Contents ADMINISTRATION REPORT 2 FIVE-YEAR OVERVIEW AND KEY FIGURES 4

Transcription

1 Annual Report 2015

2 Contents ADMINISTRATION REPORT 2 FIVE-YEAR OVERVIEW AND KEY FIGURES 4 FINANCIAL REPORTS Income statement 6 Statement of comprehensive income 6 Balance sheet 7 Statement of changes in equity 8 Cash flow statement 9 Income statement 10 Statement of comprehensive income 10 Balance sheet 11 Statement of changes in equity 12 Cash flow statement 13 Notes 14 RECOMMENDED APPROPRIATION OF PROFIT AND STATEMENT FROM THE BOARD 42 AUDITOR S REPORT 43 BOARD MEMBERS 44 ADDRESSES 45 DEFINITIONS AND EXPLANATIONS 46 Handelsbanken Finans AB Corporate identity number: Registered office: Stockholm handelsbanken.se/finans 1

3 administration report Administration report Handelsbanken Finans AB, corporate identity no , is a wholly-owned subsidiary of Svenska Handelsbanken AB (publ), corporate identity no It operates in close co-operation with the Bank s branch operations. The Handelsbanken Finans has opera tions in Sweden, Denmark, Finland, Norway, the UK, Poland and China. Operations outside Sweden are conducted in the form of branches and subsidiaries. TASK AND GOALS The task of Handelsbanken Finans is to increase the Handelsbanken s opportunities to establish long-term and profitable customer relationships with a larger number of customers by delivering a higher quality service level at lower cost than our competitors. Handelsbanken Finans defines service as availability, simplicity and care. Handelsbanken Finans operates as an integral part of the Handelsbanken ; its goal is to contribute to the Bank s corporate goal higher profitability than the average of peer banks on its home markets. BUSINESS AREAS Sweden Corporate This business area is responsible for leasing, conditional sales, vehicle fleet administration and debt collection services which are offered to companies in Sweden via Handelsbanken s branch operations. Private This business area is responsible for asset financing and unsecured credits to private individuals. These are offered in Sweden via Handelsbanken s branch operations. Retail Financial Services This business area provides financing for purchases of consumer and capital goods through co-operation with retailers in Sweden. Operations outside Sweden In Finland, the subsidiary Handelsbanken Rahoitus Oyj conducts operations in leasing, conditional sales, retail financial services and card services. Handelsbanken Finans s Finnish branch runs a leasing operation. In Norway, Handelsbanken Finans s Norwegian branch runs a leasing operation and its subsidiary Kreditt-Inkasso AS provides debt collection services. Handelsbanken Finans s branches in Denmark, Poland and the UK conduct leasing and hire purchase operations. In China, Handelsbanken Finans (Shanghai) Financial Leasing Company Ltd provides leasing. LENDING At year-end, the Handelsbanken Finans s total credits to the public were SEK 51.1 billion (53.0). Of this amount, the carrying amount of lease agreements was SEK 34.9 billion (37.2). In Handelsbanken Finans AB (the parent company), credits to the public, including leasing, decreased to SEK 47.3 billion (49.4). This is mainly due to a few large contracts expiring during the year. FINANCIAL PERFORMANCE Operating profit for the year went down to SEK 503 million (743), a decrease of 32 per cent. The poorer figure is due to lower net interest income as a result of lower credit volumes, poorer margins and lower market rates which also meant that return on equity was lower. Total operating income went down by 19 per cent to SEK 1,059 million (1,313). Expenses decreased to SEK 571 million (593) mainly due to lower staff costs. Exchange rate movements had a positive impact on profits of SEK 4 million. Recoveries and recalculated provisions led to credit losses generating an income of SEK 15 million (23). Net impaired credits, after deductions for provisions, totalled SEK 121 million (97) at year-end. Operating profit was SEK 337 million (581), a decrease of 42 per cent. The poorer figure is due to lower net interest income and net leasing income as a result of lower credit volumes, poorer margins and lower market rates which meant that return on equity was lower. Operating income reduced by amortisation of lease assets according to plan fell to SEK 762 million (1,013), for the abovementioned reasons. Expenses excluding amortisation of lease assets decreased to SEK 442 million (461). Recoveries and recalculated provisions led to credit losses generating an income of SEK 17 million (29). Net impaired credits, after deductions for provisions, totalled SEK 24 million (13). For a five-year overview of the income statements and balance sheets of the and parent company, see pages 4 and 5. RISKS AND RISK CONTROL Handelsbanken Finans consciously avoids high-risk transactions. The risk management aims to ensure that the company fulfils the strict approach to risk decided by the Board and which applies within the rest of the Handelsbanken. The Board establishes policies on risks, funding and capital. Limits are established by the Board for market and liquidity risk. The aim of this strict approach to risk is not just to maintain favourable and even earnings performance, but also to be a good business partner for customers; this requires sound credit capacity and preparedness also in troubled times. For information concerning Handelsbanken Finans s risks and risk control, see note 2 on page 19. CAPITAL ADEQUACY Handelsbanken Finans has a satisfactory capital situation. At year-end, the s common equity tier 1 ratio according to CRD IV was per cent (261.1). At year-end, the parent company s common equity tier 1 ratio according to CRD IV was per cent (311.6). For further information about capital adequacy, see page 34. 2

4 administration report THE BOARD The Board held 12 meetings during the year. At these meetings, the Board discussed the company s operations, financial position and strategy. The control functions of risk control, compliance and internal audit reported on material questions. Credit risk, operational risk, market and liquidity risks were followed up. A training plan has been established for the Board and training has been carried out in the field of money laundering, for example. The Board s work has been evaluated and decisions have been taken regarding strategic questions. ENVIRONMENTAL WORK As far as is technically and financially possible, and to the extent that is compatible with the company s undertakings, Handelsbanken Finans aims to promote long-term sustainable development. Therefore, the starting-point is that the company s impact on the environment must be minimised. Handelsbanken has signed and complies with voluntary agreements, such as the ICC Business Charter for Sustainable Development, the UN s Banks and the Environment programme (UNEP FI), the UN s Global Compact voluntary initiative, and the UN Principles of Responsible Investment (PRI). EMPLOYEES In 2015, Handelsbanken Finans had an average of 271 (300) employees, working in seven countries. 38 per cent of the employees work outside Sweden. Handelsbanken Finans applies the Handelsbanken s common guidelines for employees. Successful operations are based on trust and respect for the individual. Our decentralised way of working gives employees great freedom and creates a sense of involvement and the opportunity to make a difference. OTHER MATERIAL EVENTS In August 2015, Maria Lidström Andersson became Chief Executive of Handelsbanken Finans. In November 2015, Handelsbanken Finans was denied a right of appeal in the Supreme Administrative Court regarding the model for calculation of the deduction rate for input VAT applied by the company. This means that the Administrative Court of Appeal s judgement for 2007 and 2008 has been upheld. Handelsbanken Finans has reserved funds to cover extra costs regarding 2009 and subsequent years, see note 27. EVENTS AFTER THE END OF THE PERIOD No events with material impact on the annual report have occurred after the end of the financial year. REMUNERATION POLICY In Sweden, Handelsbanken Finans is party to collective agreements on general terms and conditions of employment during the employment period and on terms and conditions of pensions after employees have reached retirement age. Remuneration for work performed is set individually for each employee, and is paid in the form of a fixed salary, customary salary benefits and a pension provision. Salaries are established locally in accordance with the Handelsbanken s decentralised method of working and are revised once a year. Salaries are based on recognised salary-setting factors such as the nature and level of difficulty of the work, skills, performance and results achieved. In Sweden, pension is paid in accordance with collective agreements under a definedbenefit plan, which means that a pension amounting to a certain percentage of final salary is paid during the employee s remaining lifetime. In other countries, both defined contribution and defined benefit pension plans apply. The remuneration policy has been decided by the Board and is revised annually. The Board s remuneration committee comprises two persons who prepare decisions regarding remuneration. No variable remuneration is paid at Handelsbanken Finans. The Chief Executive s salary is established in the Articles of Association. Remuneration for executive officers is set annually by the Board of Handelsbanken Finans AB. See also note 8. Handelsbanken Finans s low tolerance of risks permeates the risk analysis on which the policy is based. GROUP STRUCTURE In 2015, Handelsbanken Finans conducted business via the following wholly-owned subsidiaries: Handelsbanken Finans (Shanghai) Financial Leasing Company Ltd Handelsbanken Rahoitus Oyj Kredit-Inkasso AB Kreditt-Inkasso AS. In Sweden, Handelsbanken Finans AB conducts debt collection services on commission on behalf of Kredit-Inkasso AB. THE FUTURE Leasing and conditional sales are a vital part of the Handelsbanken s offering to branch customers. With the purpose of making the business more efficient and facilitating for the Bank to develop these products on the respective market, a project has been started in order to investigate the conditions for closer co-ordination of the business with Handelsbanken in each country. It is planned to transfer the retail financial operations in Sweden to a separate company and in 2015 an application was submitted to the Swedish Financial Supervisory Authority. The financial markets continued to be subject to low market rates in 2015, which also had an impact on Handelsbanken Finans. Handelsbanken Finans s historically low tolerance of risk, sound capitalisation and strong liquidity situation means that the company is well equipped to cope with substantially more difficult market conditions than those experienced during the year. Starting in February 2016, unsecured credits to private individuals are offered via Handelsbanken, and no longer as Direct Credits at Handelsbanken Finans. 3

5 Five-year overview Five-year overview and key figures SEK m INCOME STATEMENT Operating income 1,059 1,313 1,620 1,908 1,943 Total income 1,059 1,313 1,620 1,908 1,943 Expenses Net credit losses Total expenses Operating profit ,049 1,228 1,456 Taxes Profit for the year ,214 1,074 BALANCE SHEET Assets Credits to credit institutions 4,082 4,622 3,338 1, Credits to the public 51,078 53,077 54,610 56,840 60,096 Equipment Other assets 932 1,063 1,491 1,748 1,587 Total assets 56,098 58,770 59,447 59,874 61,996 LIABILITIES AND EQUITY Due to credit institutions 24,758 26,342 25,331 26,075 28,658 Borrowing from the public ,506 1,555 1,573 Other liabilities 8,313 8,395 8,307 7,847 8,929 Total liabilities 33,081 34,744 35,144 35,477 39,160 Equity 23,017 24,026 24,303 24,397 22,836 Total liabilities and equity 56,098 58,770 59,447 59,874 61, Return on equity, % Return on total assets, % C/I ratio before credit losses, % C/I ratio after credit losses, % Capital ratio, % Tier 1 ratio, % Impaired credits reserve ratio, % Proportion of impaired credits, % Credit loss ratio, % Net earnings per share, SEK , Ordinary dividend per share, SEK Average number of employees ) Capital ratio and tier 1 ratio according to Basel II up to and including ) The historical comparison figures regarding the key ratios according to CRR/CRD IV for 2013 are estimates based on the company s interpretation of the regulations at the reporting date and assuming full implementation. For definitions, see page 46. 4

6 Five-year overview Five-year overview and key figures SEK m INCOME STATEMENT Lease income 3,896 4,186 4,443 4,957 5,298 Operating income Total income 4,193 4,536 4,978 5,391 5,637 Costs -3,873-3,984-4,089-4,260-4,493 Net credit losses Total expenses -3,856-3,955-4,074-4,305-4,330 Operating profit ,086 1,307 Appropriations 1, ,067 Taxes Profit for the year 1, BALANCE SHEET Assets Credits to credit institutions 3,952 4,490 3,247 1, Credits to the public 13,723 13,444 13,469 14,037 14,320 Equipment Lease assets 33,543 36,009 37,796 39,548 42,358 Other assets 2,060 2,229 2,696 2,964 2,811 Total assets 53,279 56,174 57,211 57,782 59,777 LIABILITIES AND EQUITY Due to credit institutions 22,706 24,398 23,567 24,341 26,724 Borrowing from the public ,506 1,555 1,573 Other liabilities 2,102 1,842 1,605 1, Total liabilities 24,818 26,247 26,678 26,964 29,235 Untaxed reserves 27,818 29,418 30,082 30,364 29,942 Equity Total liabilities and equity 53,279 56,174 57,211 57,782 59, Return on total assets, % Total capital ratio, % according to CRD IV 1) 2) Tier 1 ratio, % according to CRD IV 1) 2) Impaired credits reserve ratio, % Proportion of impaired credits, % 3) ) Capital ratio and tier 1 ratio according to Basel II up to and including ) The historical comparison figures regarding the key ratios according to CRR/CRD IV for 2013 are estimates based on the company s interpretation of the regulation at the reporting date and assuming full implementation. 3) Inlcuding leasing. For definitions, see page 46. 5

7 Financial reports Income statement SEK m Interest income Note 3 1,141 1,475 Interest expense Note Net interest income Fee and commission income Note Fee and commission expense Note Net fee and commission income Net gains/losses on financial transactions Note Other operating income Note Total income 1,059 1,313 Administrative expenses Staff costs Note Other expenses Note Depreciation, amortisation and impairments of property, equipment and intangible non-current assets Note Total expenses Net credit losses Note Profit for the year Taxes Note Profit for the year Attributable to Ordinary shareholders Net earnings per share, before and after dilution, SEK Statement of comprehensive income SEK m Profit for the year Other comprehensive income Items that may subsequently be reclassified to profit or loss for the year Cash flow hedges 0-21 Available-for-sale instruments 2 1 Translation differences for the year of which hedging of net investment in subsidiaries Tax related to other comprehensive income of which cash flow hedges 0 5 of which hedging of net investment in subsidiaries Total other comprehensive income Total comprehensive income for the year Attriutable to Ordinary shareholders Minority interest - - The year s reclassifications to the income statement are presented in Statement of changes in equity. 6

8 Financial reports Balance sheet SEK m ASSETS Credits to credit institutions Note 13 4,082 4,622 Credits to the public Note 14 51,078 53,077 Shares and participating interests Note Derivative instruments Note Intangible assets Note Equipment Note Current tax assets 2 - Deferred tax assets Note Other assets Note Prepaid expenses and accrued income Note Total assets 56,098 58,770 LIABILITIES AND EQUITY Due to credit institutions Note 22 24,758 26,342 Borrowing from the public Note Current tax liabilities Deferred tax liabilities Note 26 6,123 6,474 Provisions Note Other liabilities Note 24 1,702 1,527 Accrued expenses and deferred income Note Total liabilities 33,081 34,744 Share capital Provisions Retained earnings 22,424 23,210 Profit for the year Total equity 23,017 24,026 Total liabilities and equity 56,098 58,770 7

9 Financial reports Statement of changes in equity 2014 SEK m Share capital Hedge reserve Fair value reserve Translation reserve Retained earnings Total Opening equity ,107 24,303 Profit for the year Other comprehensive income Total comprehensive income for the year contribution provided -1,150-1,150 Tax effect of contribution Closing equity ,797 24, SEK m Share capital Hedge reserve Fair value reserve Translation reserve Retained earnings Total Opening equity ,797 24,026 Profit for the year Other comprehensive income Total comprehensive income for the year Dividend contribution provided -1,400-1,400 Tax effect of contribution Closing equity ,814 23,017 Specification of changes in equity Change in hedge reserve SEK m Hedge reserve at beginning of year 0 16 Unrealised value changes during the year Hedge reserve at end of year 0 0 Change in fair value reserve SEK m Fair value reserve at beginning of year 6 5 Unrealised market value changes during the year for remaining and new holdings 2 1 Fair value reserve at end of year 8 6 Change in translation reserve SEK m Translation reserve at beginning of year Change in translation difference related to branches -3 3 Change in translation difference related to subsidiaries Change in translation reserve on funding net assets in subsidiaries Translation reserve at end of year

10 Financial reports Cash flow statement SEK m OPERATING ACTIVITIES Operating profit of which paid-in interest 1,199 1,526 of which paid-out interest Adjustment for non-cash items in operating profit Credit losses Unrealised changes in value 0 0 Depreciation, amortisation and impairments 5 6 Paid income tax Changes in the assets and liabilities of operating activities Credits to credit institutions Credits to the public 1,933 1,467 Interest-bearing securities and equities 0 0 Due to credit institutions -1,584 1,012 Borrowing from the public 3-1,499 Derivative instruments, net positions Other Cash flow from operating activities 906 2,269 INVESTING ACTIVITIES Change in tangible non-current assets -1-3 Change in intangible non-current assets -5-9 Cash flow from investing activities FINANCING ACTIVITIES Dividend paid contribution paid -1,150-1,000 Cash flow from financing activities -1,430-1,000 CASH FLOW FOR THE YEAR ,257 Liquid funds at beginning of year 4,622 3,338 Cash flow from operating activities 906 2,269 Cash flow from investing activities Cash flow from financing activities -1,430-1,000 Exchange rate difference on liquid funds Liquid funds at end of year 4,082 4,622 Liquid funds are defined as those parts of the item Credits to credit institutions that relate to bank balances in Swedish kronor and foreign currency. 9

11 Financial reports Income statement SEK m Interest income Note Lease income Note 4 3,896 4,186 Interest expense Note Fee and commission income Note Fee and commission expense Note Net gains/losses on financial transactions Note Other operating income Note Total operating income 4,193 4,536 Administrative expenses Staff costs Note Other expenses Note Depreciation, amortisation and impairments of property, equipment and intangible non-current assets Note 10-3,440-3,532 Total expenses -3,873-3,984 Net credit losses Note Operating profit Appropriations Note 12 1, Profit before taxes 1,937 1,245 Taxes Note Profit for the year 1, Statement of comprehensive income SEK m Profit for the year 1, Other comprehensive income Items that may subsequently be reclassified to profit or loss for the year Cash flow hedges 0-21 Available-for-sale instruments 2 1 Translation differences for the year -2 1 Tax related to other comprehensive income 0 5 of which cash flow hedges 0 5 Total other comprehensive income 0-14 Total comprehensive income for the year 1, The year s reclassifications to the income are presented in Statement of changes in equity. 10

12 Financial reports Balance sheet SEK m ASSETS Credits to credit institutions Note 13 3,952 4,490 Credits to the public Note 14 13,723 13,444 Shares and participating interests Note Shares and participating interests in companies Note 15 1,348 1,348 Derivative instruments Note Intangible assets Note Tangible assets Equipment Note Lease assets Note 19 33,543 36,009 Other assets Note Prepaid expenses and accrued income Note Total assets 53,279 56,174 LIABILITIES AND EQUITY Due to credit institutions Note 22 22,706 24,398 Borrowing from the public Note Current tax liabilities Deferred tax liabilities Note Provisions Note Other liabilities Note 24 1,661 1,498 Accrued expenses and deferred income Note Total liabilities 24,818 26,247 Untaxed reserves Note 28 27,818 29,418 Share capital Other funds Retained earnings -1, Profit for the year 1, Total equity Total liabilities and equity 53,279 56,174 MEMORANDUM ITEMS Assets pledged for own debt Note 35 10,451 12,290 Commitments Note 30 11,414 11,055 11

13 Financial reports Statement of changes in equity 2014 Restricted equity Unrestricted equity SEK m Share capital Statutory reserve Hedge reserve Fair value reserve Translation reserve Retained earnings Total Opening equity Profit for the year Other comprehensive income Total comprehensive income for the year contribution provided -1,150-1,150 Tax effect of contribution Closing equity Restricted equity Unrestricted equity SEK m Share capital Statutory reserve Hedge reserve Fair value reserve Translation reserve Retained earnings Total Opening equity Profit for the year 1,506 1,506 Other comprehensive income Total comprehensive income for the year ,506 1,506 Dividend contribution provided -1,400-1,400 Tax effect of contribution Closing equity Specification of changes in equity Change in hedge reserve SEK m Hedge reserve at beginning of year 0 16 Unrealised value changes during the year Hedge reserve at end of year 0 0 Change in fair value reserve SEK m Fair value reserve at beginning of year 6 5 Unrealised market value changes during the year for remaining and new holdings 2 1 Fair value reserve at end of year 8 6 Change in translation reserve SEK m Translation reserve at beginning of year -2-3 Change in translation difference related to branches -2 1 Translation reserve at end of year

14 Financial reports Cash flow statement SEK m OPERATING ACTIVITIES Operating profit of which paid-in interest of which paid-out interest Adjustment for non-cash items in profit/loss Credit losses Unrealised changes in value 0 0 Depreciation, amortisation and impairments 3,440 3,532 Paid income tax Changes in the assets and liabilities of operating activities Credits to credit institutions 0 0 Credits to the public Lease assets Interest-bearing securities and equities 0 0 Due to credit institutions -1, Borrowing from the public 3-1,499 Derivative instruments, net positions Other Cash flow from operating activities 921 2,227 INVESTING ACTIVITIES Change in tangible non-current assets Change in intangible non-current assets -7-7 Cash flow from investing activities FINANCING ACTIVITIES Dividend paid contribution paid -1,150-1,000 Cash flow from financing activities -1,430-1,000 CASH FLOW FOR THE YEAR ,225 Liquid funds at beginning of year 4,490 3,247 Cash flow from operating activities 921 2,227 Cash flow from investing activities Cash flow from financing activities -1,430-1,000 Exchange rate difference on liquid funds Liquid funds at end of year 3,952 4,490 Liquid funds are defined as those parts of the item Credits to credit institutions that relate to bank balances in Swedish kronor and foreign currency. 13

15 Notes NOTE 1 Accounting policies CONTENTS 1. Statement of compliance 2. Changed accounting policies, etc. 3. Basis of consolidation and presentation 4. Assets and liabilities in foreign currencies 5. Recognition of assets and liabilities in the balance sheet 6. Classification of financial assets and liabilities 7. Principles for fair value measurement of financial assets and liabilities 8. Credit losses and impairment of financial assets 9. Hedge accounting 10. Leases 11. Intangible assets 12. Equipment 13. Provisions 14. Equity 15. Income 16. Employee benefits 17. Taxes 18. Material assessments and assumptions concerning the future 19. Contingent liabilities 1. STATEMENT OF COMPLIANCE The consolidated accounts have been prepared in accordance with international financial reporting standards (IFRS) and interpretations of these standards as adopted by the EU. The accounting policies also follow the Annual Accounts Act for Credit Institutions and Securities Companies (1995:1559), and the regulations and general guidelines issued by the Swedish Financial Supervisory Authority, FFFS 2008:25, Annual reports in credit institutions and investment firms. RFR 1 Supplementary accounting rules for groups as well as statements from the Swedish Financial Reporting Board are also applied in the consolidated accounts. The parent company s accounting policies are presented further down in this note. Svenska Handelsbanken AB (publ), corporate identity no , prepares consolidated accounts which include Handelsbanken Finans AB. Handelsbanken s Board has its registered office in Stockholm. Valuation principles when preparing the company s financial reports Assets and liabilities are recognised at historical cost. Financial assets and liabilities are recognised at amortised cost, except for derivatives which are recognised at fair value. Issuing and adoption of annual report The annual report and consolidated accounts were approved for issue by the Board on 10 March 2016 and will be presented for adoption at the AGM on 28 April CHANGED ACCOUNTING PRINCIPLES ETC. On 1 January 2015, the interpretative communication IFRIC 21 Levies came into effect for application within the EU. This regulatory change has not had a material impact on the s financial position and earnings, nor has it had any impact on capital adequacy. No accounting regulatory changes that came into force as of 2015 had a material impact on the s reported figures or financial position. The annual report has thus been prepared in accordance with essentially the same accounting policies and calculation methods applied in the 2014 annual report. Future regulatory changes IFRS 9 Financial Instruments, which is to replace IAS 39 Financial Instruments: Recognition and Measurement, was adopted by the IASB in July Assuming that IFRS 9 is adopted by the EU, and the date of implementation proposed by the IASB is not changed, this standard will be applied as of the 2018 financial year. The standard comprises three areas: classification and measurement, impairment of financial instruments and general hedge accounting. The new regulations for classification and measurement of financial instruments are based on the company s business model and the purpose of the holding. Due to the new regulations on writedowns, a model has been introduced which is based on expected credit losses and not on actual credit losses as in the existing model in IAS 39. The new general regulations for hedge accounting allow the company s own risk management to be better reflected in the financial reports. Handelsbanken Finans is currently analysing the financial effects of the new standard in more detail. IFRS 15 Revenue from contracts with customers has also been adopted by the IASB. Assuming that IFRS 15 is adopted by the EU, and the date of implementation proposed by the IASB is not changed, this standard will be applied as of the 2018 financial year. The current assessment is that the new standard will not have any material impact on Handelsbanken Finans s financial reports, capital adequacy or large exposures. On 13 January 2016, the IASB adopted the new standard IFRS 16 Leases. The standard, which comes into force on 1 January 2019, is assessed to have major impact on accounting of lease business for Handelsbanken Finans s customers, and thus indirectly on Handelsbanken Finans. Work has started on analysing the impact of the standard. None of the other changes in the accounting regulations issued for application are assessed to have a material impact on Handelsbanken Finans s financial reports, capital adequacy, large exposures or other circumstances according to the applicable regulatory requirements. 3. BASIS OF CONSOLIDATION AND PRESENTATION All companies directly or indirectly controlled by Handelsbanken Finans (subsidiaries) have been fully consolidated. Handelsbanken Finans is deemed to have direct control of a company when Handelsbanken Finans is exposed to, or is entitled to, variable returns from its holdings in the company and can affect the return by means of its influence over the company. Control is normally presumed to exist if Handelsbanken Finans holds more than 50 per cent of the voting power at shareholders meetings or the equivalent. Handelsbanken Finans has a 100 per cent ownership interest in all its subsidiaries. Subsidiaries are consolidated according to the acquisition method. This means that the acquisition of a subsidiary is regarded as a transaction where the acquires the company s identifiable assets and assumes its liabilities and obligations. In the case of business combinations, an acquisition balance sheet is prepared, where identifiable assets and liabilities are valued at fair value at the time of acquisition. The cost of the business combination comprises the fair value of all assets, liabilities and issued equity instruments provided as payment for the net assets in the subsidiary. Any surplus due to the cost of the business combination exceeding the identifiable net assets on the acquisition balance sheet is recognised as goodwill in the s balance sheet. Acquisition-related costs are recognised when they arise. The subsidiary s financial reports are included in the consolidated accounts starting on the acquisition date until the date on which control ceases. Intra-group transactions and balances are eliminated when preparing the s financial reports. Where the accounting policies applied for an individual subsidiary do not correspond to the policies applied in the, an adjustment is made to the consolidated accounts when consolidating the subsidiary. 14

16 4. ASSETS AND LIABILITIES IN FOREIGN CURRENCIES The s presentation currency is Swedish kronor. The functional currency for the s operations outside Sweden usually differs from the s presentation currency. The currency used in the economic environment where the operations are primarily conducted is regarded as the functional currency. Transactions in foreign currency are translated to the functional currency on the transaction date. Monetary items and assets and liabilities at fair value are valued at the functional currency s spot price at the end of the balance sheet date. Translation differences arising from non-monetary items classified as available-for-sale financial assets are recognised as a component of Other comprehensive income and accumulated in equity. Exchange rate differences arising when translating monetary items comprising part of a net investment in a foreign operation are recognised in the same way. Other exchange rate differences are recognised in the income statement. Translation of foreign operations to the s presentation currency When translating the foreign units (including branches) balance sheets and income statements from the functional currency, the current method has been used. This means that assets and liabilities are translated at the closing day rate. Equity is translated at the rate applicable at the time of investment or earning. The income statement has been translated at the average annual rate. Exchange differences are recognised as a component of Other comprehensive income and are included in the translation reserve in equity. 5. RECOGNITION OF ASSETS AND LIABILITIES IN THE BALANCE SHEET An asset is defined as a resource over which there is control as a result of past events and that is expected to provide future economic benefit. Assets are recognised in the balance sheet when it is probable that the future economic benefits related to the asset will accrue to the and when the value or acquisition cost of the asset can be reliably measured. Liabilities are the s existing obligations which as a result of past events are expected to lead to an outflow of resources from the. A liability is recognised in the balance sheet when, in order to fulfil an existing obligation, it is probable that the must surrender a resource with a value that can be reliably measured. Financial assets are recognised in the balance sheet when the becomes a party to the contractual provisions of the instrument. Purchases and sales of money market and capital market instruments on the spot market are recognised on the trade date. The same applies to derivatives. Other financial assets and liabilities are normally recognised on the settlement date. Financial assets are removed from the balance sheet when the contractual rights to the cash flows originating from the asset expire or when all risks and rewards related to the asset are transferred to another party. A financial liability is removed from the balance sheet when the obligation ceases or is cancelled. When accounting for business combinations, the acquired operations are recognised in the s accounts from the acquisition date. The acquisition date is the date when controlling influence of the acquired entity starts. The acquisition date may differ from the date when the transaction is legally established. Offsetting of financial assets and liabilities is applied where applicable with regard to derivative instruments. In other respects, operations are of the type where offsetting does not occur. The policies for recognising assets and liabilities in the balance sheet are of particular significance when accounting for leases. See the separate section below. Dividends are recognised as a liability after the annual general meeting has approved the dividend. 6. CLASSIFICATION OF FINANCIAL ASSETS AND LIABILITIES For the purposes of measurement, in compliance with IAS 39, all financial assets are placed in the following valuation categories: 1. credits and receivables 2. assets held to maturity 3. assets at fair value through profit or loss held for trading assets which upon initial recognition were designated at fair value through profit or loss 4. available-for-sale assets. Financial liabilities are classified as follows: 1. liabilities at fair value through profit or loss liabilities held for trading liabilities which upon initial recognition were designated at fair value through profit or loss 2. other financial liabilities. The classification in the balance sheet is independent of the measurement category. Thus, different measurement principles may be applied for assets and liabilities carried on the same line in the balance sheet. A classification into measurement categories of the financial assets and liabilities which are recognised on the balance sheet is shown in note 31. Upon initial recognition, all financial assets and liabilities are designated at fair value. For assets and liabilities at fair value through profit or loss, the transaction costs are recognised directly in profit or loss at the time of acquisition. For other financial instruments, the transaction costs are included in the acquisition value. Credits and receivables Unlisted interest-bearing assets are classified as Credits and receivables. Credits and receivables are carried at amortised cost, i.e. the discounted present value of all future cash flows relating to the instrument where the discount rate is the asset s effective interest rate at the time of acquisition. Credits and receivables are subject to impairment testing when there are indications of a need to recognise an impairment loss. See section 8 for more details. The impairment loss is recognised in the income statement. Thus, credits and receivables are recognised at their net amount, after deduction for probable and actual credit losses. Early redemption fees for credits and receivables which are repaid before maturity are recognised immediately in the income statement under Net gains/losses on financial transactions. Assets and liabilities held for trading Assets and liabilities held for trading are recognised at fair value in the balance sheet. Interest, dividends and other value changes related to these instruments are recognised in the income statement under Net gains/losses on financial transactions. Derivatives that are not hedging instruments are always classified as held for trading. Available-for-sale financial assets The s holdings of equities for which there is an active market but which are not held for trading are classified as available-for-sale financial assets. Financial assets which have been classified as available for sale are recognised at fair value in the balance sheet. Changes in market value of the assets are recognised as a component of Other comprehensive income and are included in the fair value reserve in equity. Changes in fair value are not recognised in the income statement until the asset has been realised or an impairment loss has occurred. Impairment testing of available-for-sale financial assets is performed when there is an indication of a need to recognise an impairment; see section 8 concerning impairment losses for financial assets. Dividends on shares designated as available for sale are continuously recognised in profit or loss as Other dividend income. Other financial liabilities Unlisted interest-bearing liabilities are reported in other financial liabilities and are carried at amortised cost. The amortised cost value is calculated in the same way as for credit receivables. Committed credit offers Committed credit offers are reported off balance until the settlement date of the credit. Fees received for credit commitments are accrued in net fee and commission income over the maturity of the commitment unless it is highly probable that the commitment will be fulfilled, in which case the fee received is included in the effective interest rate of the credit. 7. PRINCIPLES FOR FAIR VALUE MEASUREMENT OF FINANCIAL ASSETS AND LIABILITIES Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent market participants. 15

17 NOTE 1 Cont. For financial instruments traded on an active market, the fair value is the same as the quoted market price. An active market is one where quoted prices are readily and regularly available from a regulated market, execution venue, reliable news service or equivalent, and where the price information received can be verified by means of regularly occurring transactions. The current market price is generally the same as the current bid price for financial assets or the current ask price for financial liabilities. For holdings which comprise risk positions that to a large degree balance each other out, the current market price is the mid-market price on the balance sheet date. For financial instruments where there is no reliable information about market prices, fair value is established using valuation models. The valuation models used are based on input data which essentially can be verified using market observations such as market interest rates and share prices. If necessary, an adjustment is made for other variables which a market participant would be expected to take into consideration when setting a price. The assumptions used in the valuation are based on internally generated experience and are continuously examined by the risk organisation. The result is compared with the actual outcome so as to identify any need to adapt the forecasting tool. Shares and participating interests Shares listed on an active market are valued at market price. Derivatives Derivatives which are traded on an active market are valued at market price. The s derivative contracts comprise interest rate swaps valued using valuation models based on market rates and other market prices. 8. CREDIT LOSSES AND IMPAIRMENT OF FINANCIAL ASSETS All units with customer and credit responsibility in the Handelsbanken regularly perform individual assessments of the need for recognising impairment losses for credits and receivables that are recognised at amortised cost. Impairment testing is performed where there is objective evidence that the recoverable amount of the credit is less than its carrying amount. Objective evidence could, according to the circumstances, be late or non-payment, bankruptcy, changed credit rating, or a decline in the market value of the collateral. When performing impairment testing, the recoverable value of the receivable is calculated by discounting the estimated future cash flows related to the credit and any collateral (including guarantees) by the effective interest rate of the credit. If the collateral is a listed asset, the valuation of the collateral is based on the quoted price; otherwise the valuation is based on the yield value or the market value estimated in some other manner. An impairment loss is recognised if the estimated recoverable amount is less than the carrying amount and is recognised as a credit loss in the income statement. A reported credit loss reduces the carrying amount of the credit in the balance sheet, either directly (actual loss) or by a provision account for credit losses (probable loss). In addition to this individual assessment of credits, a collective assessment is made of individually measured credits with the purpose of identifying the need to recognise an impairment loss that cannot yet be allocated to individual credits. The analysis is based on a distribution of individually valued credits in terms of the risk class. An impairment loss is recognised if this is justifiable taking into account changes in the risk classification and expected loss. Impairment losses which have been recognised for a group of credits are transferred to impairment losses for individual credits as soon as there is available information about the impairment in value at an individual level. Collective impairment testing is also performed for homogeneous groups of smaller credits with a similar risk profile in which no single credit is of particular significance, primarily card credits and minor credits to private individuals. Impairment testing is performed where there is objective evidence that the recoverable amount of a group of credits is less than their carrying amount. Objective evidence could, for example, be late or non-payment. Credit losses for the period comprise actual losses and probable losses on credits granted, minus recoveries and reversals of previous impairment losses recognised for probable credit losses. Actual credit losses may refer to entire credits or parts of credits and are recognised when there is no realistic possibility of recovery. This is the case, for example, when a trustee in bankruptcy has estimated bankruptcy dividends, when a scheme of arrangement has been accepted, or a concession has been extended in some other way. An amount forgiven in connection with reconstruction of a credit or group of credits is always classified as an actual loss. If the customer is following a payment plan for a credit which was previously classified as an actual credit loss, the amount of the loss is subject to new testing. Recoveries comprise reversed amounts on credit losses previously reported as actual losses. Information about probable and actual credit losses is provided in note 11. Information concerning impaired credits Information concerning impaired credits is provided gross, before a provision for probable credit losses, and net, after a provision for probable credit losses. Credits are defined as impaired if it is not probable that all contracted cash flows will be fulfilled. The full amount of all credits which have been classified as impaired are carried as impaired credits even if parts of the credit are covered by collateral. Credits which have been written down as actual credit losses are not included in impaired credits. 9. HEDGE ACCOUNTING The applies different methods for hedge accounting, depending on the purpose of the hedge. For cash flow hedges, interest rate swaps are used as the hedging instrument. When hedging currency risks related to net investments in foreign units, financial liabilities in the functional currency of the foreign unit are used as the hedging instrument. Cash flow hedges are used to manage exposures to variations in cash flows related to changes in the variable interest rate on lending and funding. The expected maturity for this type of lending and funding is normally much longer than the fixing period, which is very short. Cash flow hedges are also used to hedge the currency risk in future cash flows deriving from lending and funding. Currency risks deriving from intragroup monetary items can also be subject to this type of hedging, if they give rise to currency exposures which are not fully eliminated on consolidation. Derivatives which are hedging instruments in cash flow hedges are measured at fair value. If the derivative s value change is effective that is, it corresponds to future cash flows related to the hedged item it is recognised as a component of Other comprehensive income and in the hedge reserve in equity. Ineffective components of the derivative s value change are recognised in the income statement under Net gains/losses on financial transactions. More information about cash flow hedges is provided in note 16. Hedging of net investments in foreign units is applied to protect the from exchange rate differences due to operations abroad. Credits in foreign currency raised to hedge net investments in foreign operations are recognised in the at the exchange rate on the balance sheet date. The effective part of the exchange rate differences for such credits is recognised as a component of Other comprehensive income and in the translation reserve in equity. The ineffective components of the hedge are recognised in the income statement. 10. LEASES The s leases are defined as either finance or operating leases. A finance lease substantially transfers all the risks and rewards incidental to legal ownership of the leased asset from the lessor to the lessee. Other leases are operating leases. All agreements where the is the lessor have been defined as finance leases. Leases of this kind are carried as credits in the balance sheet, initially for an amount corresponding to the net investment. Lease fees received are recognised on a continual basis as interest income or repayments. Impairment testing on finance leases is performed according to the same principles as for other lending which is reported at amortised cost. Operating leases are not reported in the balance sheet. Expenses relating to operating leases where the is the lessor are recognised on a straight-line basis over the leasing period as other expenses. 16

18 11. INTANGIBLE ASSETS Recognition in the balance sheet An intangible asset is an identifiable non-monetary asset without physical form. An intangible asset is only recognised in the balance sheet if the probable future economic benefits attributable to the asset will flow to the and the cost of acquisition can be reliably measured. This means that internally generated values in the form of goodwill, brands, customer databases and similar are not recognised as assets in the balance sheet. Investments in software developed by the Bank are carried as an expense on a current basis to the extent that the expenditure refers to maintenance of existing business operations or software. In the case of development of new software, or new business operations for existing software, the expenditure incurred is capitalised from the time when it is probable that economic benefit that can be reliably measured will arise. Expenditure arising from borrowing costs is capitalised from the date on which the decision was made to capitalise expenditure for development of intangible assets. Goodwill Goodwill is carried at cost less any impairment losses. These assets are tested annually for impairment when preparing the annual accounts or when there is an indication that the asset is impaired. Impairment testing is performed by calculating the recoverable amount of the assets, i.e. the higher of the value in use and the fair value less costs to sell. As long as the recoverable amount exceeds the carrying amount, no impairment loss needs to be recognised. Impairment losses are recognised directly in the income statement. Material assessments and assumptions in impairment testing of goodwill are described in note 17 and in section 18. Previously recognised goodwill impairment losses are not reversed. Intangible assets with a finite useful life Intangible assets for which it is possible to establish an estimated useful life are amortised. The amortisation is on a straight-line basis over the useful life of the asset. The amortisation period is tested on an individual basis at the time of new acquisition and also continually if there are indications that the useful life may have changed. Intangible assets with a finite useful life are tested for impairment when there is an indication that the asset may be impaired. The impairment test is performed in the same way as for intangible assets with an indefinite useful life, i.e. by calculating the recoverable amount of the asset. 12. EQUIPMENT The s tangible non-current assets consist of equipment that is recorded at cost of acquisition less accumulated depreciation and impairment losses. Depreciation is based on the estimated useful lives of the assets. A linear depreciation plan is usually applied. The estimated useful lives are tested annually. Personal computers are usually depreciated over three years and other equipment is depreciated over five years. Impairment testing of property and equipment is carried out when there is an indication that the value of the asset has decreased. Impairment loss is recognised in cases where the recoverable amount is less than the carrying amount. Any impairment losses are recognised immediately in the income statement. An impairment charge is reversed if there is an indication that there is no longer any impairment loss and there has been a change in the assumptions underlying the estimated recoverable amount. 13. PROVISIONS Provisions consist of recognised expected negative outflows of resources from the and which are uncertain in terms of timing or amount. Provisions are reported when the, as a consequence of past events, has a legal or constructive obligation, and it is probable that an outflow of resources will be required to settle the obligation. For recognition it must be possible to estimate the amount reliably. The amount recognised as a provision corresponds to the best estimate of the expenditure required to settle the obligation at the balance sheet date. The expected future date of the settlement is taken into account in the estimate. 14. EQUITY Equity comprises the following components. Hedge reserve Unrealised changes in value on derivative instruments which comprise hedge instruments in cash flow hedges are reported in the hedge reserve. Fair value reserve The fair value reserve comprises unrealised changes in value on financial assets classified as available for sale. Translation reserve The translation reserve comprises unrealised foreign exchange effects arising due to translation of foreign units to the currency of the consolidated accounts. Retained earnings Retained earnings comprise the profits generated from the current and previous financial years. 15. INCOME Income is recognised in the income statement when it is probable that future economic benefits will be gained and these benefits can be reliably measured. The following general principles apply to recognition of income for various types of fees and charges: Fees attributable to a specific service or action are recognised as income at the time the service is performed. Examples of such fees are payment commissions. Fees that constitute part of the effective interest of a financial instrument are accrued in cases where the instrument is valued at amortised cost in accordance with the effective interest method. For financial instruments at fair value, such fees are recognised as income immediately. Net interest income Interest income and interest expense are recognised as Net interest income in the income statement, with the exception of interest flows deriving from held-for-trading financial instruments. Net interest income also includes interest deriving from derivative instruments that hedge items whose interest flows are recognised in Net interest income. In addition to interest income and interest expense, net interest income includes fees for state guarantees, such as deposit guarantees and stability fees. Net fee and commission income Income and expense for various kinds of services are recognised in the income statement under Fee and commission income and Fee and commission expense, respectively. This primarily concerns commission related to leasing and conditional sales. Net gains/losses on financial transactions Net gains/losses on financial transactions include all items with an impact on profit or loss which arise when measuring financial assets and liabilities at fair value in the income statement and when financial assets and liabilities are realised. Specifically, the items reported here are: Capital gains or losses from the disposal and settlement of financial assets and liabilities. Realised and unrealised changes in value on financial assets and liabilities classified as held for trading. Interest from held-for-trading financial instruments, with the exception of interest originating from derivatives that are hedging instruments whose interest flows are reported in Net interest income. Ineffective component of the value change on derivatives which comprise hedging instruments in cash flow hedges. Ineffective component of the value change on hedging instruments which are hedging net investments in foreign operations. Dividend received Dividends on shares classified as available for sale are recognised in profit and loss as Other dividend income, if such income exists. 17