk control The risk organisation is independent of the business operations and is responsible for identification, quantification, analysis and reporting of all risks. It upholds principles and frameworks for risk management to facilitate risk assessments. The credit risk function issues internal lending guidelines, such as cash flow and collateral requirements for customers as well as mandate structures for credit decisions within the organisation. For loans exceeding certain levels, the decisions are taken in credit committees to create a duality with the business operations. The committees also promote a sound risk culture by supporting and training employees in the business areas. Third line of defence Internal audit Internal Audit, an independent review function directly subordinate to the Council, conducts reviews of the first and second lines of defence. It identifies potential improvements in operations by evaluating risk management, governance and internal control. Internal Audit has also been tasked with identifying and helping to minimise activities that do not create value. When flaws are identified, the operations in question, in consultation with Internal Audit, formulate an action plan that clearly defines responsibilities and sets a timetable. The agreed-upon actions are followed up, and Internal Audit reports on their status to the Council and executive management on a quarterly basis until the work is completed. RISK TYPES Swedbank defines risk as a potentially negative impact on a company that can arise due to current internal processes or future internal or external events. The concept of risk comprises the probability that an event will occur and the impact it would have on the Group s earnings, equity or value. The risk management process includes eight steps: prevent risks, identify risks, quantify risks, analyse risks, suggest measures, control and monitor, report risks, and, lastly, follow-up risk management. The process encompasses all types of risk and results in a description of Swedbank s risk profile, which in turn serves as the basis of the internal capital adequacy assessment process. Risk Credit risks Market risks Liquidity risks Operational risks Compliance risks Other risks Description The risk that counterparty will not meet its financial obligations to the Group and the risk that pledged collateral does not cover the claims. The credit risk includes counterparty risk, concentration risk and settlement risk. The risk to value, earnings, or capital arising from movements of risk factors in financial markets. This risk includes Interest rate risk (including real and nominal interest rates, credit spreads, and basis spreads), Currency risk, Equity risk (including Dividend risk), Commodity risk (including precious metals) and risks from changes in volatilities or correlations. The risk that Swedbank cannot fulfil its payment commitments at maturity or when they fall due. The risk of losses resulting from inadequate or failed internal processes, people and systems, or from external events. The definition of operational risk includes legal risk and information risk. The risks that exist of failure by the Group to fulfil its obligations pursuant to laws, statutes and other regulations applicable to the operations subject to authorisation. Includes business risk, pension risk, strategic risk and reputational risk.

23 Swedbank AS, Annual Report CREDIT RISK DEFINITION Credit risk refers to the risk that a counterparty or borrower fails to meet their contractual obligations towards Swedbank and the risk that pledged collateral will not cover the claim. Credit risk also includes counterparty risk, concentration risk and foreign exchange settlement risk. Counterparty risk is the risk that a Counterparty to a trading transaction would not meet its financial obligations towards Swedbank and that collateral held would not be enough to cover the claims. This definition encompasses repurchase agreements, derivatives, securities financing transactions. Concentration risk is the risk related to large individual exposures as well as significant exposures to groups of counterparties whose probability of default is driven by common underlying factors, e.g. sector, economy, geographical location or type of instrument. Foreign exchange settlement risk is the risk that occurs for transactions when exchange of delivery/payment is not done simultaneously and exists until the bank has secured that the counterparty has fulfilled its obligations. RISK MANAGEMENT A central principle in Swedbank s lending is that each business unit has full responsibility for its credit risks, and that credit decisions adhere to the credit process, are made in accordance with applicable rules, and are in line with the bank s business and credit strategies. Depending on the size and nature of each credit, a lending decision can be made, for example, by an officer with help from system support or by a credit committee. The business unit has full commercial responsibility regardless of who makes the ultimate decision, including responsibility for internal credit control. The duality principle provides guidance for credit risk management within the Group. The principle is reflected in the independent credit organisation, decision making bodies and credit processes. Each business unit is responsible for ensuring that internal control is integrated in all lending and monitoring. The risk classification system is a key part of the credit process; it comprises work and decision-making processes for lending, credit monitoring, and quantification of credit risk. The decision to grant credit requires that there are good grounds to expect that the borrower can fulfil his or her commitment to the Group. In addition, adequate and sufficient collateral must be pledged for the credit. MEASUREMENT OF CREDIT RISKS The vast majority of Swedbank s lending to the public has been rated according to Swedbank s internal rating system. The rating aims at forecasting the probability of default within a 12-months period. In beginning of 2009 the Bank has received approval from the Latvian and Swedish Financial Supervisory Authority for the Internal rating based (the IRB) approach, and it is consequently the method used to calculate most of the capital requirement for credit risk. The IRB approach is used for the absolute majority of credit exposures, with sovereign credit exposures being the main exception. Swedbank s internal risk classification system is the basis for: Risk assessment and credit decisions Calculating risk-adjusted returns (including RAROC) Monitoring and managing credit risks (including migrations) Reporting credit risks to local Management board Developing credit strategies and associated risk management activities Calculating capital requirements and capital allocation. The risk class is assessed and decided on as part of credit decisions. The class also affects requirements on the scope of the analysis and the documentation and governs how customers are monitored. In this way, low-risk transactions can be approved through a simpler and faster credit process. Risk classification is also a key element in monitoring individual credit exposures. The system governs the monitoring processes in ensuring, for example, that a weak risk class will be tested separately, followed by a decision on possible measures. The goal of the risk classification is to predict defaults within 12 months; it is expressed on a scale of 23 classes, where 0 represents the greatest risk and 21 represents the lowest risk of default, with one class for defaulted loans. The table below describes the risk classification and how it relates to the probability of default within 12 months (PD), as well as an indicative rating from Standard & Poor s. Risk grade according to the IRB methodology Internal rating PD (%) Indicative rating Standard & Poor s Defaults Default 100 D High risk 0-5 >5.7 C to B Augmented risk B+ Normal risk BB- to BB+ Low risk <0.5 BBB- to AAA To achieve maximum precision in measurement, the Bank has developed a number of different risk classification models. There are primarily two types of models; one is based on a statistical method, which requires access to a large amount of information on counterparties, and enough information on those counterparties who have defaulted. In cases where the statistical method is not applied, models are created where evaluation criteria is based on expert opinions. The models are validated when introduced, in connection with significant changes and periodically (at least annually). The validation is designed to ensure that each model measures risk satisfactorily. In addition, the models are monitored to assure they function well in daily credit operations. The models indicate the likelihood of default normally on a one-year horizon. Considering that credit commitments usually involve a longer period, the models are also evaluated for a more extended period. In summary, the validations performed to date have shown that the models are statistically highly reliable.

24 Swedbank AS, Annual Report RISK CLASSIFICATION SYSTEM Customer segment Credit institutions Large corporate clients Corporate SMEs (SMEs) Retail SMEs (SSEs) Private individuals Definition All Exposure > 0.8 EURm Exposure EURm Exposure < 0.2 EURm All Application PD dimension Portfolio Risk Classification System for Countries, Bank Systems and Banks LGD dimension CCF dimension - - Corporate Rating System - - SME Application Scoring System SSE Application Scoring System Application Scoring System for Private Persons SME/SSE Portfolio Scoring System SME/SSE Portfolio Scoring System Portfolio Scoring System for Private Persons - - Retail LGD Models Retail LGD Models Retail CCF Models Retail CCF Models Risk classification system for countries, bank systems and banks The Swedbank Group Risk Classification System for countries, bank systems and banks is used to rate credit institutions on their default risk. The system was implemented in the Baltic portfolio in The rating process is based on expert models, and the ratings it produces comply with the TTC (through-the-cycle) concept. Risk rating system for large corporate clients The Corporate Rating System was implemented in Latvia The rating process is based on expert models (combining assessments of quantitative and qualitative factors), where separate models are developed to rate different types of corporate borrowers (such as industrial and real estate companies). The ratings it assigns comply with the TTC (through-the-cycle) concept. Application scoring system for medium-sized companies The SME Application Scoring System is designed to be applied primarily in the credit origination phase to assess the default risk of medium-sized companies. The system was implemented in Latvia in It was upgraded from an expert model to hybrid models in The system enables the assignment of both point-in-time and through-the-cycle estimates of default risk. Application scoring system for small companies The SSE Application Scoring System is designed to be applied primarily in the credit origination phase to assess the default risk of small companies. The system is based on statistical models and has been integrated into the credit decision-making process since early The system enables the assignment of both point-in-time and throughthe-cycle estimates of default risk. Portfolio scoring system for small and medium-sized companies The SME/SSE Portfolio Scoring System is designed to assess the default risk of existing exposures to small and medium-sized companies (SSE and SME customers). The system is based on statistical models that are run on a monthly basis as an automated process by Enterprise Data Warehouse and was first deployed in It enables the assignment of both point-in-time and through-the-cycle PD estimates. Application scoring system for private individuals The Application Scoring System for private individuals is designed to be applied primarily in the credit origination phase to assess the default risk of credit applications received from private individuals. The system is based on statistical models and was first deployed in early The system enables the assignment of both point-in-time and through-the-cycle estimates of default risk. Portfolio scoring system for private individuals The Portfolio Scoring System for private individuals is designed to assess the default risk of existing exposures to private individuals. The system is based on statistical models that are run on a monthly basis as an automated process by Enterprise Data Warehouse. The system was first deployed in It enables the assignment of both point-in-time and through-the-cycle PD estimates. Retail LGD models Retail LGD models are designed to produce LGD estimates for retail exposures to private individuals and SSE customers. The system is based on statistical models that are run on a monthly basis as an automated process by Enterprise Data Warehouse. The system was first deployed in The LGDs assigned on the basis of retail LGD models present downturn estimates of loss given default (i.e. reflect downturn conditions). Retail CCF models Retail CCF models are designed to produce CCF estimates for retail exposures with undrawn limits to private individuals and SSE customers. The system is based on statistical models that are run on a monthly basis as an automated process by Enterprise Data Warehouse. The system was first deployed in IMPAIRMENT POLICY Credit is impaired and losses are incurred if there is evidence of impairment resulting from one or more events that occurred after the initial recognition of a loss event, and the loss event(s) affect the estimated future cash flows of credit that can be reliably estimated. Losses expected as a result of future events are not recognised. Evidence that credit is impaired includes the following loss events: Significant financial difficulty of the issuer or obligor A breach of contract, such as delinquency in interest or principal payments The lender, for economic or legal reasons relating to the borrower s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider It is becoming evident that the borrower will go bankrupt or undergo other financial reorganisation and The disappearance of an active market for the financial asset because of financial difficulties Portfolio provisions can be used if there is data which indicates that there is a decrease in the estimated future cash flows of credit since the initial recognition of the assets, but the decrease cannot be identified with the individual credits in the portfolio, including: Adverse changes in the payment status of borrowers in the group (e.g. an increased number of delayed payments or an increased number of credit card borrowers who have reached their credit limit and are paying the minimum monthly amount) or Economic conditions that correlate with defaults on the credit (e.g. an increase in the unemployment rate in the

25 Swedbank AS, Annual Report geographical area of the borrowers, a decrease in property prices for mortgages in the relevant area, adverse changes in industry conditions that affect the borrowers in the group etc.) In individual assessment, experienced judgement may be used to estimate the amount of any impairment loss. The bank uses its judgement to adjust data for credit to reflect current circumstances. In some cases the data required to estimate the amount of loss on credit may be limited or no longer relevant to the circumstances. For example, this may be the case when a borrower is in financial difficulties and there is little available data relating to similar borrowers. Credit impairments recognised on a group basis represent an intermediate step before impairment losses on individual credits in the group are identified. As soon as information is available which specifically identifies losses on individually impaired credit, this credit is removed from the group. Future cash flows in a group of credits evaluated for impairment are estimated on the basis of historical loss experience for credit with similar characteristics. If there is no specific loss experience or insufficient experience, peer group experience or expert judgment is used. Historical loss experience is adjusted on the basis of current data to reflect the effects of the current conditions, which did not affect the period on which the historical loss experience is based, and to eliminate the effects of conditions that no longer exist. For significant exposures in the corporate segment, individual provisions are made for ratings that imply nonperforming loans. In such cases, the provisions are based on calculations of net present value. In the SME segment, provisions are set at a fixed percentage based on past experience of historical losses in a similar environment. In the private individual segment, provisions are based on product-specific LGDs based on past historical losses in a similar environment. The private individual product portfolio must bear similar risk characteristics and take into account product characteristics accounting for possible changes over time. The following tables summarise the Exposures at Default (EAD) for which credit risk capital requirements are calculated according to IRB and standardized methodologies. The tables include all off-balance sheet items after applying credit conversion factor (CCF) and all assets in balance sheet before impairment provisions on loan portfolio, except intangible assets and treasury bills and bonds which are included in trading portfolio for capital requirement calculations and therefore market risk capital requirement is calculated for them. Group IRB methodology 2015 EAD in thous. EUR Risk grades PD Retail Corporate Institution Other Total Defaults Default High risk 0-5 > Augmented risk Normal risk Low risk < Total rated exposures Total non-rated exposures Total IRB methodology Standardised methodology Central governments and central banks Regional and local governments Public sector authorities Multilateral development banks International Organisations - Credit institutions and investment firms Corporates Retail exposures Secured by mortgages on immovable property Exposures in default 134 Equity 231 Other assets Total standardised methodology Total IRB and standardised methodology

26 Swedbank AS, Annual Report Group IRB methodology 2014 EAD in thous. EUR Risk grades PD Retail Corporate Institution Other Total Defaults Default High risk 0-5 > Augmented risk Normal risk Low risk < Total rated exposures Total non-rated exposures Total IRB methodology Standardised methodology Central governments and central banks Regional and local governments Public sector authorities Multilateral development banks International Organisations Credit institutions and investment firms Corporates Retail exposures Secured by mortgages on immovable property Exposures in default 319 Equity 231 Other assets Total standardised methodology Total IRB and standardised methodology Bank IRB methodology 2015 EAD in thous. EUR Risk grades PD Retail Corporate Institution Other Total Defaults Default High risk 0-5 > Augmented risk Normal risk Low risk < Total rated exposures Total non-rated exposures Total IRB methodology Standardised methodology Central governments and central banks Regional and local governments Public sector authorities Multilateral development banks International Organisations - Credit institutions and investment firms Corporates Retail exposures Secured by mortgages on immovable property Exposures in default 16 Equity Other assets Total standardised methodology Total IRB and standardised methodology

27 Swedbank AS, Annual Report Bank IRB methodology 2014 EAD in thous. EUR Risk grades PD Retail Corporate Institution Other Total Defaults Default High risk 0-5 > Augmented risk Normal risk Low risk < Total rated exposures Total non-rated exposures Total IRB methodology Standardised methodology Central governments and central banks Regional and local governments Public sector authorities Multilateral development banks International Organisations Credit institutions and investment firms Corporates Retail exposures Secured by mortgages on immovable property Exposures in default 144 Equity Other assets Total standardised methodology Total IRB and standardised methodology Maximum credit risk exposure % 2015 % 2014 % 2015 % 2014 Loans to public 74.1% % % % Loans to credit institutions 3.1% % % % Derivatives 0.2% % % % Investments 7.3% % % % Other assets 0.6% % % % Guarantees 2.8% % % % Commitments 11.9% % % % Total 100% % % % The Group's and Bank's most significant risk exposure is in the balance sheet items Loans to credit institutions and Loans to the public. Therefore these are divided into sector/industry and collateral type. Impaired loans Impaired loans are those for which it is likely that payment will not be received in accordance with the contractual terms. A loan is considered impaired when there is objective proof that a loss event has occurred at an individual level after the loan s first reporting date and a loss arises when the loan s anticipated future cash flows differ from the contractual cash flows (both discounted by the loan s original effective interest rate). Loss events on an individual level include when a borrower incurs significant financial difficulties, when it is likely that the borrower will file for bankruptcy or liquidation, when the borrower is facing a financial reconstruction, a breach of contract such as late or nonpayment of interest or principal, or various concessions due to the borrower s financial difficulties. Exposures overdue by more than 90 days or those for which the terms have changed in a significant manner due to the borrower s financial difficulties are automatically considered impaired loans. A loan is not impaired if there is collateral that covers the principal, unpaid interest and any late fees by a satisfactory margin. Forborne loans Forborne loans refer to loans whose contractual terms have been amended due to the customer s financial difficulties. The purpose of the forbearance measure is to get the borrower current on their payments again, or when this is not considered possible to maximise the repayment of outstanding loans. Changes in contractual terms include various forms of concessions such as amortisation suspensions, reductions in interest rates to below market rate, forgiveness of all or part of the loan, or issuance of new loans to pay overdue amounts or avoid default. Changes in contractual terms may be so significant that the loan is also considered impaired, which is the case if the forbearance measure reduces the original loan s carrying amount regardless of concessions. The forborne loan s carrying amount is determined by discounting future anticipated cash flows by the original loans s effective interest rate. Before a forborne loan ceases being reported as forborne all the criteria set by the European Banking Authority must be met.

28 Swedbank AS, Annual Report Impaired, past due, restructured and foreborne loans Impaired loans Carrying amount before provisions Provisions Carrying amount after provisions Share of impaired loans, net, % 2.08% 2.66% 2.09% 2.60% Share of impaired loans, gross, % 3.55% 4.82% 3.57% 4.74% Past due loans that are not impaired 5-30 days days more than 60 days Total Recognised value of restructured loans that are not impaired or past due Recognised value of impaired loans returned in status to normal loans during the reporting period Forborne loans Group Bank Performing Non-performing Total

29 Swedbank AS, Annual Report Group 2015 Loans which are not impaired Impaired loans Total Before portfolio provisions Sector/industry Performing Past due more than 60 days Portfolio provisions After portfolio provisions Before provisions Provisions After provisions Loans after provisions Private customers Mortgage loans, private Other, private Corporate customers Agriculture, forestry, fishing Manufacturing Public sector and utilities Construction Retail Transportation Shipping Hotels and restaurants Information and communications Finance and insurance Property management Professional services Other corporate lending Lending to the public, excl. repos Credit institutions Repurchase agreements public Loans to the public and credit institutions Loans by type of collateral held as security Real estate residential Real estate commercial Guarantees Cash Unsecured Other collateral Lending to the public, excl. repos Credit institutions Repurchase agreements - public Loans to the public and credit institutions

30 Swedbank AS, Annual Report Group 2014 Loans which are not impaired Impaired loans Total Before portfolio provisions Sector/industry Performing Past due more than 60 days Portfolio provisions After portfolio provisions Before provisions Provisions After provisions Loans after provisions Private customers Mortgage loans, private Other, private Corporate customers Agriculture, forestry, fishing Manufacturing Public sector and utilities Construction Retail Transportation Shipping Hotels and restaurants Information and communications Finance and insurance Property management Professional services Other corporate lending Lending to the public, excl. repos Credit institutions Repurchase agreements public Loans to the public and credit institutions Loans by type of collateral held as security Real estate residential Real estate commercial Guarantees Cash Unsecured Other collateral Lending to the public, excl. repos Credit institutions Repurchase agreements public Loans to the public and credit institutions

31 Swedbank AS, Annual Report Bank 2015 Loans which are not impaired Impaired loans Total Before portfolio provisions Sector/industry Performing Past due more than 60 days Portfolio provisions After portfolio provisions Before provisions Provisions After provisions Loans after provisions Private customers Mortgage loans, private Other, private Corporate customers Agriculture, forestry, fishing Manufacturing Public sector and utilities Construction Retail Transportation Shipping Hotels and restaurants Information and communications Finance and insurance Property management Professional services Other corporate lending Lending to the public, excl. repos Credit institutions Repurchase agreements public Loans to the public and credit institutions Loans by type of collateral held as security Real estate residential Real estate commercial Guarantees Cash Unsecured Other collateral Lending to the public, excl. repos Credit institutions Repurchase agreements - public Loans to the public and credit institutions

32 Swedbank AS, Annual Report Bank 2014 Loans which are not impaired Impaired loans Total Before portfolio provisions Sector/industry Performing Past due more than 60 days Portfolio provisions After portfolio provisions Before provisions Provisions After provisions Loans after provisions Private customers Mortgage loans, private Other, private Corporate customers Agriculture, forestry, fishing Manufacturing Public sector and utilities Construction Retail Transportation Shipping Hotels and restaurants Information and communications Finance and insurance Property management Professional services Other corporate lending Lending to the public, excl. repos Credit institutions Repurchase agreements - public Loans to the public and credit institutions Loans by type of collateral held as security Real estate residential Real estate commercial Guarantees Cash Unsecured Other collateral Lending to the public, excl. repos Credit institutions Repurchase agreements - public Loans to the public and credit institutions

33 Swedbank AS, Annual Report Provisions Total allowance for loan losses at the beginning of the year, including: loans - specifically assessed loans - collectively assessed Charge: loans - specifically assessed loans - collectively assessed Release: loans - specifically assessed loans - collectively assessed Allowance charged to the statement of income, net, including: loans - specifically assessed loans - collectively assessed Change of allowance due to write-offs: Effect of changes in currency exchange rates: Total allowance for loan losses at the end of the year, including: loans - specifically assessed loans - collectively assessed Repossessed assets Group Carrying Carrying amount Fair value amount Fair value Land and buildings Leasing objects Other Total Bank Carrying Carrying amount Fair value amount Fair value Land and buildings Other Total

34 Swedbank AS, Annual Report Liquidity risks DEFINITION Liquidity risk refers to the risk that the Group will not be able to meet its payment obligations at maturity. FINANCING AND LIQUIDITY STRATEGY Group Treasury has overarching responsibility for managing the Group s liquidity within the framework for the mandates established by Swedbank Group Board of Directors and Swedbank Group CEO. The Group s financing strategy and liquidity buffer are significant factors in liquidity risk management. Managing liquidity risks is a significant aspect of Swedbank s operations. Liquidity risk is continuously measured, controlled, forecast and analysed based on various time periods with the purpose of ensuring that Swedbank can always meet its payment obligations on time and without being forced to quickly sell assets on unfavourable terms. RISK MEASUREMENT Aside from Group Treasury s overarching responsibility, Group Risk identifies all relevant aspects of liquidity risk and measures and monitors liquidity risks on a daily basis. Swedbank uses a number of methods and systems to ensure it can meet its payment obligations and commitments every day, under normal as well as stressed conditions. Managing intra-day payments includes monitoring and verifying that payment obligations are executed punctually and that any financing needs are identified. Group liquidity risk methodology is used in measuring liquidity risk for Swedbank. The calculation of liquidity risk is based on the future contractual cash flows, which are netted and accumulated over time. Swedbank has defined the minimum limits on cumulative cash flow projections and survival horizon in total and in the main currencies. Swedbank also monitors liquidity risks through additional measures including LCR and NSFR. According to the requirements of Financial and Capital Market Commission in Latvia Swedbank has to maintain at least 30% highly liquid reserves: Cash Balances with Latvian Central Bank up to 30 days Loans to credit institutions up to 30 days Liquid securities Total liquid assets Liquidity ratio for Bank 54.24% 43.83% In addition to daily liquidity risk measurement, Swedbank performs stress tests regularly to increase readiness for liquidity disturbances such as, for example, a severe bank run. The stress tests take both idiosyncratic and market-related problems into account, whereas analyses encompass the effect of a combination of the two. In these tests, the Bank constructs unlikely but still possible adverse scenarios, which trigger a range of risk drivers - client withdrawals of deposits, severe utilization of customer credit lines and general price fall of the assets in the liquidity portfolio. CAPITAL REQUIREMENT FOR LIQUIDITY RISK Today banks and financial institutions do not face any capital requirements for liquidity risk. However, disruptions to liquidity can arise due to an imbalance between risk and capital. The purpose of the internal capital adequacy assessment process is to prevent this type of imbalance. Consequently, a conservative view of liquidity risks is important to the capital process. The Group s liquidity needs are assessed annually in the internal liquidity adequacy assessment process (ILAAP).

35 Swedbank AS, Annual Report Maturity report Based on remaining contractual maturity Group 2015 Assets Payable on demand < 3 mths. 3 mths.- 1yr. 1-5 yrs yrs. > 10 yrs. No maturity Cash and balances with central banks Treasury bills and other bills eligible for refinancing with central banks, etc Loans to credit institutions Loans to the public Bonds and other interest-bearing securities Shares and participating interests Derivatives Intangible fixed assets Tangible assets Other assets Total, 31 December Total Liabilities Amounts owed to credit institutions Amounts owed to other financial organisations Deposits and borrowings from the public Derivatives Other liabilities Equity Total, 31 December Group 2014 Assets Payable on demand < 3 mths. 3 mths.- 1yr. 1-5 yrs yrs. > 10 yrs. No maturity Cash and balances with central banks Treasury bills and other bills eligible for refinancing with central banks, etc Loans to credit institutions Loans to the public Bonds and other interest-bearing securities Shares and participating interests Derivatives Intangible fixed assets Tangible assets Other assets Total, 31 December Liabilities Amounts owed to credit institutions Amounts owed to other financial organisations Deposits and borrowings from the public Derivatives Other liabilities Equity Total, 31 December Total

36 Swedbank AS, Annual Report Maturity report Based on remaining contractual maturity Bank 2015 Payable on demand < 3 mths. 3 mths.- 1yr. 1-5 yrs yrs. > 10 yrs. No maturity 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 the public Bonds and other interest-bearing securities Shares and participating interests Investments in Group entities Derivatives Intangible fixed assets Tangible assets Other assets Total, 31 December Total Liabilities Amounts owed to credit institutions Amounts owed to other financial organisations Deposits and borrowings from the public Derivatives Other liabilities Equity Total, 31 December Bank 2014 Assets Payable on demand < 3 mths. 3 mths.- 1yr. 1-5 yrs yrs. > 10 yrs. No maturity Cash and balances with central banks Treasury bills and other bills eligible for refinancing with central banks, etc Loans to credit institutions Loans to the public Bonds and other interest-bearing securities Shares and participating interests Investments in Group entities Derivatives Intangible fixed assets Tangible assets Other assets Total, 31 December Liabilities Amounts owed to credit institutions Amounts owed to other financial organisations Deposits and borrowings from the public Derivatives Other liabilities Equity Total, 31 December Total

37 Swedbank AS, Annual Report Undiscounted cash flows Undiscounted cash flows describe liability side outflows which are presented by nominal contract amounts with all contractual unpaid interest payments till the end of the contract. For remaining liabilities discounted and undiscounted cash flows are the same as shown in maturity table. Group 2015 Liabilities < 3 mths. 3 mths.- 1yr. 1-5 yrs yrs. > 10 yrs. Total Amounts owed to credit institutions Amounts owed to other financial organisations Deposits and borrowings from the public Future contractual interest payments Total, 31 December Group 2014 < 3 mths. 3 mths.- 1yr. 1-5 yrs yrs. > 10 yrs. Total Liabilities Amounts owed to credit institutions Amounts owed to other financial organisations Deposits and borrowings from the public Future contractual interest payments Total, 31 December Bank 2015 < 3 mths. 3 mths.- 1yr. 1-5 yrs yrs. > 10 yrs. Total Liabilities Amounts owed to credit institutions Amounts owed to other financial organisations Deposits and borrowings from the public Future contractual interest payments Total, 31 December Bank 2014 < 3 mths. 3 mths.- 1yr. 1-5 yrs yrs. > 10 yrs. Total Liabilities Amounts owed to credit institutions Amounts owed to other financial organisations Deposits and borrowings from the public Future contractual interest payments Total, 31 December

38 Swedbank AS, Annual Report Market risks Risk profile Swedbank s market risks are generally considered low. The main market risks are of a structural or strategic nature and relate to the interest rate risk that arises as a natural part of the Group s operations e.g. when customers demand different fixed interest terms on deposits and loans. In addition, market risks arise in the financial products that the bank offers to meet customer needs. Definition The risk to value, earnings, or capital arising from movements of risk factors in financial markets. This risk includes Interest rate risk (including real- and nominal interest rates, credit spreads, and basis spreads), Currency risk, Equity risk (including Dividend risk), and Commodity risk (including precious metals) and risks from changes in volatilities or correlations. Risk management The Group s total risk-taking is governed by the risk appetites decided by the Group Board, which limit the nature and size of financial risk-taking. Only so-called risk-taking units, including ones within Swedbank, i.e. units assigned a risk mandate by the Swedbank Group CEO, are permitted to take market risks. To monitor the limits allocated by the Swedbank Group CEO, the Group s Chief Risk Officer has also established limits as well as various types of indicators that, when they reach certain levels, indicate an elevated risk in particular activities. In addition to the Chief Risk Officer s limits and selected indicators, local business area limits serve as important tools in the risk-taking units daily activities. The Group s market risk analysis department is responsible, on a daily basis, for measuring, monitoring and reporting market risks within Swedbank. The majority of the Swedbank market risks are of a structural nature and are managed primarily by Group Treasury. Structural interest rate risks are natural in a bank that handles deposits and loans. Interest rate risk arises primarily when there is a difference in maturity between the Group s assets and liabilities. They are managed by Group Treasury, within given mandates, largely by matching these maturities either directly or through the use of various derivatives such as interest rate swaps. Risk measurement Swedbank uses a number of different risk measures, both statistical and non-statistical, to guide the Group s risk-taking units and ensure strict compliance. Statistical measures such as Value-at-Risk (VaR) and Stressed Value-at-Risk (SVaR) are important tools in Swedbank s risk management process. VaR uses a model to estimate a probability distribution for the change in value of Swedbank s portfolios based on the last year s movements in various market risk factors. VaR is a useful tool not only to determine the risk level for an individual security or asset class, but mainly to compare levels between various risk factors. Non-statistical measures such as sensitivity analyses are an important complement to VaR and SVaR, since in some cases they provide a deeper understanding of the market risk factors being measured. In addition to VaR and various types of sensitivity analyses, Swedbank conducts an array of stress tests. These tests can be divided into three groups: historical, forward-looking and method and model stress scenarios. The purpose of these stress tests, and the scenarios that serve as a basis for them, is to further identify significant movements in risk factors or losses that could arise due to exceptional market disruptions. Interest rate risk Interest rate risk refers to the risk that the value of the Group s assets, liabilities and interest-related derivatives will be negatively affected by changes in interest rates or other relevant risk factors. The majority of the Group s interest rate risks are structural and arise within the banking operations when there is a mismatch between the interest fixing periods of assets and liabilities, including derivatives. The interest rate risk in fixed rate assets, primarily customer loans, accounts for the large part of this risk and is hedged through fixed-rate funding or by entering into various types of swap agreements. Interest rate risk also arises within trading operations through customerrelated activities. Sensitivity analysis Group Group Change Net interest income, 12 months Increased interest rates +1%-p.p Decreased interest rates -1%-p.p Change in value Market interest rate Exchange rates +1%-p.p %-p.p % % The methodology for performing the NII sensitivity was changed in The NII sensitivity calculation covers all interest bearing assets and liabilities, on and off balance, on a contractual level in the banking book. It is a static analysis with parallel shifts across the interest rate curve that takes place over-night, and illustrates the effect on NII for a 12 month period. Maturing assets and liabilities during the 12 month period are assumed to be repriced to the existing contractual interest rate +/- the shift. The assets that are re-priced are assumed to have the same interest rate throughout the remaining part of the 12-month period. In the positive shift transaction accounts are assumed to have 0% elasticity (i.e. there is no adjustment made to the paid interest) while all other deposits have a 100% elasticity to changes in the market rate (i.e. adjustments are made to the interest paid). In the negative shift all deposits are assumed to have 100% elasticity to the respective floors. In the negative shift scenarios a floor on contractual rates for deposits is applied, i.e. for deposits from the public a floor of 0% is applied on the contractual rate. All other balance sheet items are allowed to go to negative contractual rates. Currency risk Currency risk refers to the risk that the value of the Group s assets and liabilities, including derivatives, may fluctuate due to changes in exchange rates or other relevant risk factors. The Group s currency risks are managed by adapting the total value of assets and liabilities, including derivatives, in the same currency to the desired level. This is mainly done using derivatives, such as cross currency swaps and forward exchange agreements. Share price risk Share price risk refers to the risk that the value of the Group s holdings of shares and share-related derivatives may be affected negatively by changes in share prices or other relevant risk factors. There is no share price risk in Swedbank portfolios as risk taking mandate is not assigned. Commodity risk Commodity risk refers to the risk that the value of the Group s holdings of commodity related derivatives will be negatively affected by a change in asset prices. The exposure to commodity risks arises in the Group only in exceptional cases as part of customer related products. All positions with a commodity exposure must always be hedged with another party so that no open exposure remains. As of 31 December 2015 Swedbank had no open commodity exposures.

39 Swedbank AS, Annual Report Interest repricing maturity report Group 2015 < 1 mths. 1-3 mths. Assets 3 mths.- 1yr. 1-2 yrs. 2-5 yrs. > 5 yrs. Noninterest bearing assets Cash and balances with central banks Loans to credit institutions Securities Loans to the public Tangible and intangible assets Other assets Total, 31 December Total Liabilities Amounts owed to credit institutions and other financial organisations Deposits and borrowings from the public Other liabilities Equity Total, 31 December Balance sheet interest sensitivity gap Off balance sheet interest sensitivity gap Group 2014 Assets < 1 mths. 1-3 mths. 3 mths.- 1yr. 1-2 yrs. 2-5 yrs. > 5 yrs. Noninterest bearing assets Cash and balances with central banks Loans to credit institutions Securities Loans to the public Tangible and intangible assets Other assets Total, 31 December Liabilities Amounts owed to credit institutions and other financial organisations Deposits and borrowings from the public Other liabilities Equity Total, 31 December Total Balance sheet interest sensitivity gap Off balance sheet interest sensitivity gap

40 Swedbank AS, Annual Report Interest repricing maturity report Bank 2015 Assets < 1 mths. 1-3 mths. 3 mths.- 1yr. 1-2 yrs. 2-5 yrs. > 5 yrs. Noninterest bearing assets Cash and balances with central banks Loans to credit institutions Securities Loans to the public Tangible and intangible assets Other assets Total, 31 December Total Liabilities Amounts owed to credit institutions and other financial organisations Deposits and borrowings from the public Other liabilities Equity Total, 31 December Balance sheet interest sensitivity gap Off balance sheet interest sensitivity gap Bank 2014 Assets < 1 mths. 1-3 mths. 3 mths.- 1yr. 1-2 yrs. 2-5 yrs. > 5 yrs. Noninterest bearing assets Cash and balances with central banks Loans to credit institutions Securities Loans to the public Tangible and intangible assets Other assets Total, 31 December Total Liabilities Amounts owed to credit institutions and other financial organisations Deposits and borrowings from the public Other liabilities Equity Total, 31 December Balance sheet interest sensitivity gap Off balance sheet interest sensitivity gap

41 Swedbank AS, Annual Report Currency risk Currency risk refers to the risk that the value of the Group s assets and liabilities, including derivatives, may fluctuate due to changes in exchange rates or other relevant risk factors. The Group s currency risks are managed by adapting the total value of assets and liabilities, including derivatives, in the same currency to the desired level. This is mainly done using derivatives, such as cross currency interest rate swaps and forward exchange agreements. Currency distribution Group 2015 EUR USD Other Total Assets Cash and balances with central banks Loans to credit institutions Loans to the public Interest-bearing securities Other assets Total Liabilities Amounts owed to credit institutions Amounts owed to other financial organisations Deposits and borrowings from the public Other liabilities Equity Total Off balance sheet net notional position Net position in currency Group 2014 EUR USD LTL Other Total Assets Cash and balances with central banks Loans to credit institutions Loans to the public Interest-bearing securities Other assets Total Liabilities Amounts owed to credit institutions Amounts owed to other financial organisations Deposits and borrowings from the public Other liabilities Equity Total Off balance sheet net notional position Net position in currency

42 Swedbank AS, Annual Report Currency distribution Bank 2015 EUR USD Other Total Assets Cash and balances with central banks Loans to credit institutions Loans to the public Interest-bearing securities Other assets Total Liabilities Amounts owed to credit institutions Amounts owed to other financial organisations Deposits and borrowings from the public Other liabilities Equity Total Off balance sheet net notional position Net position in currency Bank 2014 EUR USD LTL Other Total Assets Cash and balances with central banks Loans to credit institutions Loans to the public Interest-bearing securities Other assets Total Liabilities Amounts owed to credit institutions Amounts owed to other financial organisations Deposits and borrowings from the public Other liabilities Equity Total Off balance sheet net notional position Net position in currency

43 Swedbank AS, Annual Report Operational risks DEFINITION Operational risk refers to the risk of losses resulting from inadequate or failed internal processes or procedures, human error, faulty systems or external events. The definition includes legal risk and information risk. Risk management Operational risks are inherent in any business activities. It is not cost-efficient to attempt to eliminate all operational risks, nor is it possible to do so. Swedbank seeks to maintain the lowest possible level of operational risks, taking into account market sentiment and regulations, as well as our strategy, rating ambitions and capacity to absorb operational risk losses. Larger losses of material significance are rare, and Swedbank seeks to reduce the likelihood of these through relevant operational risk control, continuity management and compliance to maintain readiness for events that could cause financial losses, reputational damage or impact the availability of our services. Risk-based planning During 2015, risk-based planning was centralized and merged with overall operational planning. Coordination and information sharing between Group Risk, Group Compliance and Internal Audit was improved. Reporting Operational risk reporting takes place in the form of regular reporting and immediate escalation. Comprehensive reports are presented to the country Board and the Head of Baltic Banking on a monthly basis (operational risks deviations are reported in the monthly Group CRO report) and to the Group Risks and the Baltic Banking Risk and Compliance Committee on the quarterly basis. During 2015, work related to the risk limit framework continued and the risk limits were set. Risk and Control Self-Assessments One of the main risk identification tools for effective risk management is an internationally accepted method RCSA, which is performed by the main business areas and Group Functions. The tool is used to identify the risks, analyse them and prepare the mitigation actions to keep operational risks within accepted levels. New Product Approval During 2015 the NPAP was aligned with existing product and project management processes. It is designed to emphasize the responsibility of the business areas for risk identification, analysis and mitigation. Risk Control contributes with an expert evaluation of the risk analysis process and the residual risks and has the mandate to halt changes, where residual risks could exceed the risk appetite and the underlying limits. Business Continuity Management Swedbank s principles for Business Continuity Management are defined in a Group-level framework. Crisis Management teams are available both on Group and local levels to coordinate and communicate internally and externally. In addition, Business Continuity Plans are in place for all critical processes, for IT systems supporting these processes, and for services that are critical for society in the countries where Swedbank operates. The plans are implemented on Group and local levels and describe how Swedbank shall operate in the event of a severe business disruption or potential crisis situation. Swedbank s Business Continuity and Crisis Management models are derived from the international standard ISO/IEC ISO 22301:2012 Societal security - Business continuity management systems. Control supports the business areas in reporting, analysing and implementing action plans to ensure that risk drivers are identified and properly managed. Operational risk incidents and losses are reported to the database for aggregation and further analysis. Risk management maturity assessment The risk management maturity assessment tool was introduced in 2014 and is a scorecard used by Risk Control to assess the Business risk management maturity level in various topics. A high risk-management maturity level within the Business indicates a strong risk culture and risk awareness which in turn reduces the threat of unforeseen losses and keeps business assets secure and safe. Recovery Planning The Group has established a Group-level Recovery Plan in accordance with the Bank Recovery and Resolution Directive (BRRD) regulatory framework and complemented by the guidelines and technical standards issued by the EBA. The Recovery Plan describes a set of measures that can be applied in distress to restore the sound financial position of Swedbank and to ensure the continuity of critical financial services provided by Swedbank Group in all home markets. Information risk, a part of Operational risk, and Information Security Swedbank has an internal regulation, based on international Information Security Forums Standard of Good Practice for Information Security, which describes information protection. Continuous work to improve and redefine processes in order to strengthen the Information Security Management System is ongoing. Several cybercrime-mitigating activities are constantly improved. Insurance policies Swedbank has insurance protection for significant parts of its operations and maintains several insurance programs to mitigate operational risks (and other types of risks). The insurance programs include Crime, Professional Liability, Directors and Officers Liability, and Property insurance. Compliance Compliance risk refers to the risk that the bank, by breaching laws, regulations and policies (external and/or internal), will fail to meet the standards and behaviour expected by external counterparties. Swedbank s internal regulation comprises rules for managing compliance risk. The central component of the internal regulation is Policy for the Compliance Function. The aim of the internal rules is to ensure that the Swedbank always meets the quality requirements and standards of behaviour expected by customers and financial regulators. Compliance function monitors and concludes controls of business activities, provides training and advice, is involved in assessing business risks and development of new products and services. Swedbank complies with the international standards and EU legislation for prevention of money laundering and terrorist financing. Anti Money Laundering function is regulated by internal Policy on Anti Money Laundering and Countering Terrorist Financing. Swedbank has professional staff, necessary screening and monitoring systems and internal procedures for combating money laundering and financing of terrorism, also for complying with restrictions imposed by international sanctions. Incident management Swedbank has established procedures and systems which support managing, reporting and following up on incidents. Risk

44 Swedbank AS, Annual Report Capital Internal capital assessment Purpose The internal capital adequacy assessment process (ICAAP) aims to ensure that the Group, including its subsidiaries are adequately capitalized to cover its risks and to conduct and develop its operations. The ICAAP therefore takes into account all relevant risks that arise within the Group. Measurement Types of risk Swedbank calculates Pillar 2 capital for all relevant risk types identified. Strategic risk and reputational risk are handled indirectly within the capital adequacy assessment, as the capital buffer implicitly protects against such risks. These risks remain an important part of the Group s potential exposure and are carefully monitored and managed. Risk type Pillar 1 Pillar 2 Capital is allocated Contributes to calculated capital need? Credit risk Yes Yes Concentration risk (in Credit) Yes Yes Market risk Yes Yes Market risk: Interest rate risk in banking book No Yes Operational risk Yes Yes Business risk: Earnings volatility risk No Yes 1 Insurance risk 2 Yes Yes Risks in post-employment benefits 3 No Yes Strategic risk: Business plans No Yes Strategic risk: Projects and acquisitions No Yes, as a one-off No specific capital is Identified and allocated mitigated? Reputational risk No Yes Liquidity risk No Yes, stress tests Strategic risk: Decision risk No Yes 1. Only relevant for the Baltic subsidiaries. 2. Insurance risk is relevant for Swedbank Group, but not relevant for Swedbank. 3. Risks in post-employment benefits are relevant for Swedbank Group, but not relevant for Swedbank. The adverse ICAAP scenario To ensure efficient use of capital, to meet minimum legal capital requirements and maintain access to capital markets even under adverse market conditions, the Group conducts scenario-based simulations and stress tests at least once a year. The analyses provide an overview of the most important risks that the Group is exposed to by quantifying the impact on the income statement and balance sheet as well as the capital base and risk exposure amount calculated according to the capital adequacy rules. The 2015 ICAAP adverse scenario represents Swedbank s home markets exposed to a house price shock with high unemployment rates. An additional trigger is a further escalation of the geopolitical tensions. Eurozone slides into another recession. Swedish and Baltic gross domestic products fall sharply due to rapidly falling exports. The scenario s severity level is set on the conservative side; when comparing Swedish historic economic crises with similar macro developments, these appear less frequently than 1 in 25 years. The 2014 ICAAP results state that Swedbank Group and its Baltic subsidiaries, including Swedbank AS (Latvia) demonstrate strong resilience throughout the scenario, even during the years with the highest stress level and would meet the anticipated Pillar 1 regulatory requirements each year of the three-year scenario horizon. Capital adequacy analysis Under the EU Capital Requirements Regulation (CRR), a bank s total capital must be equivalent to at least the sum of the capital requirements for credit- market- and operational risks, including capital buffers and potential Pillar 2 add-ons. Besides a capital conservation buffer of 2.5%, the Latvian financial supervisory authority (FSA) has introduced additional requirements for systemically important financial institutions, however without setting O-SII capital buffer requirements so far. The capital conservation buffer came into force in 2014, while the countercyclical capital buffer is applied starting 1 February Swedbank was identified as a systemically important institution in the Latvian FSA s decision of 29 December 2015, whereas an assignment of institution-specific O-SII buffer requirements (up to 2%) may take place during This means that the capital requirement for Swedbank CS in Pillar 1, as a percentage of REA, amounts to 7% in CET1 capital and 10.5% in Total capital. In addition, the capitalisation of Swedbank CS must comply with the capital requirement in Pillar 2. As a backstop rule, Swedbank CS also needs to comply with the Basel 1 floor, i.e. 80% of the capital requirements according to Basel 1. At 31 December 2015, Swedbank CS s Common Equity Tier 1 and Total Capital ratio were 40.17% and 40.17%, respectively. The actual total capital at end-2015 exceeded the capital requirement according to the Basel 1 floor by EUR 865.8m. Hence, the capitalisation of Swedbank CS is maintained above the capital requirements according to CRR/CRDIV and the Basel 1 floor with adequate buffers. Swedbank CS leverage ratio was 17.88% (18.11%) at end-2015 (end-2014). In the 2015 Supervisory Review and Evaluation Process (SREP), Swedbank CS was assessed to be adequately capitalised (including Pillar 2 risks) and able to comply with regulatory capital requirements going forward. Capital base Risk-exposure amount Tier 1 capital ratio, % 40.17% 34.28% 39.28% 33.88% Total capital ratio, % 40.17% 34.28% 39.28% 33.88% Estimated capital requirements, Latvia Consolidated Situation Total minimum capital requirement, % 8.00% 8.00% 8.00% 8.00% Capital conservation buffer (CCoB), % 2.50% 2.50% 2.50% 2.50% Individual Pillar 2 charge, % 2.30% % - Capital requirements, % 12.80% 10.50% 12.80% 10.50%

45 Swedbank AS, Annual Report Capital base Primary capital (Tier 1) Share capital Reserves Retained earnings from previous periods Intangible assets Deferred tax assets Deferred tax assets - Transitional Period Value adjustments due to the requirements for prudent valuation Expected loss exceeding value adjustments and provisions Total Tier Total Tier Capital base, total Capital requirement Capital requirement for credit risks, standardized approach Central governments and central banks Regional and local governments Public sector authorities Credit institutions and investment firms Corporates Retail exposures Secured by mortgages on immovable property Exposures in default Equity Other assets Capital requirement for credit risks, internal ratings based approach Corporate exposures Retail exposures Credit institutions and investment firms Other items Total capital requirement for credit risk Capital requirement for market risks Foreign exchange risk capital requirement Capital requirement for interest rate risk Total capital requirement for market risk Capital requirement for operational risks Operational risk standardized approach Total capital requirement for operational risk Capital requirement for credit valuation adjustment Standardised method Total capital requirement for credit valuation adjustment Total capital requirement

46 Swedbank AS, Annual Report Capital requirement Group Average Average EAD risk weight Capital requirement EAD risk weight Credit risks according to standardized approach Capital requirement Central governments and central banks % % 197 Regional and local governments % % 645 Public sector authorities % % 80 Multilateral development banks % % - International Organisations - 0% % - Credit institutions and investment firms % % Corporates % % Retail exposures % % Secured by mortgages on immovable property % % 975 Exposures in default % % 26 Equity % % 18 Other assets % % 749 Credit risks according to IRB - Corporate exposures % % Retail exposures % % Credit institutions and investment firms % % Other items % % Total % % Bank Credit risks according to standardized approach EAD Average risk weight Capital requirement EAD Average risk weight Capital requirement Central governments and central banks % % 197 Regional and local governments % % 623 Public sector authorities % % 77 Multilateral development banks % % - International Organisations - 0% % - Credit institutions and investment firms % % Corporates % % Retail exposures % % Secured by mortgages on immovable property % % 974 Exposures in default % % 12 Equity % % Other assets % % 417 Credit risks according to IRB - Corporate exposures % % Retail exposures % % Credit institutions and investment firms % % Other items % % Total % %

47 Swedbank AS, Annual Report Net interest income Group Average balance Interest Average annual interest rate, % Average balance Interest Average annual interest rate, % Balances with central banks % % Loans to credit institutions % % Loans to the public % % Interest-bearing securities % % Interest-bearing assets % % Derivatives Other assets Total assets % % Balances with central banks Amounts owed to credit institutions and other financial organisations % % Deposits and borrowings from the public % % of which deposit guarantee fees Interest-bearing liabilities % % Derivatives Other liabilities Total liabilities % % Equity Total liabilities and equity % % Net interest income Investment margin 2.20% 2.37% 1 In 2015 interest expense generated by negative interest rate on balances with Central bank. 2 In 2015 interest expense contains expenses of 349 thous. EUR generated by negative deposit interest rate. 3 In 2014 interest expense from amounts owed to credit institutions and other financial organisations contains penalty of thous. EUR paid to parent company for termination of Funding agreement.

48 Swedbank AS, Annual Report Bank Average balance Interest Average annual interest rate, % Average balance Interest Average annual interest rate, % Balances with central banks % % Loans to credit institutions % % Loans to the public % % Interest-bearing securities % % Interest-bearing assets % % Derivatives Other assets Total assets % % Balances with central banks Amounts owed to credit institutions and other financial organisations % % Deposits and borrowings from the public % % of which deposit guarantee fees Interest-bearing liabilities % % Derivatives Other liabilities Total liabilities % % Equity Total liabilities and equity % % Net interest income Investment margin 2.01% 2.16% 6 Net commissions Commission income Card issuance and clearance Payment processing Asset management Lending Account fees Guarantees Other commission income Total Commission expenses Card issuance and clearance Payment processing Lending and guarantees Asset management Securities Other commission expenses Total Total In 2015 interest expense generated by negative interest rate on balances with Central bank. 5 In 2015 interest expense contains expenses of 349 thous. EUR generated by negative deposit interest rate. 6 In 2014 interest expense from amounts owed to credit institutions and other financial organisations contains penalty of thous. EUR paid to parent company for termination of Funding agreement.

49 Swedbank AS, Annual Report Net gains and losses on financial items at fair value Net profit/(loss) from financial assets and financial liabilities held for trading Derivatives Debt securities Net profit/(loss) from financial assets and financial liabilities at fair value through profit or loss Debt securities Shares Net profit from dealing and revaluation of foreign currencies Total

50 Swedbank AS, Annual Report Staff costs COMPENSATION WITHIN SWEDBANK s view is that compensation should inspire employees to live up to Swedbank s goals, strategy and vision. Compensation should also encourage employees to embrace our values simple, open and caring which we are convinced is the basis of a successful and sustainable business. The majority of employees have fixed and variable compensation components, which represent their total compensation. Total compensation is market-based and designed to achieve a sound balance between the fixed and variable components. The maximum ratio between variable and fixed compensation is set in accordance to legislation in force and may never exceed the variable pay cap as decided by the Swedbank AB (publ) Annual General Meeting and/or applicable regulations. For staff whose professional activities have a material impact on the risk profile the variable component shall not exceed 100% of the fixed component of the total compensation for each individual. Further information on compensation principles and policies is published on Group website ( in the document Information regarding the remuneration in Swedbank 2015 and other relevant reports. FIXED COMPENSATION Fixed compensation is the main component of all employees total compensation. Fixed compensation is based on the employee s duties, whether they meet their performance targets and abide by Swedbank s values, and it is also based on local market conditions. VARIABLE COMPENSATION Variable compensation is tied to individual performance, the Group s total result and the business area result during the performance year. Variable compensation is based on relevant, predetermined and measurable criteria, set with the purpose of increasing the Group s long-term value. Variable compensation will primarily be based on a common risk-adjusted measure of profit. Allotments of variable compensation are contingent on a positive economic profit (operating profit after deducting company tax and the cost of capital) at the business area and Group levels. Principal design of variable compensation Swedbank currently has 4 share-based variable compensation programmes. Latvian employees participate in Programme 2012, 2013, 2014 and The programmes are considered to have expired when shares have been transferred to employees. In 2015 a remaining part of the shares associated with Programme 2011 were transferred to employees. Swedbank applies the requirement to defer variable compensation to all employees participating in compensation programmes. Risk management Swedbank s variable compensation is adapted to risks in the company. Risk management can be divided into two parts: exante and ex-post. Ex-ante risk management (risk management before the allotment of variable compensation): variable compensation is tied to employee s performance, the Group s total result and the business area result during the performance year. Allotments of variable compensation are contingent on a positive Economic profit (Operating profit after deducting company tax and the cost of capital) at the business area and Group levels. Variable compensation is limited at the individual level, i.e., there is a maximum amount, and is evaluated on the basis of predetermined parameters. Total variable compensation for the Group and each business area is also limited to a predetermined amount in accordance with the Board s decision. Ex-post risk management (risk management after the allotment of variable compensation during the deferral period). A portion of variable compensation within Swedbank is deferred for at least three years. In addition, there is no threshold without requiring deferral, nor any pro-rata payment for deferred compensation, as permitted by law (pro-rata payment allows a company to pay out deferred compensation once a year evenly distributed over the deferral period). Programme 2015 Programme 2015 consists of two parts: A general programme Eken, which comprises essentially all employees in the Group and consists of deferred compensation in the form of Swedbank AB (publ) shares. An individual programme comprising 36 employees in Latvia and consisting of cash and deferred compensation in the form of shares. Share-based compensation includes dividend compensation during the deferral period of three years. Continued employment is a prerequisite for delivery of shares. The delivery of shares is preceded by an evaluation described under ex-post risk management.