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1 )HEUXDU\ Press release +LJKOLJKWVRI$QQXDO5HSRUW,QWKHFRPSDUDWLYHILJXUHVIRU6WDGVK\SRWHNLVLQFOXGHGLQWKH+DQGHOVEDQNHQ*URXSIURP)HEUXDU\ 6XPPDU\ 7KH+DQGHOVEDQNHQ*URXSUHVXOWVZHUH6(.ELOOLRQ 5HWXUQRQVKDUHKROGHUVHTXLW\ZDV,QFRPHURVHE\ /RDQORVVHVVWLOODWORZOHYHO 7KHUHVXOWRIEUDQFKRIILFHRSHUDWLRQVLQFUHDVHGWR6(.ELOOLRQ 1HWLQWHUHVWLQFRPHLQEUDQFKRIILFHRSHUDWLRQVURVHE\ 7KH%RDUGRI'LUHFWRUVUHFRPPHQGV WKDWWKHGLYLGHQGLVUDLVHGWR6(.SHUVKDUH DUHGHPSWLRQRIWKHLQGH[DQGSUHIHUHQFHVKDUHV DERQXVLVVXHDQGVSOLW 7KH*URXS 5HVXOWFRQWLQXHVWREHVWURQJ The Handelsbanken Group s profits for 1998 were SEK 7 711m (7 820) and return on shareholders equity was 18.6 % (20.1). It has been possible to retain the Bank s profits at a high level in spite of reduced yield on the Bank s Central Treasury due to falling interest rates and IT costs being SEK 600m higher than the previous year. Branch office operations continue to put in a strong performance and their result increased to over SEK 6bn.,QFUHDVLQJQHWLQWHUHVWLQFRPHLQEUDQFKRIILFHRSHUDWLRQV The Group s income rose by 6 %. 1HWLQWHUHVWLQFRPH in branch office operations, which is by the far the largest income item for the Group, increased by 7 % or SEK 588m to SEK 9 480m. This was due to continued increases in volume and market share. The average volume of mortgage loans went up by 4 % in spite of a expected loss of volume, mainly for loans to municipalities. In the important private customer market, volumes have increased since summer In view of the fact that Stadshypotek has continually been losing volumes in private banking since the beginning of the 1990s, this was a historical break in trend. It proves the importance of the integration of Stadshypotek and Handelsbanken s branch office networks. 1

2 The average volume of bank loans rose by as much as 21 %. Extra business from the new Stadshypotek customers has played an important role in this respect customers of Stadshypotek have moved their other banking business to Handelsbanken since the acquisition. The branches are greatly helped by Handelsbanken s position as the most popular bank in Sweden for people who are considering changing banks, according to a recently published survey in a financial periodical, Privata Affärer. As many as 31 % said that they would like to change to Handelsbanken. The bank which came second received only half as many votes. The fact that Handelsbanken treats its customers well is also proved by the proportion of complaints to the National Board for Consumer Complaints which throughout the 1990s has been lower than the Bank's share of the bank market. During 1998, Handelsbanken's proportion of the complaints fell even more to only 8 % - which can be compared with the Bank's 30 %-share of the lending market. Handelsbanken has the lowest figure for complaints of all the major Swedish banks. The interest spread fell compared to 1997 but stabilised during the second half of 1998, partly because the volume of bank loans with a higher spread increased more quickly than the volume of mortgage loans. Net interest income for the Central Treasury fell by 38 % or SEK 381m as a result of lower yield on the Bank's liquidity due to falling interest rates. Markets' net interest income fell by 35 % or SEK 367m. However, this was balanced by an even larger increase in the net result on financial operations for interest-rate related trading, and thus the overall result was better than last year. The decrease in net interest income for the Central Treasury and Markets meant that the Group's total net interest income was unchanged at SEK 11.2bn. 1HWFRPPLVVLRQLQFRPH increased by 2 % to SEK 3 408m. Payment commission and investment banking commission reported good results in Deposit commission has fallen because the Swedish banks no longer receive remuneration from the National Debt Office for national savings accounts (Allemansspar). Brokerage commission on shares rose by 2 %. 0DUNHWV±6ZHGLVKELJJHVWPRQH\PDUNHWEDQNLQWKHHXUR]RQHDQGPHPEHURI (XULERUSDQHO 7KHQHWUHVXOWRQILQDQFLDORSHUDWLRQV increased substantially from SEK 927m to SEK 1 520m. Less than half of the increase balanced the above-mentioned decrease in net interest income at Markets. Nevertheless this is a substantial increase. It is mainly due to a better result for Markets' trading operations. Markets' result before loan losses rose by 67 % to SEK 432m. At the end of 1998, Markets was the biggest trading bank in Sweden with 35 % of Swedish corporate sales in the foreign exchange market and 20 % in the money market. Handelsbanken is also the biggest Swedish bank in the money market in the euro zone. As a consequence of this, the Bank is on the Euribor panel which fixes the Euribor interest rate. This panel includes the Swedish bank with the highest volume in the euro zone money markets. 2

3 )DVWLJKHWV$%%DOGHU Other income includes capital gains of SEK 338m on the sale of real property to Fastighets AB Balder which was distributed to the Bank s shareholders during the year. The distribution of Balder to the Bank s shareholders has also reduced the Handelsbanken Group s operating profit. The overall impact on the result by Balder is therefore SEK 238m during /RZHVWH[SHQVHVRIPDMRU6ZHGLVKEDQNV±GHVSLWHVKDUSO\LQFUHDVHG,7FRVWV ([SHQVHV rose by 14 %. Increased IT costs represent 8 percentage points of the increase. Two percentage points can be attributed to the acquisition of Stadshypotek. Despite the increases in expenses, Handelsbanken has by far the lowest expenses of the major Swedish banks and a cost-effectiveness level which is among the best of the European universal banks. IT costs are SEK 2.6bn, an increase of SEK 600m compared to This is 30 % of the Bank s total expenses and implies that Handelsbanken spends a higher proportion of its total expenses on information technology than any other bank in Sweden. In absolute figures, however, the Bank s IT costs are lower than those of other major banks. The fact that the proportion is nevertheless higher is explained by the fact that Handelsbanken s other expenses are so much lower than those of the other banks. Of these SEK 2.6bn, approximately half is for running the Bank s systems and communication lines and the other half is new development. At the beginning of the 1990s, IT costs were approx. SEK 1bn. IT expenses culminated in 1998, partly because mandatory preparations and adaptations for EMU and the new millennium coincided with other major system changes for the purpose of enhancing competitiveness. During the next few years, IT costs as a proportion of the Bank s total expenses are expected to fall to around 25 %, which is nevertheless a high figure in an international perspective. IT costs are expected to be approx. SEK 2.3bn in 1999 and SEK 2.1bn in This will have a favourable effect on the Group s expenses trend in the next few years. /RDQORVVHVVWLOODWORZOHYHO Loan losses, including changes in value for property taken over amounted to SEK 319m (302) or 0.05 % (0.05) of lending. The proportion of bad debts was 0.45 % (0.64) of lending. The volume of collateral taken over was SEK 193m (7 251). This decrease is related to the distribution of Fastighets AB Balder. The Bank s exposure to the problem countries in South-East Asia (The Philippines, Indonesia, Malaysia, South Korea and Thailand) was SEK 1.6bn in mid-february. At the same date, exposure to Russia was SEK 0.1bn, and to Latin America SEK 0.5bn, including SEK 0.2bn to Brazil. In relation to Handelsbanken s size, the Bank s exposure in these countries is small and the necessary provisions have been made. 3

4 &DSLWDOUDWLRDQGUDWLQJ The Handelsbanken Group s capital ratio is 9.8 % (10.4). The Tier 1 capital ratio was 6.3 % (6.2). Handelsbanken continues to have the highest rating of the Swedish banks. (DUQLQJVSHUVKDUHDQGGLYLGHQG Net earnings per ordinary share were SEK (25.15). The Board recommends a dividend on the ordinary shares, class A and B of SEK 8.00 (6.50). The dividend on the index shares, which according to the Bank s Articles of Association is to follow the consumer price index, will be SEK 0.80 (0.80). In accordance with the Articles of Association, the dividend on preference shares will be SEK 0.45 (0.45) on class A and SEK 0.60 (0.60) on class B. The Board is also recommending to the annual general meeting to redeem the index and preference shares. As a result of new legislation, these shares prevent the Bank from carrying out new issues with preferential rights for the shareholders. The redemption also leads to a welcome reduction in the number of share classes. The high level of the Bank s result means that the Bank no longer needs this capital. The redemption amount will be determined in accordance with the rules in the Articles of Association. The amount is SEK per preference share and SEK per index share. Interest is payable on the preference shares from the beginning of the year. It is expected that payment will be made on 12 August. %RQXVLVVXHDQGVSOLW The Board is proposing to the annual general meeting that the nominal value of the ordinary shares is increased from SEK 10 to SEK 12. Each share will then be split into three new shares with a nominal value of SEK 4 each. If the above proposal is accepted, only ordinary shares will remain, the number being (08 Handelsbanken s preparations for the start of the economic and monetary union in January 1999 have been pursued on a large scale since spring 1996.Development and adaptation of the Group s products and computer systems ready for this event have gone according to plan and on 4 January 1999, the Bank was able to offer customers in Sweden a number of new euro services for payments, investment and financing. At the Bank s units outside Sweden, adaptations required for the new currency were achieved as planned. In Finland, which is part of the Bank s Nordic domestic market, the Bank has its most comprehensive operations within the EMU. EMU will lead to Europe having a money market which functions much better than before. The fact that Handelsbanken has gradually reinforced its position on the money market also in the euro zone has therefore been an important feature of the EMU preparations. 4

5 $GDSWDWLRQVIRU\HDUUXQQLQJWRSODQ In 1996, Handelsbanken started a project to ensure that all necessary adaptations would be made ready for the year However, since 1989, the Bank has made sure that every new system and every system that has undergone major changes has been made Year 2000 compliant. At the end of January 1999, 90 % of the Bank s central application systems in Sweden had been analysed, adapted, tested and launched into production. Nine percent of the systems will be removed or replaced by other systems which are already compliant. The remaining one percent of the systems are expected to be completed during the first quarter of Adaptations of technical platforms, PC systems and embedded systems are progressing according to plan. During the first half of 1999, supplementary tests will be run on the interfaces between systems at the Bank and on external interfaces. No special difficulties have arisen in the adaptation work, and schedules are being met. All adaptation measures within the Group will be completed by 30 June 1999 at the latest. Stockholm, 23 February 1999 Arne Mårtensson President and Group Chief Executive For further information please contact Arne Mårtensson, Group Chief Executive of Svenska Handelsbanken, or Sven Grevelius, Head of Accounting and Control, tel: Lars Lindmark, Head of Corporate Communications tel: Gustaf Elmstedt, Head of Investor Relations tel: KHLQWHULPUHSRUWIRUWKHILUVWTXDUWHURIZLOOEHSXEOLVKHGRQ$SULO Handelsbanken's interim reports and other publications are also available on the Internet ( 5

6 %XVLQHVVDUHDV Business area reporting now includes Stadshypotek Bank and Handelsbanken Central Treasury as separate business areas. 5HVXOWSHUEXVLQHVVDUHD -DQXDU\'HFHPEHU6YHQVND+DQGHOVEDQNHQ*URXS %UDQFK 0DUNHWV $VVHW )LQDQV /LYÃÃ 6K\S &HQWUDO 2WKHU 7RWDO 7RWDO 6(.P RIILFHV 0JQW %DQN 7UHDV Net interest income Commission, net Net res on fin operations Other income RWDOÃLQFRPH Ã Ã Ã Ã,QFRPHÃLQFOXGHVÃÃ QHWÃLQWHUQDOÃUHPXQHUDWLRQ Ã 1HWÃLQWHUQDOÃUHPXQHUDWLRQ KDVÃEHHQÃGHGXFWHGÃIURPÃLQFRPH 7RWDOÃH[SHQVHV Ã Ã Ã Ã 5HVXOWÃEHIRUH ORDQÃORVVHV Ã Ã Ã Loan losses SHUDWLQJÃUHVXOW Ã Ã Ã 5HWXUQÃRQÃHTXLW\ÃÈ È È È È È È È È È The net amount of received/paid remunerations between the business areas is included in/deducted from the income categories for the business areas The net amount of received/paid remuneration is shown above. The internal remuneration is credited to the business area which is responsible for the customer and reduces the income of the unit paying the remuneration. The remuneration is intended to cover expenses and also to distribute the profit arising on market terms. Expenses include the distribution of costs made internally within the Group for services rendered by business support operations. Return on shareholders equity for the business areas is computed after standard tax while it is reported after appropriations and full tax for the whole Group. The shareholders equity, on which the calculation of return on equity is based, is mainly distributed in accordance with the requirements of the Act on Capital Adequacy. "Other" includes capital gains, amortisation of goodwill and Group adjustments. (1) Handelsbanken Liv Fondförsäkrings AB (unit-linked) and commission income from the mutual company are included under the business area "Handelsbanken Liv". 6

7 %UDQFKRIILFHRSHUDWLRQV Handelsbanken conducts complete universal banking operations in the whole of the Nordic area. Branch office operations consist of ten regional banks - seven in Sweden and one each in Norway, Finland and Denmark. Operations in Sweden and the other Nordic countries are run using the same concept to deliver universal banking services with a higher service level and at lower cost for the Bank than competitors. It is on this base that the Bank will be able to grow in the whole of the Nordic area. Handelsbanken is already the largest bank in the Nordic countries and locally is the fourth largest commercial bank in Finland and sixth in Norway. 4XDUWHUO\SHUIRUPDQFH %UDQFKRIILFHRSHUDWLRQV 7RWDO 7RWDO 6(.P Net interest income Commission, net Net res on fin operations Other income RWDOÃLQFRPH Ã Ã Ã Ã Ã Ã,QFRPHÃLQFOXGHVÃQHWÃLQWHUQDOÃUHPXQHUDWLRQ Ã 7RWDOÃH[SHQVHV Ã Ã Ã Ã Ã Ã 5HVXOWÃEHIRUH ORDQÃORVVHV Ã Ã Ã Ã Ã Ã Loan losses SHUDWLQJÃSURILW Ã Ã Ã Ã Ã Ã 5HWXUQÃRQÃHTXLW\ÃÈ È È È È È È Branch office operations have developed well and the profit for the whole of 1998 increased to SEK 6 026m (5 805). Net interest income increased to SEK 9 480m (8 892), an increase of 7 % compared to the previous year. There are two reasons for this rise: firstly the average volume of mortgage loans went up by 4 % due to the acquisition of Stadshypotek and secondly the average volume of bank loans increased by 21 %. The interest spread fell during 1998 compared to the previous year, however. The decrease in interest spread slowed down during the second half of 1998 however. The branch office operations net interest income includes the fee of SEK 268m (298) to the Swedish government for the deposit protection guarantee. Compared to 1997, costs have also increased, mainly because of investments in the area of information technology. More than half of the total number of workstations at the Swedish branches have now been replaced by modern PC-based workstations. A new customer information system was also installed during the year on the first batch of the new workstations. 7

8 &RQWLQXHGH[SDQVLRQLQWKH1RUGLFFRXQWULHV Our expansion in the other Nordic countries continued during the year. The Bank opened a total of six branches in these countries- three in Finland, two in Norway and one in Denmark. The new branches in Finland were in Pori, Oulu and Lappeenranta, and in Norway, in Kristiansand and Tønsberg. In Denmark another branch was opened in the Copenhagen area. This means that the Bank now has 15 branches in Finland, 15 in Norway and 3 in Denmark. Today, Handelsbanken is the only bank with complete banking operations in all four Nordic countries. With the exception of three towns in Denmark, there are branches in all towns in the Nordic countries with more than inhabitants. 6XFFHVVIXOWDUJHWLQJRI6WDGVK\SRWHNVSULYDWHPDUNHW Since the beginning of the 1990s, Stadshypotek had been continuously losing volumes in the private market. After the acquisition, the Bank has succeeded in reversing this trend. The loss in volume on the private side was already halted by summer 1998 and volumes then started to increase. We have also succeeded in doing a large amount of extra business in the ordinary banking operations. Just over of Stadshypotek's customers were not already customers of Handelsbanken. Almost of these have already changed to Handelsbanken for their other banking business. 8VHRI,QWHUQHWDQGRWKHUHOHFWURQLFVHOIVHUYLFHSURGXFWV LQFUHDVLQJVLJQLILFDQWO\ Swedish private customers continue to use self-service products to an increasing extent. In 1998, self-service transactions of various types cash dispensers, POS terminals, privatgiro payments, autogiro (direct debits), datasvar telephone service, standing orders and Internet represented almost 80 % of the total number of transactions among the Bank's private customers in Sweden. The proportion is even higher in Norway and Finland. Today Handelsbanken has over private customers who can use the Bank's Internet services. Private customers can today perform the majority of normal bank transactions via Handelsbanken on the Internet. Ten percent of all private payments and twelve percent of all share orders at the Bank are made via the Internet. Corporate Internet services were also launched during the year. 8

9 +DQGHOVEDQNHQ0DUNHWV Handelsbanken Markets is responsible for corporate finance, trading in the equity, money and foreign exchange markets, debt capital financing, correspondent banking and trade finance. It also includes the Bank s unit for economic research and banking operations outside the Nordic countries. Operations are conducted in seventeen countries and are organised in four main areas: Investment Banking, Trading, Trade Finance and Financial Institutions, and Banking operations outside the Nordic countries. Operations are focused on the Bank s Nordic customer base. 4XDUWHUO\SHUIRUPDQFH +DQGHOVEDQNHQ0DUNHWV 7RWDO 7RWDO 6(.P Net interest income Commission. net Net result on financial operations Other income RWDOÃLQFRPH Ã Ã 1HWÃLQWHUQDOÃUHPXQHUDWLRQÃGHGXFWHGÃIURPÃLQFRPH 7RWDOÃH[SHQVHV Ã Ã 5HVXOWÃEHIRUH ORDQÃORVVHV Loan losses SHUDWLQJÃSURILW 5HWXUQÃRQÃHTXLW\ÃÈ È È È È È È The result before loan losses increased by 67 % to SEK 432m. After recovered loan losses, Markets profit was SEK 532m (581). Trading income, which consists both of parts of net interest income and of the net result on financial operations, has risen. Expenses rose by approx. 15 %, mainly due to IT investments. Turbulence on the emerging markets has led to some loan losses but these were almost completely compensated for by recovered loan losses.,qyhvwphqw%dqnlqj The unit has performed well and coped well with the turbulence on the financial markets. Due to the turbulence on securities and currency markets, commission from Corporate Finance and securities trading, which was developing well at the beginning of the year, no longer increased during the second half of the year. 9

10 7UDGLQJ The unit has developed in the right direction and retained its strong position in Nordic currencies and interest rate related products. For the third year running, in the annual survey conducted by the leading periodical, Foreign Exchange and Money Markets, Handelsbanken has been acclaimed the best bank for Nordic currencies by major customers. In 1998, Handelsbanken established itself as the largest trading bank for Swedish corporate sales on the foreign exchange and money markets and one of the largest trading banks for other Nordic currencies. For some time now, the unit has been engaged in extensive efforts to focus and improve efficiency in its interbank operations and further strengthen marketing operations. These measures will also lead to considerable savings in costs. 7UDGH)LQDQFHDQG)LQDQFLDO,QVWLWXWLRQV Operations have developed in a stable manner and the unit enjoys a strong market position. Financial market developments in Asia and Russia have had a negative impact on income. Increased deposit volumes from foreign banks have contributed to the unit nevertheless improving its result. %DQNLQJRSHUDWLRQVRXWVLGHWKH1RUGLFFRXQWULHV The unit has retained a strong position on its markets and continues to have stable income. 10

11 +DQGHOVEDQNHQ$VVHW0DQDJHPHQW Handelsbanken Asset Management comprises Fund Management, Discretionary Management and Institutional Custody Services. Operations are conducted in the four Nordic countries and in Luxembourg and the UK. 4XDUWHUO\SHUIRUPDQFH +DQGHOVEDQNHQ$VVHW0DQDJHPHQW 7RWDO 7RWDO 6(.P Net interest income Commission. net Net result on financial operations Other income RWDOÃLQFRPH 1HWÃLQWHUQDOÃUHPXQHUDWLRQÃGHGXFWHGÃIURPÃLQFRPH 7RWDOÃH[SHQVHV 5HVXOWÃEHIRUH ORDQÃORVVHV Loan losses 2SHUDWLQJÃSURILW 5HWXUQÃRQÃHTXLW\ÃÈ È È È È È È Income rose to SEK 940m (729) of which SEK 455m was paid in compensation to the branch office operation. Expenses at Handelsbanken Asset Management amounted to SEK 185m (173), and thus the result was markedly improved. On 1 September 1998, a new organisation was introduced for management operations. The previously separate management functions within Handelsbanken Mutual Funds and within Discretionary Management were co-ordinated under joint management. The objective of the re-organisation was to improve efficiency by increasing the degree of specialisation and the focus on general allocation decisions. At the Swedish regional banks, fund advisors have been appointed to support the branch offices in their sales work. The volume managed by Handelsbanken Asset Management as at 31 December 1998 amounted to approximately SEK 100bn. 11

12 Overall and in relative terms, good portfolio performance was achieved. The conditions for creating extra return by reallocation between categories of assets were unusually favourable during Handelsbanken Asset Management therefore conducted an active allocation strategy, which contributed to the management assignments of which Handelsbanken Liv is the largest outperforming their benchmark indexes by a good margin. Handelsbanken Liv achieved a total yield of 18.7 %. Total yield for the Swedish life assurance companies was on average 16 % for the whole of XWXDO)XQGV Net new savings in the Bank's mutual funds were SEK 3.9bn for the whole of Net deposits for the fourth quarter were SEK 1.4bn. The increase was noted principally in long-term saving in unit-linked insurance. Most of the inflow was invested in fixed income, multimarket and Europe funds. As at 31 December, the assets managed amounted to SEK 55bn, having increased by 22 %. The Bank s market share was 10 %. 'LVFUHWLRQDU\PDQDJHPHQW Handelsbanken Asset Management manages discretionary assignments amounting to approximately SEK 45bn. Management performance was good compared to benchmark indexes. &XVWRG\VHUYLFHV At present, Handelsbanken is the only bank which offers its own institutional custody services in all the Nordic countries. The operation in Sweden reports good profitability. By the end of the year, the operation which started in Finland at the beginning of 1998 was already making a positive contribution to results. Handelsbanken s branches can also offer custody services. These also include advisory services. The number of custody accounts increased by more than 60 %. The total value of the accounts is SEK 451bn, an increase of 12 %. 12

13 +DQGHOVEDQNHQ)LQDQV Handelsbanken Finans offers a full range of finance company services and has operations in all the Nordic countries. Finance company services are an established feature of the branch offices range of products. 4XDUWHUO\SHUIRUPDQFH +DQGHOVEDQNHQ)LQDQV 7RWDO 7RWDO 6(.P Net interest income Commission, net Net result on financial operations -1-1 Other income RWDOÃLQFRPH 1HWÃLQWHUQDOÃUHPXQHUDWLRQÃGHGXFWHGÃIURPÃLQFRPH 7RWDOÃH[SHQVHV 5HVXOWÃEHIRUHÃ ORDQÃORVVHV Loan losses SHUDWLQJÃSURILW 5HWXUQÃRQÃHTXLW\ÃÈ È È È È È È New sales have developed well compared with the previous year. The increase in expenses is mainly attributable to IT investments. Leasing and conditional sales for companies has increased its credit volume by 7 % compared to the previous year due to strong new sales in car financing and traditional leasing. Several new contracts have been concluded with vendors from selected business sectors. Retail Financial Services, which provides financing via retailers for private individuals purchases of capital goods, continues to show good profitability. New and developing co-operation with retailers of capital goods has overall generated 20 % higher credit volumes compared with the previous year. Operations in the Nordic units outside Sweden, are dominated by Handelsbanken Rahoitus Oy, which is the fourth largest finance company in Finland. During the autumn, a new card service, Aktiiviraha Private, was successfully launched. Profitability is still good in the operations and volumes have increased sharply. Factoring services have increased turnover by 25 % compared with The new factoring with finance service has been very well received. The overall turnover for debt collection services has doubled compared with the previous year. 13

14 +DQGHOVEDQNHQ/LY A complete range of life assurance products is marketed under the name Handelsbanken Liv via Handelsbanken s branch office network. These products include occupational and personal pensions, asset protection schemes and employee pension insurance for companies, private customers and organisations. Handelsbanken Liv also offers a small range of life insurance products in the other Nordic countries. Via unit-linked savings plans, policyholders can take responsibility for the yield on their insurance savings or they can transfer the responsibility to the insurer via traditional life insurance. In both cases, the assets are managed according to agreement by Handelsbanken via Handelsbanken Mutual Funds or Handelsbanken Asset Management. For legal reasons, the traditional life insurance operations in Handelsbanken Liv Försäkrings AB are run on mutual principles where the whole surplus on operations goes back to policy-holders in the form of bonuses. 4XDUWHUO\SHUIRUPDQFH +DQGHOVEDQNHQ/LYÃÃ 7RWDO 7RWDO 6(.P Net interest income Commission. net Net result on financial operations Other income RWDOÃLQFRPH 1HWÃLQWHUQDOÃUHPXQHUDWLRQÃGHGXFWHGÃIURPÃLQFRPH 7RWDOÃH[SHQVHV 5HVXOWÃEHIRUH ORDQÃORVVHV Loan losses 2SHUDWLQJÃUHVXOW 5HWXUQÃRQÃHTXLW\ÃÈ È È È È È (1) Handelsbanken Liv Fondförsäkrings AB (unit-linked) and commission income from the mutual company are included under the business area "Handelsbanken Liv". Income from the combined insurance operations increased to SEK 207m (145) of which 125m was paid in compensation to other business areas. Today, Handelsbanken Liv is the fourth largest life insurance company in Sweden, in terms of new premiums. The market share has increased from 5% at the beginning of the 1990s to around 12 % in

15 8QLWOLQNHGLQVXUDQFH Unlike traditional life assurance, operations in Handelsbanken Liv Fondförsäkrings AB distribute profits. They include both pension and capital insurance. Premium income increased by 71 % from SEK 1.9bn in 1997 to SEK 3.2bn in A savings product called Fondkapitalspar has developed particularly well. Managed assets amounted at year end to SEK 6.4bn (3.0). Operating profit was SEK 20m (30) and declined as a result of increased expenses. The increase in expenses was attributable partly to continued investments in IT and partly to establishment expenses for operations in the other Nordic countries. 7UDGLWLRQDOOLIHLQVXUDQFH Total premium income for traditional insurance was SEK 1.9bn (1.9) in As at 31 December 1998, managed assets were SEK 16bn (13.2). The company s total yield for 1998 was 18.7 % and the solvency margin was 121 % at the end of Total yield and solvency margin at these levels have made it possible to pay a bonus rate in 1998 of on average 14 % before taxes and fees. 1HZLQVXUDQFHFRPSDQLHVOHJLVODWLRQ A bill concerning new legislation for insurance companies will be presented to parliament on 10 March It is proposed that the new law comes into force on 1 January It will thereby also be possible to distribute profits from traditional insurance company operations. It will also be possible to conduct unit-linked insurance and traditional insurance operations in the same company. 5HVXOWV +DQGHOVEDQNHQ/LY) UVlNULQJV$% 7RWDO 7RWDO 6(.P Premium income Investment income Insurance claims Changes in life insurance provisions Bonus Operating expenses SHUDWLQJÃVXUSOXV Ã Ã (1) Handelsbanken Liv Försäkrings AB is a mutual life assurance company and is not consolidated. 15

16 6WDGVK\SRWHN%DQN Stadshypotek Bank is Sweden s largest independent telephone bank with customers and SEK 23bn in customer funds. Stadshypotek Bank is active under its own brand name and has its own range of services. Stadshypotek Bank offers a limited selection of bank and insurance services to customers who do not require the full range of services and individually adapted services offered by the branch offices. 4XDUWHUO\SHUIRUPDQFH 6WDGVK\SRWHN%DQN 7RWDO 7RWDO 6(.P Net interest income Commission, net Net result on financial operations -12 Other income 1 1 7RWDOÃLQFRPH 1HWÃLQWHUQDOÃUHPXQHUDWLRQÃGHGXFWHGÃIURPÃLQFRPH 7RWDOÃH[SHQVHV 5HVXOWÃEHIRUHÃ ORDQÃORVVHV Loan losses 2SHUDWLQJÃUHVXOW 5HWXUQÃRQÃHTXLW\ÃÈ È È È È È In 1998, Stadshypotek Bank achieved satisfactory profitability for the first time since Profitability has developed well thanks to falling expenses and rising income. The result declined in the second half of the year when Stadshypotek Bank paid remuneration for internal services. Stadshypotek Bank developed its own Internet service during the year. This service was introduced in November together with a private customer package (PrivatPaket) with a satisfied customer guarantee. The private customer package consists of a number of automatic bank services to meet the customer s basic requirements. It includes an account which offers a good rate of interest from the first krona, a VISA payment card, Internet service and payments via the Internet or using the Privatgiro payment service. Stadshypotek Bank is the first bank in Sweden to offer customers with a VISA card a bonus on all purchases made anywhere in the world. It is easy to link Stadshypotek Bank s other products to this package. Stadshypotek Bank s system for saving in shares has been developed so that customers are able to reinvest share dividends free of charge and the limit for monthly savings in individual shares has been lowered from SEK 500 to SEK 100. Monthly saving in individual shares has continued to develop well. 16

17 In spite of lower market rates, account deposits showed stable growth and average deposits were SEK 5.8 bn. The number of deposit accounts is approximately Stadshypoteks Bank s net interest income includes the fee of SEK 19 m (14) to the Swedish government for the deposit protection guarantee. Despite a large number of retail bonds maturing and interest rates continuing to fall, Stadshypotek Bank has succeeded in defending its market share for retail bonds. FondSpar, a selection of Handelsbanken s mutual funds which can be bought and sold over the phone, continued to perform very well during the year. The number of savers has increased from just under to over

18 +DQGHOVEDQNHQ V&HQWUDO7UHDVXU\ Central Treasury manages the Group s liquidity in Swedish kronor, the internal bank, funding in the capital market, and funding and clearing at the Riksbank, as well as measuring and controlling financial risks within the Group. The activity that has a direct and tangible effect on the profit and loss account is cash management in Swedish kronor. It is an integrated feature of the internal bank. 4XDUWHUO\SHUIRUPDQFH +DQGHOVEDQNHQ&HQWUDO7UHDVXU\ 7RWDO 7RWDO 6(.P Net interest income Commission. net Net result on financial operations Other income 7RWDOÃLQFRPH 1HWÃLQWHUQDOÃUHPXQHUDWLRQÃGHGXFWHGÃIURPÃLQFRPH 7RWDOÃH[SHQVHV 5HVXOWÃEHIRUH ORDQÃORVVHV Loan losses 2SHUDWLQJÃSURILW 5HWXUQÃRQÃHTXLW\ÃÈ È È È È È È Surplus liquidity from the branch office operation, on average approximately SEK 37bn, is used for Stadshypotek s lending. This is one example of the way in which the internal bank evens out liquidity. Before the acquisition of Stadshypotek, the surplus was used to purchase bonds in the investment portfolio. Investments in the portfolio have declined gradually throughout 1997 and As the bonds matured, the funds were reinvested at a new and lower rate of interest. This is the main reason why the Central Treasury s result fell from SEK 970m in 1997 to 617m in As well as managing the internal bank, Central Treasury administrates the Bank s funding on the overnight market and funding and clearing in the Riksbank. In order to be able to administrate clearing, the Bank must pledge securities with the Riksbank. These pledged securities consist of Swedish government bonds or mortgage bonds that are managed in a special portfolio. In 1998, the portfolio made a small positive impact on the result, but not as large as the impact from the internal bank operation. The pledge portfolio, worth approximately SEK 20bn, may be regarded as Handelsbanken s cash funds. The portfolio is maintained in order to manage daily or even hourly fluctuations in liquidity. 18

19 3URILWDQGORVVDFFRXQW*URXS -DQXDU\±'HFHPEHU &KDQJH 6(.P 6(.P,QWHUHVWLQFRPH,QWHUHVWH[SHQVH Net interest income Dividends received &RPPLVVLRQLQFRPH &RPPLVVLRQH[SHQVH Net commission income 1RWHÃ Net result on financial operations 1RWHÃ Other operating income RWDOLQFRPH General administrative expenses - Staff costs Other 1RWHÃ Depreciation and write-down in value of tangible and intangible fixed assets RWDOH[SHQVHV 3URILWEHIRUHORDQORVVHV Net loan losses 1RWHÃ Change in value of property taken over SHUDWLQJSURILW Minority interests Appropriations - Pension provisions Taxes URILWIRUWKH\HDU 1RWHÃÃÃÃÃ&RPPLVVLRQ ÃÃÃÃÃÃÃÃÃ-DQXDU\ÃÃ'HFHPEHU 6(.ÃP 6(.ÃP Payments Lending Deposits Guarantees Securities Other &RPPLVVLRQÃLQFRPH &RPPLVVLRQÃH[SHQVH HWÃFRPPLVVLRQÃLQFRPH

20 1RWHÃÃÃÃÃ1HWÃUHVXOWÃRQÃILQDQFLDOÃRSHUDWLRQV ÃÃÃÃÃÃÃÃ-DQXDU\ÃÃ'HFHPEHU 6(.ÃP 6(.ÃP Shares and participations Interest-bearing securities HDOLVHGÃSURILW Shares and participations Interest-bearing securities QUHDOLVHGÃFKDQJHVÃLQÃYDOXH &KDQJHVÃLQÃH[FKDQJHÃUDWHV HWÃUHVXOWÃRQÃILQDQFLDOÃRSHUDWLRQV RWHÃÃÃÃÃ2WKHUÃDGPLQLVWUDWLYHÃH[SHQVHV Property and premises External computer costs Communication Travel and marketing Purchased services Supplies Other expenses WKHUÃDGPLQLVWUDWLYHÃH[SHQVHV RWHÃÃÃÃ/RDQÃORVVHV $ÃÃÃÃ,QGLYLGXDOO\ÃYDOXHGÃFODLPV The year s write-down for actual loan losses Write-back of previous provisions for possible loan losses which are reported as actual loan losses in the year s accounts The year s write-down relating to possible loan losses Recovered from actual loan losses in previous years Write-back of provisions for possible losses which are no longer necessary HWÃH[SHQVHÃIRUÃWKHÃ\HDUÃIRU LQGLYLGXDOO\ÃYDOXHGÃFODLPV %Ã&ODLPVÃYDOXHGÃDVÃDÃJURXS The year s write-down for actual loan losses Recovered from actual loan losses in previous years Allocation to/dissolution of reserve for loan losses HWÃH[SHQVHÃIRUÃWKHÃ\HDUÃIRU FODLPVÃYDOXHGÃDVÃDÃJURXS &Ã3URYLVLRQVÃWRÃJHQHUDOÃUHVHUYHÃIRUÃFRXQWU\ÃULVNV 7RWDOÃORDQÃORVVHVÃ$%& 20

21 4XDUWHUO\SHUIRUPDQFHRI6YHQVND+DQGHOVEDQNHQ*URXS6(.P Net interest income Commission, net Net result on financial operations Other RWDOÃLQFRPH à à à à à Staff costs Other administrative expenses Depreciation and write-downs RWDOÃH[SHQVHV à à à à à Profit before loan losses à à à à Loan losses Operating profit à à à à à Minority interests Pension provisions Taxes on the period s result Net result for the period à à à à à %DODQFHVKHHW*URXS 'HF 6(.P 'HF 6(.P /HQGLQJWRWKHJHQHUDOSXEOLF 1RWHà Lending to credit institutions Interest-bearing securities - Financial fixed assets 1RWHà Financial current assets Other assets RWDODVVHWV Deposits and funding from the general public Liabilities to credit institutions Issued securities etc Subordinated liabilities Other liabilities Shareholders equity RWDOOLDELOLWLHVDQGVKDUHKROGHUV HTXLW\ RWHÃÃÃÃÃ/HQGLQJÃWRÃWKHÃJHQHUDOÃSXEOLF SEK lending - to households to companies etc *) Foreign currency lending - to households to companies etc Reserve for possible loan losses RWDOÃOHQGLQJ *) Of which National Debt Office

22 1RWHÃÃÃÃ)LQDQFLDOÃIL[HGÃDVVHWV The Group s surplus liquidity has been invested as a financial fixed asset (investment portfolio). Following the acquisition of Stadshypotek the Group no longer has surplus liquidity. That part of the investment portfolio which originated from previous surplus liquidity has therefore been re-classified as a current asset and disposed of. The portfolio value was SEK 891m and there was a positive effect on the result of SEK 11m. )LQDQFLDOUDWLRVIRUWKH6YHQVND+DQGHOVEDQNHQ*URXS ÃÃÃÃÃÃÃÃÃÃÃÃ-DQXDU\ÃÃ'HFHPEHU Return on shareholders equity 18.6% 20.1% Income/expenses (I/E ratio) - before loan losses after loan losses Net earnings per ordinary share, SEK No. of ordinary shares Adjusted equity per ordinary share, SEK Average number of employees at 31 Dec Number of branches in Nordic countries, 31 Dec WKHULQIRUPDWLRQ &DSLWDOÃEDVHÃDQGÃUHTXLUHPHQW 6(.ÃP 6(.ÃP Tier 1 capital Total capital base Risk-weighted volume Capital ratio 9.8% 10.4% Tier 1 capital ratio 6.3% 6.2% %DGGHEWV 6(.ÃP 6(.ÃP Bad debts Reserve for possible loan losses %DGÃGHEWVÃQHW à à Reduced rate loans without a provision for possible loan losses à à 7RWDOÃSUREOHPÃORDQV Bad debt reserve ratio 58.8% 52.6% Proportion of bad debts 0.45% 0.64% Problem loans before write-down for possible loan losses Loan loss ratio 0.05% 0.05% Non-performing loans for which interest is accrued Collateral taken over: - Buildings and land Shares and other participations Other RWDOÃFROODWHUDOÃWDNHQÃRYHU à 22

23 'HULYDWLYHV 31 December 1998, SEKm ÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃÃ,QWHUHVWUDWHÃUHODWHG &XUUHQF\UHODWHG (TXLW\UHODWHG 0DUNHW 9DOXH %RRN YDOXH 0DUNHW YDOXH %RRN YDOXH 0DUNHW YDOXH %RRN 9DOXH 3RVLWLYHÃYDOXHV HJDWLYHÃYDOXHV The above table is compiled in accordance with the Swedish Financial Supervisory Authority s regulations and includes all derivative instruments in the Group. For derivative instruments which are part of trading operations, the book value is the same as the market value. The differences between market value and book value reported in the table correspond to the reversed differences between market value and book value in that part of the Group s operations which is subject to hedge accounting. 9DOXHDW5LVN During the period 1998, Handelsbanken Markets exposure to interest rate and exchange rate risk (incl. option risk), measured as Value-at Risk (VaR) was on average SEK 30m. During the period, this risk varied between SEK 17m and SEK 50m. Here no account has been taken of the links between the interest rate related and foreign exchange markets. During the same period, Handelsbanken Markets exposure to equity price risks, measured as VaR, was on average SEK 9m. This risk varied between SEK 4m and SEK 15m. 23

24 +DQGHOVEDQNHQ VVKDUHV The Affärsvärldens general index increased during 1998 by 10 %. The bank index, excluding Handelsbanken' s shares, increased by 13 %, while Handelsbanken's share increased by 24 %. 7UHQGÃIRUÃ+DQGHOVEDQNHQVÃVKDUHVÃXQWLOÃÃ'HFÃ SHB ordinary shares AFGX AFBA excl. SHB KDUHÃSULFH 2UGLQDU\ FODVVÃ$Ã6(. 0DUNHW FDSLWDOLVDWLRQ 6(.EQ Ã'HFHPEHUÃ Ã'HFHPEHUÃ DQGHOVEDQNHQVUDWLQJDVDW'HFHPEHU )LQDQFLDOÃVWUHQJWK 6KRUWWHUP /RQJWHUP 0RRG\ V B P-1 Aa3 6É3 A-1 A+ )LWFKÃ,%&$ B F1+ AA- %DQNZDWFK B TBW-1 24