Annual report a Svenska Handelsbanken company

Transcription

1 Annual report 2004 a Svenska Handelsbanken company

2 PUBLICATION DATES FOR INTERIM REPORTS: January March 25 April 2005 January June 23 August 2005 January September 25 October 2005

3 Contents Key figures and definitions 2 Highlights of A word from the chief executive 4 Organisation and human resources 6 Lending 8 Funding operations 12 Risk management, capital adequacy and rating 15 Financial results 18 Sensitivity analysis 19 Income statement 20 Balance sheet 21 Changes in shareholders equity 22 Cash flow statement 23 Accounting principles 24 Notes 26 Recommendation for distribution of profits 35 Audit report 36 Board, auditors and senior management 37 Five-year summary 38 Stadshypotek, bond tables 39 Facts about the company, addresses 41 The pages in the annual report which are part of the directors report are separately marked at the bottom of the page. The following sections are not part of the directors report: Highlights of 2004, A word from the chief executive, Income statement, Balance sheet, Changes in shareholders equity, Cash flow statement, Accounting principles, Notes (including other disclosures), Audit report and Stadshypotek s bond tables. a Svenska Handelsbanken company DIRECTORS REPORT 1

4 Key figures Key figures Profit before loan losses, SEK m Loan losses, SEK m Operating profit, SEK m Total assets, SEK m Shareholders equity, SEK m Return on shareholders equity, % Cost/income ratio before loan losses, % Cost/income ratio after loan losses, % Net interest margin, % Loan loss ratio,% Bad debt reserve ratio, % Proportion of bad debts, % Capital ratio, % Tier 1 capital ratio, % Return on total assets, % Average number of employees DEFINITIONS BAD DEBTS. Loans where payments will probably not be met according to the conditions of the contract. A loan is not a bad debt if there is collateral which covers the principal amount, interest and penalties for late payments by a satisfactory margin. BAD DEBT RESERVE RATIO. Provision for probable loan losses as a percentage of gross bad debts. CAPITAL BASE. The capital base is the sum of tier 1 (primary) and tier 2 (supplementary) capital. Tier 1 capital comprises shareholders equity less goodwill plus 72% of untaxed reserves in the parent company. Tier 2 capital includes subordinated loans with some reduction when the residual maturity is under five years. This part of the supplementary capital must not exceed 50% of tier 1 capital. CAPITAL RATIO. Capital ratio or the total capital ratio is the capital base in relation to risk-weighted volume. The Act on Capital Adequacy and Large Exposures of Credit Institutions and Securities Companies stipulates that it should be at least 8%. COST/INCOME (C/I) RATIO. Total expenses in relation to total income. The C/I ratio is computed before and after loan losses including changes in value of repossessed property. LOAN LOSS RATIO. Loan losses and changes in value of repossessed property as a percentage of the opening balance for lending to the general public, lending to credit institutions (excluding banks), repossessed property and credit guarantees. NON-PERFORMING LOANS. Loans where interest, repayments or overdrafts have been due for payment for more than 60 days. PROFITABILITY. See Return on equity. PROPORTION OF BAD DEBTS. Bad debts (net) in relation to total lending to the general public and credit institutions (excluding banks). RESTRUCTURED LOAN RECEIVABLES. Loans where some kind of concession has been made due to the borrower s inadequate payment capacity. RETURN ON EQUITY. Earnings for the period after appropriations and tax in relation to average shareholders equity adjusted for rights issues and dividend and also including minority interest. RETURN ON TOTAL ASSETS. Operating profit before tax in relation to average total assets. RISK-WEIGHTED VOLUME. The risk-weighted volume is determined by the assets and off-balance-sheet items being placed in varying risk classes, in accordance with the Act on Capital Adequacy and Large Exposures of Credit Institutions and Securities Companies. The volumes are weighted taking into account the assessed risk such that they are included in the risk-weighted volume by 0%, 20%, 50% or 100%. TIER 1 CAPITAL RATIO. Primary capital in relation to risk-weighted volume. (See Capital base and Risk-weighted volume.) NET INTEREST MARGIN. Net interest income in relation to average total assets. 2 STADSHYPOTEK ANNUAL REPORT 2004 DIRECTORS REPORT

5 Highlights of 2004 Operating profit increased by SEK 145m to SEK 5,150m. Net interest income rose by SEK 197m to SEK 5,183m, an increase of 4%. Most satisfied corporate customers in the mortgage market. Stadshypotek s position as the leading player in the corporate market was reinforced. Largest proportion of satisfied private customers of the major banks mortgage institutions. New features launched for the private market have been warmly welcomed. Higher rating from Moody s and Standard & Poor s. DIRECTORS REPORT STADSHYPOTEK ANNUAL REPORT

6 A word from the chief executive For Stadshypotek, 2004 was another year of growth, producing an increase in both profits and lending volumes. Furthermore, Stadshypotek consolidated its position as the dominant lender to the corporate sector and this has been achieved with the most satisfied customers. These positive trends are the result of solid groundwork in Handelsbanken s branch operations. I am pleased to report that Stadshypotek has continued to show improvements in earnings. Our operating profit amounted to SEK 5,150m, an increase of SEK 145m compared with the previous year. The main reason for the favourable earnings trend was an improved net interest income, which was attributable primarily to an increase in lending volumes. As in previous years, our active and successful debt management operations have contributed to the positive earnings trend. Greater uniformity in the structure of our companies and systems coupled with more efficient working practices have helped keep cost levels on the right track in This also meant that additional efforts devoted to systems support and new products could proceed during the year without any increase in costs. The high quality of credits was another important element that had a positive impact on earnings. The repayment capacity of our borrowers has remained solid. The proportion of bad debts and the need for making provisions for these has steadily decreased. The overall effect was that recoveries once again exceeded new loan losses. LEADING POSITION IN THE CORPORATE MARKET Stadshypotek consolidated its position in 2004 as the leading lender to the corporate market. Lending rose by SEK 4bn, a slight increase compared to This consists largely of loans to housing co-operatives situated mainly in growth regions. The increase should be considered in light of the fact that overall lending from mortgage companies to the corporate market continued to follow a downward trend in 2004, falling by SEK 8bn. Stadshypotek increased its market share to the corporate market by 1.4 percentage points to 34.2%. The market share for loans to housing co-operatives also rose slightly to 34.8% (34.4). SATISFIED CUSTOMERS One of our most important aims is to increase our lending and to do so with satisfied customers. I am therefore pleased to be able to report that our position in the annual survey of customer satisfaction in the mortgage market, conducted by Svenskt Kvalitetsindex (SKI), improved compared with the previous year. According to the survey, Handelsbanken and Stadshypotek have the most satisfied customers in the mortgage market. According to SKI, we also have the highest proportion of satisfied private customers of all the major bank-owned mortgage institutions. This proportion has also improved compared with last year s survey. The positive results of the customer satisfaction survey should primarily be attributed to the competence and commitment of all employees at Handelsbanken s branch offices. They show that the determined efforts to be available at all times and to provide good service, which happens every day at Handelsbanken s branches, are appreciated by customers. Satisfied customers are also important indeed crucial for attracting new customers. The positive testimonials we have received in these customer satisfaction surveys raise our hopes for continued good progress in the future. NEW PRODUCTS Our aim is that Stadshypotek and Handelsbanken should be a secure, long-term alternative for our customers. Much of our work is therefore focused on constantly developing our product range to be able to offer services that have a high customer value. The expansion of the product range in 2004 was aimed mainly at improving the number of choices available to private customers, as well as their financial terms and security. To meet the high level of customer interest for taking advantage of the historically low short-term interest rates, a new three-month product was added to Stadshypotek s product range in April. The loan has an interest rate that is fixed for three months at a time and is a good value alternative to variable rate loans. The loan product showed the highest growth in monetary terms during the year. In April, the higher interest rate for fixed-rate loans for housing co-operative apartments and second homes was removed. As a result, we now apply the same interest rates on our fixedrate loans, regardless of the type of property concerned. At the beginning of May, the Loan protection with security capital product was launched. This service is provided free of charge to customers who have all their loans in Handelsbanken/Stadshypotek. This simple way of providing a family with greater security in the event of a death has been very well received. The service has been used by a large number of customers and also one of the main reasons for the improving trends in our lending to private customers. 4 STADSHYPOTEK ANNUAL REPORT 2004

7 During the year, our electronic property bidding service, e- bud, has continued to show stable growth, both in terms of the number of active estate agents and the number of properties and bids. Bidding for properties in demand has become increasingly common, resulting in a more widespread use of e-bud outside the Stockholm area. In May, an SMS text message service was launched for e- bud. This has been in demand from both customers and estate agents and has encouraged a number of estate agents to start using e-bud. CONTINUED GROWTH IN THE PRIVATE MARKET Throughout the year, the competition for private customers has become increasingly fierce in the mortgage market. Virtually all lenders have expressed an aim to consolidate their position by seeking to boost the growth of lending operations. The fiercer competitive climate has led to a sharp increase in initiatives aimed at attracting new customers. Lower interest rates have played an important part in the substantial growth in lending noted in recent years. This was particularly true for Expectations of continued low inflation have led to fixed lending rates falling to their lowest levels in modern times. In order to grow in a market in which the products are all fairly similar, price has gained ground as the most readily available weapon in the hunt for new customers. Low interest rates have also been an important impetus for the high levels of buying and selling in the markets for single-family housing and housing co-operatives. The high demand for property in many areas has led to extensive bidding, which has in turn resulted in rising prices. In many parts of the country, prices have reached record levels. This increase in value has also resulted in much of the increase in consumption being financed with housing as collateral. The strong growth in lending to private customers in recent years is also reflected in Stadshypotek s lending. The year s increase of SEK 23bn is the largest increase ever for a single year. IMPROVED CREDIT RATINGS During the spring, Moody s announced that they were raising Stadshypotek s long-term credit rating from Aa2 to Aa1. In November, Standard & Poor s raised its long-term credit rating from A+ to AA-, whilst the short-term credit rating was raised from A-1 to A-1+. This means that Stadshypotek has the highest rating of all Swedish mortgage institutions as well as a very high credit rating by international standards. A high credit rating is very important to a major borrower such as Stadshypotek. It creates opportunities with lenders who have particularly high demands with regard to credit quality. It also improves the potential for reducing funding costs. A high rating is also a significant advantage when issuing covered bonds. The act came into force on 1 July 2004 and was followed by regulations issued by the Finansinspektionen (Swedish Financial Supervisory Authority) at the end of the year. Stadshypotek aims to issue covered bonds. Work is currently under way to meet the relatively extensive demands set by the supervisory authority and by the rating agencies for issuers of this new type of funding. A NEW YEAR 2004 was a very good year for Stadshypotek. Now we are focusing our energy on a new financial year. As interest rates remain favourable, with few indications at present to suggest any dramatic increase, there is every reason to believe that the demand for credit will remain buoyant in the years to come. I am also convinced that the fierce competitive climate will prevail. With our range of products, our excellent service levels and access to Handelsbanken s extensive branch network, I feel that we are well poised to keep up with the competition. I would like to conclude by conveying my sincere thanks to my colleagues at Stadshypotek for all their hard work in Our success is also largely the result of the excellent co-operation with and stalwart efforts of our colleagues at Handelsbanken s branch offices and other departments of the Bank. Full of expectation, we can now move forward and focus our energy on the challenges that await us in STOCKHOLM, FEBRUARY 2005 Claes Norlén STADSHYPOTEK ANNUAL REPORT

8 Organisation and human resources ORGANISATION AND EMPLOYEES Stadshypotek AB, business organisation number , is a public credit market company authorised to conduct operations under the Banking and Financing Business Act. Its core business comprises financing of housing and also office and commercial buildings. Since 26 February 1997, the company has been a wholly-owned subsidiary of Svenska Handelsbanken AB (publ), organisation number The Banking and Financing Business Act (2004:297) came into effect on 1 July The new act does not involve any changes in Stadshypotek s operations. The introduction of this act revoked the Act on Financing Operations (1992:1610), which previously regulated Stadshypotek s operations. In a letter to Stadshypotek, the Finansinspektionen (Swedish Financial Supervisory Authority) has confirmed that the licence to conduct financing activities pursuant to the old act is valid to conduct financing activities pursuant to the new act. STRUCTURE Stadshypotek AB is the parent company of a sub-group which is responsible for Handelsbanken s mortgage business in Sweden. Following a merger in March 2003 between Stadshypotek AB and its subsidiary Handelsbanken Hypotek AB, the mortgage business is conducted only in Stadshypotek AB. The Stadshypotek group consists of the parent company Stadshypotek AB, Stadshypotek Delaware Inc. and the dormant company Svenska Intecknings Garanti AB Sigab. Stadshypotek Delaware Inc. is a subsidiary of Stadshypotek AB assigned the task of issuing instruments for short-term borrowing on the US market. In this annual report, the name Stadshypotek is used to refer to the Stadshypotek Group as a whole or when it is not important to specify a particular legal entity. The name Stadshypotek AB always refers to the parent company. INTEGRATION WITH HANDELSBANKEN Stadshypotek s business is based on the basic principle that the different branches of the Handelsbanken Group decide their own organisation and working practices and bear a joint responsibility for individual customers. One consequence of this is that Stadshypotek s lending operations are strongly decentralised and are conducted via Handelsbanken s Swedish branch network. Stadshypotek s treasury function is integrated with Handelsbanken s Central Treasury. The functions which are necessary for the management and control of the company remain within Stadshypotek. Stadshypotek s decentralised way of working has been successfully applied since Handelsbanken s acquisition in This has been the main reason for the strong market position of Stadshypotek. ENVIRONMENTAL ISSUES Work on environmental issues is now a well-established part of Stadshypotek s operations, in terms of both internal work and granting credits and other operations. Environmental work is carried out in close co-operation with Handelsbanken and is thereby covered by the agreements and policy decisions which apply at Handelsbanken. The main principle in the Group s environmental policy is that as far as is technically and economically viable, Stadshypotek must take measures to minimise the company s negative impact on the environment. Stadshypotek makes continuous efforts to reduce environmental impact. Here are some examples: In 2004, work has continued on converting the company s printed forms into electronic ones. The number of printed forms has therefore gone down. To reduce the number of letters, Stadshypotek s borrowers will receive their 2004 annual statement together with the equivalent information from Handelsbanken. Environmental issues associated with granting loans In accordance with Handelsbanken s credit policy, environmental factors are taken into consideration when assessing customers repayment capacity. The branch which is responsible for the customer gathers environment-related information and where deemed necessary, assesses the impact of possible environmental effects on the borrower s situation. In order to evaluate the borrower s focus on environmental risks, an investigation can be carried out to see whether any environmental and quality policy has been adopted. For property-related credits, it is essential to take into account environmentally harmful factors pertaining to buildings or activities conducted in the building. Environmental factors in the vicinity of the property are also taken into consideration since these may be of importance when determining the value of the property. 6 STADSHYPOTEK ANNUAL REPORT 2004 DIRECTORS REPORT

9 HUMAN RESOURCES In 2004, the average number of employees in the Stadshypotek Group was 23 (27). Of these, 36% (35) were women and 64% (65) men. Excluding staff on loan to other units and staff on parental leave, the number of employees was 19 (22) at the end of the year. The reduction in the number of employees in 2004 has been made possible by the efforts to increase efficiency in the last few years. BOARD During the year, the board has convened eight times, of which three times per capsulam and once by phone. At the annual general meeting, Björn Börjesson, Lennart Francke, Curt Källströmer, Claes Norlén, Håkan Sandberg and Magnus Uggla were re-elected as members until the annual general meeting is held in During the year, a change in the employee representation in the board has taken place. From the first board meeting on 23 April 2004, Björn Sjöberg replaced Barbro Carelle as employee representative. A list of members of the board of Stadshypotek AB can be found on page 37. For information on certain terms of employment for senior management and on loans to board members and senior management, see note 5 on page 26. AUDITORS At the annual general meeting in 2004, KPMG Bohlins AB were appointed auditors of Stadshypotek AB, with Stefan Holmström, authorised public accountant, as the auditor in charge until the annual general meeting in The Finansinspektionen (Swedish Financial Supervisory Authority) appointed Ulla Nordin Buisman, authorised public accountant, PricewaterhouseCoopers AB, as auditor of the company from the general meeting in 2004 until further notice. As a result of Handelsbanken s decentralised work methods, the Bank s branches are responsible for marketing, customer contacts, pricing and credit assessment. DIRECTORS REPORT STADSHYPOTEK ANNUAL REPORT

10 Lending STADSHYPOTEK S ROLE IN HANDELSBANKEN In Handelsbanken s Swedish operations, mortgage finance is offered principally via Stadshypotek. All mortgage lending takes place through Handelsbanken s branch office network. As a result of the decentralised method of working within Handelsbanken, the branches have been delegated responsibility for marketing, contact with customers, pricing and processing all mortgage loans. Handelsbanken thus acts as an agent for Stadshypotek, with responsibility for ensuring that credit assessments and collateral valuations are carried out in accordance with the guidelines approved by Stadshypotek s board. Handelsbanken s position in the Swedish mortgage market has been reinforced by a customer-oriented range of products, a branch office network that operates close to its customers and a high level of service. THE MARKET IN 2004 Mortgage lending in Sweden continued to show a strong rate of growth in Including lending volumes managed on behalf of other parties, the mortgage institutions total lending to the general public rose by SEK 100bn, which was SEK 16bn more than the increase from the previous year. Lending to the private market rose by SEK 108bn, of which single-family housing accounted for SEK 75bn (61) and housing co-operative apartments for SEK 33bn (27). Lending for multi-family dwellings, commercial properties and office buildings fell by SEK 8bn (-4). At the end of the year, lending by mortgage institutions, including lending volumes managed on behalf of other parties, totalled SEK 1,395bn (1,295), of which lending for single-family houses and housing co-operative apartments accounted for SEK 918bn (810). According to Statistics Sweden, price levels for single-family housing rose by 10% during the year, while prices for housing co-operative apartment went up by 11%, according to the Association of Swedish Real Estate Agents. There were, however, considerable regional price differences. These differences can be largely explained by an increase of the number of people moving into metropolitan areas where there is limited availability of housing, while the number of private homes sold showed a slight increase compared with In Stockholm, prices for single-family housing rose by 10% and for housing co-operative apartments by 5%. In Gothenburg, single-family housing prices rose by 12% and housing co-operative apartment prices rose by 15%. In Malmö, the corresponding increases were 15% for single-family houses and 18% for housing co-operative apartments. The average price for a single-family house in Sweden in December 2004 was SEK 1,396,000 (1,264,000). The main reason for this increase compared to the previous year is the combination of favourable interest rates, a low supply of new properties and higher demand due to the positive trends for household incomes. Since 1996, single-family housing prices, measured in current prices, have risen by just over 80% and housing co-operative apartment prices by just over 140%. During the same period, Swedish household debts have risen by 85%. As a result of the positive trends noted for household incomes, the household debt ratio, i.e. debt measured in relation to disposable income, has, Private homes net increase and price index Net increase Single-family house lending Housing co-operative lending Single-family house prices Housing co-operative prices Price index 2004 following a reduction during the mid-1990s, once again risen to the same level noted in the early 1990s, just over 120%. Lower interest rates have meant that households are paying considerably less for their loans today than they were at the beginning of the 1990s. At that time, interest payments accounted for around 11% of a household s disposable income. Nowadays, they only account for just over 4%. In 2004, households also accounted for most of the increase in the demand for credit, partly through higher mortgaging levels for housing properties. Higher prices that have led to increased valuations have, however, meant that larger mortgages can be raised. The majority of the increase in the demand for credit is reflected in higher mortgage levels for properties. Rising property values have, however, resulted in this occurring with virtually no change in the loan-to-property value. The construction of new apartment buildings continues to rise, according to Statistics Sweden. In recent years, around 20,000 apartments have been completed each year throughout the country. The office rental market remains weak and has been characterised by a high number of rental vacancies. However, vacancy levels have fallen for modern premises offering flexible solutions in good locations. Older, less modern premises are less attractive for rental purposes and vacancies for these properties have remained high. According to Statistics Sweden, new construction of 27,300 apartments started in 2004, an increase of 23% compared to the previous year. Work began on the construction of 10,400 apartments (9,444) for single-family houses and on 16,900 apartments (12,700) for multi-family housing STADSHYPOTEK ANNUAL REPORT 2004 DIRECTORS REPORT

11 New construction of houses completed rose from 19,986 apartments in 2003 to 24,300 for the full year 2004, an increase of 22% on the previous year. More than half the apartments completed are situated in metropolitan areas, according to Statistics Sweden. In 2004, renovation started of 24,650 apartments (26,186) in multi-family housing, a 6% reduction compared to The number of apartments completed in renovated apartments in multi-family housing was 27,900 (28,700) in INTEREST RATE TRENDS IN THE MORTGAGE MARKET 2004 was another year characterised by falling mortgage rates. Both fixed and variable rates fell to record lows during the year. The reductions in the repo rate noted in February and April also led to a fall in fixed lending rates. The lending rate for a fiveyear mortgage fell from 5.60% at the beginning of the year to 4.75% at the beginning of April. Expectations of a rise in interest rates led to a temporary rise in fixed mortgage rates during the second quarter, but when no increase materialised, these rates subsequently fell back during the second half of the year. After peaking at 5.45% at the beginning of July, the lending rate for a five-year mortgage fell to at lowest 4.30% at the end of the year. Variable interest rates fell during the year, from 4.40% at the beginning of the year to 3.65% at the end of the year. The spread between a five-year mortgage and a variable rate Mortgage rate for single-family homes Stadshypotek % year fixed rate 2-year fixed rate Variable rate mortgage was at its lowest 0.60 percentage points at the end of March and peaked at 1.80 percentage points from the middle of May to the beginning of July. Despite a reduction in the spread between fixed and variable rates during the second half of the year, borrowers demand remained high for variable and/or short-term fixed rates on new loans and when changing terms. Towards the end of the year, a growing interest in fixed-rate mortgages was discerned. NEW PRODUCTS Several new products were launched for the private market in A new loan product was introduced in April with a fixed-interest period of three months to meet the increasing demand for loan products with short-term fixed rates. The product has been very well received by the market and demand has been buoyant, with the three-month product accounting for the greatest increase in volumes during the year. At the same time, the higher interest rate for fixed-rate loans for housing co-operative apartments and second homes was removed. Since the end of May, customers have been able to sign up for the Loan protection scheme with security capital at no cost in co-operation with Handelsbanken, if all the customer s loans are placed with Handelsbanken. Many loan customers have made use of this opportunity, with the result that the Loan protection scheme with security capital deserves much of the credit for the positive growth trend for lending. Stadshypotek s system for electronic bidding in connection with property deals, e-bud, has undergone further development. Since the end of May, a new service has been available that allows and text messages to be sent directly to a mobile telephone with information on the latest bid. The e- bud service was accessed by an increasing number of customers, at an average of 85,000 visitors each month. STADSHYPOTEK S LENDING Competition in the mortgage market remained fierce during the year. Virtually all players in the mortgage market have been driven by an explicit goal to increase market share, particularly in the private market, where price became an important competitive factor, resulting in some downward price pressure. In this very difficult market climate, Stadshypotek increased its lending to the general public by SEK 27.0bn (20.0). Of the overall increase in volumes, the private market accounted for an increase of SEK 22.6bn (17.3) and the corporate market for an increase of SEK 4.4bn (2.7). Stadshypotek s lending to the general public was SEK 413.2bn (386.2) at the end of the year. DIRECTORS REPORT STADSHYPOTEK ANNUAL REPORT

12 Lending by type of property 31 December SEK bn Change Single-family housing Shares in housing co-operatives Private market MORTGAGE BUSINESS INCREASINGLY IMPORTANT TO THE BRANCH OFFICES The mortgage market has grown considerably in recent years. As demand has continued to rise, mortgages have become an increasingly important line of business to individual Handelsbanken branches. Branch manager Gert Lundmark and Anders Spång, head of the Mortgage Group in Linköping agree. They both work at a Handelsbanken branch office where mortgages have for many years been given highest priority, a branch which has shown strong development. The mortgage market has been characterised by an increasingly keen competitive climate and battle for customers. Gert Lundmark explains how they have risen to the challenge at the Linköping branch: For some institutions, price is the only strategy, largely because they don t have much else to offer. We choose to adopt a different approach, based on what we refer to as a whole customer concept. This means that the relationship with the customer not only looks at the mortgage, but also takes into consideration other services the branch might be able to offer. Gert mentions the following factors that he believes are responsible for the success of the Linköping branch. A good organisation and a professional approach to everything we do. Committed and highly skilled employees with excellent social skills are also paramount, with every employee keen to ensure the best possible service for our customers. We are mortgage experts. By this we mean that we know the market and we know our products. We focus on being able to offer our customers a good solution. Anders explains how conditions have changed: You need to go to the market. You can t sit in your office and expect customers to come to you. The era of being a mere recipient of an order is a thing of the past. The key word today is activity. And Gert adds: If you want to make your mark on this market, you need to take an active part in and out of the office. Availability and being there have become increasingly important. You need to get out to the showings of houses and apartments, develop and maintain good contacts with the estate agents and house suppliers and establish contacts with both existing and potential borrowers. The idea of a nine-to-five job no longer applies. Our housebuyers school is just one example of the branch s activities in the mortgage business, but a very important one nevertheless. We invite around 100 people to these events, which are held a couple of times a year. Those invited are not normally Handelsbanken customers. At these events, we go through the things you ought to think about when buying a house. By the time our visitors have bought their house, we have already met them and may be considered as a viable alternative when it comes to financing the house purchase. Anders says that a private customer s home is his or her number one priority, adding: Buying a house is probably the most important deal of your life. It is a time when many people realise their dreams. It is a privilege to be a part of something like that, but at the same time, it sets demands that involve a commitment. At the Linköping branch, the customer is always in focus. Or as Gert puts it: We make every effort for our customers in what is their most important deal. Multi-family housing Offices or commercial buildings Corporate market Total Since its acquisition of Stadshypotek in 1997, there has been a shift towards a greater proportion of private market lending, a trend which continued in At the end of the year, private market lending accounted for 60.6% (58.9) of overall lending. The equivalent share at the year-end before Handelsbanken s acquisition was 38.8%. Since the margins for these loans are higher than those available through other lending, this trend in the distribution of lending is very positive for Stadshypotek. The distribution of loan volumes by borrower is given in the table below. Lending by borrower category 31 December SEK bn Change Households Public sector, municipal companies Housing co-operatives Other legal entities Total Stadshypotek s market share of the mortgage institutions lending, including lending volumes managed on behalf of third parties, rose to 34.2% (32.8) for the corporate market and amounted to 27.2% (28.1) for the private market. Stadshypotek consolidated its position as the dominating lender to housing co-operatives, increasing its market share from 34.4% to 34.8%. Stadshypotek s total market share of the mortgage institutions lending, including lending volumes managed on behalf of a third party, amounted to 29.6% (29.9) at 31 December LOAN LOSSES The conditions on the property market have been conducive to positive growth during the year. Low interest rates have appealed to borrowers and demand for properties in geographical markets where Stadshypotek has the majority of its lending 10 STADSHYPOTEK ANNUAL REPORT 2004 DIRECTORS REPORT

13 Non-performing loans by borrower 31 December SEK bn Non-performing Non-performing loans for which loans interest which are has been included in accrued bad debts Non-performing Non-performing loans for which loans interest which are has been included in accrued bad debts Households Public sector, municipal companies Housing co-operatives Other legal entities Total operations has been firm. These conditions applied to singlefamily houses and housing co-operative apartments, as well as to multi-family housing. A broad knowledge of the market one operates in is important for the lending process. In Handelsbanken, this knowledge is guaranteed by an extensive network of branch offices that is well-represented in geographical terms. Each branch office acquires a sound knowledge of people and local market conditions and trends, which is essential for ensuring high quality credit decisions. This local support and the good customer contacts it engenders will often mean that any problems among existing borrowers can be quickly identified. Any measures deemed necessary can be taken at an early stage, which is normally the most important condition for limiting loss. The above-mentioned factors played an important role in ensuring that the recovery rate for the sixth consecutive year exceeded new loan losses. Net loan losses thus had a positive impact on the results, SEK 170m (232), which corresponds to a loan loss ratio of -0.04% (-0.06) of total lending. Written-back provisions of SEK 99m (198) and amounts recovered from actual loan losses in previous years of SEK 101m (111) exceeded actual loan losses net by SEK 12m (31) and probable loan losses by SEK 18m (46). The largest loan loss attributable to a single customer or customer category was SEK 3m (24). The ten largest loan losses amounted to a total of SEK 13m (51). Loan losses are reported in note 8, page 27. BAD DEBTS As at 31 December 2004, Stadshypotek s bad debts before deduction of the reserve for probable loan losses amounted to SEK 958m (1,446). Of the bad debts, SEK 87m (207) were non-performing loans and SEK 871m (1,239) were loans on which the borrowers paid interest and amortisation but which were considered doubtful in view of the Bad debts by borrower 31 December SEK bn Provision for Bad probable debts losses Bad debts net Provision for Bad probable debts losses Bad debts net Households Public sector, municipal companies Housing cooperatives Other legal entities Total The provision for probable losses refers to a specific provision for indvidually valued claims. borrowers repayment capacity and due to uncertainty as to the value of the collateral. In addition, there were non-performing loans of SEK 461m (471) for which the collateral was considered sufficiently good for interest to be reported as income. After deduction of the provision for probable loan losses, the volume of bad debts was SEK 710m (1,075). Bad debts are also reported in note 12, page 28. For a definition of bad debts, etc. see definitions on page 2. REPOSSESSED PROPERTY As at 31 December 2004, there was no repossessed property. According to Swedish Quality Index, Stadshypotek and Handelsbanken have the most satisfied corporate customers in the mortgage sector and the highest proportion of satisfied private customers of the privatelyowned mortgage companies. DIRECTORS REPORT STADSHYPOTEK ANNUAL REPORT

14 Funding operations The treasury department of Stadshypotek AB is integrated with Handelsbanken s Central Treasury department. This organisation offers the best conditions for using the funding source and the instrument offering the lowest funding cost each time funding is carried out. An integrated treasury department is an essential condition for efficient use of Handelsbanken s liquidity. DEBT INSTRUMENTS Stadshypotek raises funds mainly on the Swedish, European and US money and capital markets and through borrowing in Handelsbanken. The primary source of funding is bond loans in Sweden. Bonds are sold in the company s own name and mainly within the framework of a benchmark loan system aimed at the institutional market. This means that only a small number of separate bond loans are issued, with redemption dates set at intervals of about nine months. By concentrating large volumes into a small number of loans in this manner, good market liquidity can be achieved. Stadshypotek s benchmark loans, arranged by six market makers, are normally issued with an original maturity of about five years and are after that open for regular issues until about one year before the final maturity date. The company has active commercial paper programs in Sweden, the US and Europe. The ceiling of the Swedish commercial paper program is SEK 90bn. The ceilings for the US and the European programmes are USD 5bn and EUR 4bn respectively. Stadshypotek s retail bonds are sold through its fellow subsidiary Stadshypotek Bank AB. INTEREST RATE TREND Stadshypotek s fixed rate lending is mainly funded in the Swedish bond market. In 2004, Swedish bond yields followed international interest rate trends. A labour market without growth prompted the American central bank to keep its key rates at a record low 1.00% in the first quarter of the year. The Swedish Riksbank also lowered the Swedish key rate in February and April by a total of 0.75 percentage points. American and European bond yields fell and Swedish bond yields followed suit. In the spring, the labour market in the US started to recover and the American central bank prepared the market for interest rate hikes. The Riksbank started to prepare the market that the next change would be an increase. The long US and Swedish government bond yields rose from their lowest level in March at 2.64% and 3.28% respectively to a highest level in June of 4.10% and 4.19% respectively. During the fourth quarter, repeatedly low inflation figures and strong currencies caused bond yields to start falling again in Sweden and other European countries. The Riksbank held the Swedish repo rate unchanged at a record low 2.00%. International interest rates 5-year government bonds % Swedish interest rates % Stadshypotek bonds Government bonds Repo rate Swedish government US Treasury Euro 2004 In the US, the central bank raised its key rate for the fifth time in September to 2.25%. These increases and the surprisingly strong economic statistics and expectations of continued rate hikes pushed up American bond yields in the last few months of the year. Stadshypotek s five-year bond yield fell during the second half of the year and in December was 3.45% at its lowest. In 2004, the spread between Swedish government bonds and Stadshypotek s bonds the mortgage spread was at its widest in May at 36 basis points. The implementation of the new law on covered bonds, which led to expectations of higher ratings for Swedish mortgage bonds, resulted in a narrowing mortgage spread in the second half of By the end of the year, the mortgage spread had fallen to 23 basis points. FUNDING AND DEBT MANAGEMENT 2004 Lending at variable and short-term fixed rates is financed in the short-term capital market. The amount and growth of this lending demand well diversified funding. This is achieved by spreading it over different geographical markets and dif- 12 STADSHYPOTEK ANNUAL REPORT 2004 DIRECTORS REPORT

15 Spread between 5-year government bond and 5-year Stadshypotek bond % ferent types of funding instruments. Stadshypotek has active commercial paper programmes in Sweden, the US and the eurozone. In order to reduce the liquidity risk, this funding is supplemented by long-term funding which by means of swap agreements is adapted in terms of maturity so that it matches the maturity of the lending. Some of the funding for short-term lending comprises funding in the name of Handelsbanken, which is then lent on to Stadshypotek. Long-term lending is mainly funded by issuing benchmark mortgage bonds in Sweden. To a certain extent, Stadshypotek s long-term lending is also funded by Handelsbanken raising Swedish kronor in the international capital markets. Stadshypotek is a very active participant in the Swedish swap market. Swap instruments are used both to extend and shorten Stadshypotek s funding and also to create increased availability and liquidity in Stadshypotek s benchmark bonds. At the end of the year, swap agreements in which fixed interest is received amounted to a nominal amount of SEK 98.0bn (81.8), while for interest rate swap agreements paying fixed interest, the nominal amount was SEK 98.1bn (92.9). Starting on 1 January 2005, Stadshypotek will implement the new accounting standards according to IAS 39. One implication of these rules is that derivatives are recognised at fair value. Stadshypotek s swap portfolio has been adapted in order to minimise the fluctuations in earnings which the new valuation principles would give rise to. The adaptation means that recognising the company s swaps at fair value will only affect the reported earnings to a limited extent. Sales of bonds from Stadshypotek s benchmark series were SEK 116.9bn (173.0) in The book value of the outstanding benchmark loans was SEK 157.6bn (156.6) as at 31 December. During the year, Stadshypotek s volume of outstanding repos grew from SEK 2.2bn to SEK 25.5bn. This comprises issued bonds where Stadshypotek has simultaneously contracted a price agreed in advance for the repurchase. This increase was caused by investors demanding Stadshypotek s bonds to a greater extent than corresponded to Stadshypotek s funding requirements. This demand was met by issuing bonds in the form of repos. At the same date, the outstanding volume of commercial paper in Sweden was SEK 33.3bn (35.7). At the end of the year, the outstanding volume under the US commercial paper program was SEK 15.9bn (26.6), while the outstanding volume under the European commercial paper program at the end of the year was SEK 2.1bn (7.3). New sales of retail bonds by Stadshypotek amounted to SEK 1.4bn (0.9) in The book value of Stadshypotek s funding via retail bonds continues to fall and was SEK 4.6bn (5.5) at the end of the year. Stadshypotek s total funding at year-end was SEK 389.2bn (359.1), of which SEK bn (122.4) came from Handelsbanken. The distribution of funding by instrument is shown in the table below. Maturity profile for borrowing 31 December Maturity Book value SEK bn Share % 2005 Q Q Q Stadshypotek s funding 31 December SEK bn Book value Share % Book value Share % Funding from the parent company Commercial paper Bond loans, Sweden Retail bonds Bond loans, foreign Repos Commercial paper US Commercial paper ECP Total DIRECTORS REPORT STADSHYPOTEK ANNUAL REPORT

16 The new loan with a three-month fixed interest rate represented the largest increase during the year. COVERED BONDS In 2003, the Swedish Riksdag passed a law on issuing covered bonds (2003:1223). This law came into force on 1 July At the same time, certain changes resulting from this were decided in the act on priority of collateral and other acts. In October 2004, the Finansinspektionen published its directives and general advice on covered bonds, FFFS 2004:11. Covered bonds are a new type of funding which offer greater security to the investors since the undertakings under the bonds are secured by assets which the issuer has registered to cover the issued bonds. The collateral may, for example, consist of mortgage loans. The new act gives the Swedish mortgage institutions access to a funding instrument which is used in several other European countries. The risk weighting for covered bonds in terms of capital adequacy is 10% as compared to 20% for normal mortgage bonds. A covered bond may be given a higher rating than that of the issuer itself. The permission of the Finansinspektionen is required to issue covered bonds. Stadshypotek plans to issue covered bonds. Extensive preparatory work is in progress to make this possible. 14 STADSHYPOTEK ANNUAL REPORT 2004 DIRECTORS REPORT 14

17 Risk management, capital adequacy and rating Stadshypotek s policy is to conduct its operations with a controlled low level of risk. The main risks are credit risk, financial risks and operational risks. The credit risk is minimised by carrying out credit assessment of all customers and by demanding adequate collateral for loans. The financial risks are limited by achieving a good balance between lending and funding. CREDIT RISK Stadshypotek s business is property financing, primarily for housing purposes. The borrower base is distributed throughout Sweden with a concentration in built-up areas. The customers represent all categories of property owners, from individual households to large property companies. Of the loan portfolio, owner-occupied housing and shares in housing co-operatives account for 60.6% (58.9), multi-family housing for 34.7% (35.9) and office and commercial property for 4.7% (5.2). Lending to the largest individual customer corresponds to 0.3% (0.5) of the whole portfolio. There are 5 (5) customers or corporate groups with more than SEK 1,000 million in loans. Credit assessment In the Handelsbanken Group, a joint credit analysis is carried out both for the Bank and its subsidiaries by the branch responsible for the customer, and overall customer and corporate group limits are established. In the credit assessment, both the borrower s repayment capacity and the value of the collateral are taken into account. All mortgage loans over a certain amount must also be evaluated by Stadshypotek s credit committee before the loan is paid out. VALUATION The valuation of properties and shares in housing co-operatives is an independent part of the credit assessment. Mortgages are assessed on the basis of the market value of the property. The market value is defined as the price at which a property or shares in a housing co-operative can be sold in the open market under normal circumstances. The valuation must be recent. In the case of small multi-family properties, single-family properties and shares in housing co-operatives, a simplified assessment of market value is carried out at the local branch where knowledge of the local market is greatest. In other cases, an up-to-date, complete valuation must always be made by a valuer approved by Handelsbanken before a loan can be granted. Handelsbanken s branch offices are responsible for ensuring that this is done. In order for a mortgage to qualify as adequate collateral, an upper ceiling equivalent to 75% of the estimated market value of the property normally applies. In areas where the market for single-family properties is stable, mortgages are acceptable as collateral up to 85% of the assessed market value. FINANCIAL RISKS Interest rate risk lending In the Stadshypotek Group, interest rate risk is defined as the difference which arises in the present value of future cash flows if the yield curve experiences an upward shift of one percentage point. Interest rate risks of this type arise when the interest rate adjustment periods for financial assets and liabilities or off-balance-sheet items do not coincide. Due to the concentration of the benchmark loans in a small number of final maturity dates, it is not possible to match maturities in a traditional manner. Instead, the general method for achieving risk-neutral matching is based on the use of two different bond loans to finance one lending transaction. Since one of the bond loans has a shorter maturity than the lending and the other a longer maturity, opposite interest rate risks are created for the two borrowing items. These balance each other such that the borrowing is risk-neutral compared with respect to the lending. Due to this matching of financial assets and liabilities and off-balance-sheet items, changes in interest rates have only a marginal effect on Stadshypotek s financial performance. Interest rate risks are measured on a daily basis, as are follow-ups of the interest rate risk limits that have been set by the board of the company. Interest rate risk equity capital The equity capital is placed in lending with an average rate adjustment period of three years. The daily interest rate risk on equity capital must not deviate from this standard risk beyond an amount specified by the board. The tables on the next page show the interest rate adjustment periods for the group s and the parent company s assets and liabilities in the balance sheet, and also off-balance-sheet items at the end of Liquidity risk A large part of the lending at variable interest rates, is funded by issuing short-term instruments. The maturity structure of this funding is well-diversified and adapted so that the Handelsbanken Group s liquidity is in balance. The integration with Handelsbanken s treasury has also given Stadshypotek access to Handelsbanken s liquidity reserves. Exchange rate risk Stadshypotek has active certificate programs in the US and the eurozone. The company has issued in US dollars, euros and pounds sterling under these programmes. The exchange rate risk in connection with all lending in foreign currencies is eliminated by matching currency forward rate contracts. All other refinancing on the foreign markets is raised through Handelsbanken and subsequently transferred to Stadshypotek in Swedish kronor. Derivative instruments The majority of derivative transactions entered into by Stadshypotek are interest rate swaps. By doing so, Stadshypotek aims to hedge the risk in its own balance sheet or to obtain cheaper funding. The latter may be obtained by extending DIRECTORS REPORT STADSHYPOTEK ANNUAL REPORT

18 Interest rate adjustment periods for the Group s assets and liabilities 31 December 2004 SEK m 3 mths 3 6 mths 6 12 mths 1 5 yrs 5 yrs Total ASSETS Lending to credit institutions Lending to the general public Total assets LIABILITIES Liabilities to credit institutions Issued securities Total liabilities Off-balance-sheet items Difference between assets and liabilities including off-balance sheet items Accumulated difference Accumulated difference as percentage of total assets Average interest rate adjustment period for lending to the general public 1.4 years (1.6) Average interest rate adjustment period for funding 1.2 years (1.4) Interest rate adjustment periods for the parent company s assets and liabilities 31 December 2004 SEK m 3 mths 3 6 mths 6 12 mths 1 5 yrs 5 yrs Total ASSETS Lending to credit institutions Lending to the general public Total assets LIABILITIES Liabilities to credit institutions Issued securities Total liabilities Off-balance-sheet items Difference between assets and liabilities including off-balance sheet items Accumulated difference Accumulated difference as percentage of total assets -2,81-6,52 0,08 7,38 6,38 6,38 Average interest rate adjustment period for lending to the general public 1.4 years (1.6) Average interest rate adjustment period for funding 1.2 years (1.4). the maturity of short-term borrowing via interest rate swap agreements. Via the interest rate swap market, derivative instruments can also be combined with funding instruments to create attractive short-term and long-term funding solutions. Stadshypotek s capped rate loan offers borrowers insurance against future interest rate increases. It is a five-year loan where the interest rate on the loan goes down when shortterm interest rates fall. If short-term interest rates rise, the customer never has to pay more than a pre-determined maximum rate of interest. This commitment is hedged with interest rate caps on terms corresponding to this lending. Standardised interest rate futures have also been used. These have not given rise to any counterparty risks as they are cleared though OM. Since the derivative agreements that are entered into constitute a hedge against unfavourable changes in value in the mortgage 16 STADSHYPOTEK ANNUAL REPORT 2004 DIRECTORS REPORT

19 group s lending and borrowing portfolios, hedge accounting with acquisition valuation is applied on these types of position. Information about Stadshypotek s positions with regard to derivative instruments is provided in note 26 on page 31. Counterparty risk The use of derivative agreements in connection with Stadshypotek s funding leads to credit exposure on the banks which are counterparties in the derivative agreements. This type of risk is usually referred to collectively as value change risk. This risk arises when Stadshypotek has entered into derivative agreements, such as currency futures, interest rate swaps or options, with a counterparty and there is a risk that this counterparty will not be able to meet its obligations. If such a situation arises, a new equivalent contract must be acquired in the market to replace the old one. This may entail a cost, depending on price trends in the market in question. The risk of this cost arising is calculated for each contract and is regarded as a risk on the counterparty in the contract. Most of Stadshypotek s derivative agreements are entered into with Handelsbanken as the counterparty. Thus it is the parent company which bears this type of credit risk. Some of the credit limits which are available with the parent company are intended to cover any counterparty risks arising from Stadshypotek s trading in derivatives. OPERATIONAL RISK Operational risk refers to the risk of loss due to inadequate internal processes, human error, erroneous systems or external events. As a subsidiary within the Handelsbanken Group, Stadshypotek follows the same policy and guidelines that apply to the Group in its management of operational risks. Most of Stadshypotek s business is conducted within the framework of a co-operation agreement which the company has with Handelsbanken. Responsibility for the identification, management and control of operational risk at Handelsbanken is an integrated part of managerial responsibility. In instructions for all areas, special attention is always paid to how internal controls are organised and it is the duty of managers responsible for specific functions to ensure that appropriate instructions and routines are drafted for handling operational risks within their business area. CAPITAL ADEQUACY Stadshypotek s capital ratio was 8.1% (9.0) as at 31 December The Tier 1 capital ratio was 8.1% (9.0). The reduction of the capital ratio is explained by an increased risk-weighted amount due to higher lending, combined with a slightly lower capital base. Stadshypotek does not have a trading book of financial instruments or any open currency positions. Thus, there is no capital requirement for market risks. A full capital adequacy analysis is presented in note 29 on page 33. NEW CAPITAL ADEQUACY RULES New capital adequacy rules known as the Basel II rules, will be introduced on 1 January 2007 and will be fully implemented over a two-year transitional period. The fundamental concept of the rules is to create a clearer link between risk and capital requirements where the relatively rough standard measurements in the current capital adequacy rules are replaced by more risk-sensitive methods. At Handelsbanken, comprehensive preparatory work has been in progress for nearly three years. Stadshypotek is included as an integrated part of this work. Basel II allows the lender to use its own risk assessments for estimating the capital required to cover various risks arising in operations. The risk classification system under the new rules will be based on the valuation and internal rating methods which Handelsbanken has successfully applied for the last 25 years. Based on this, the preparatory work has focused on constructing the verification support demanded by the new rules. Harmonisation with the new rules is not expected to lead to any immediate change in Stadshypotek s credit process. Credit assessments will continue to be based on the knowledge of Handelsbanken s branches and the local knowledge of employees and their contacts with customers. With the new rules, risk control will be more individual, this being one of the purposes of the new capital adequacy rules. This will enhance the quality of the credit process even more. For Stadshypotek, the new rules will lead to a reduction in the risk-weighted amounts for credit risks. RATING FOR STADSHYPOTEK S DEBT In March 2004, Moody s rating agency raised Stadshypotek s long term rating from Aa2 to Aa1. In November, Standard & Poor s rating agency upgraded Stadshypotek s long term rating from A+ to AA- and the short term rating from A-1 to A-1+. Thus, Stadshypotek has the same rating as its parent company Handelsbanken, which means that no Swedish or Nordic bank has a higher rating. Rating Stadshypotek has the same rating as its parent company Handelsbanken, which means that no Swedish or Nordic bank has a higher rating. Long-term Short-term Moody s Aa1 P1 Standard & Poor s AA- A-1+ DIRECTORS REPORT STADSHYPOTEK ANNUAL REPORT

20 Financial results Rating PERFORMANCE Stadshypotek s operating profit amounted to SEK 5,150m (5,005), the best performance ever. This means that operating profits have risen each year since Handelsbanken s acquisition of the company. The improvement in profits is mainly due to increased net interest income and lower expenses. Operating profit before loan losses increased by SEK 207m and was SEK 4,980m (4,773). OPERATING INCOME Net interest income increased by SEK 197m to SEK 5,183m (4,986). The improvement was mainly due to higher lending volumes. A continued increase in the share of private market lending has more than compensated for continuing pressure on prices as a consequence of strong competition. Favourable market conditions also contributed to a positive debt management trend. Lower shareholders equity combined with low and, during the year, falling interest rates have affected net interest income in a negative direction. As in previous years, there was a certain variation in net interest income from quarter to quarter. These variations are mainly due to a difference in the timing of interest rate adjustments for borrowing and lending of the type discussed under the heading Interest rate risk lending on page 15. EXPENSES AND LOAN LOSSES Total expenses continued to fall. For 2004, they totalled SEK 150m (166), a decrease of SEK 16m or 10%. The decrease is due to the costs for 2003 including agent s commissions paid by Handelsbanken Hypotek to Handelsbanken before the merger with Stadshypotek which was carried out in March of that year. Excluding these commissions totalling SEK 17m, expenses were virtually unchanged compared to the previous year. Recoveries exceeded new loan losses and the net amount recovered was SEK 170m (232), which corresponded to a loan loss ratio of -0.04% (-0.06) of lending. As at 31 December 2004, Stadshypotek s bad debts before deduction of the reserve for probable loan losses amounted to SEK 958m (1,446). Of the bad debts, SEK 87m (207) were non-performing loans and SEK 871m (1,239) were loans on which the borrowers paid interest and amortisation but which were considered doubtful in view of the borrowers repayment capacity and due to uncertainty as to the value of the collateral. After deduction of the provision for probable loan losses, the volume of bad debts was SEK 710m (1,075). TAXES AND NET PROFIT FOR 2004 The net profit for the year after taxes of SEK 1,442m (1,381) was SEK 3,708m (3,624). The net profit for the parent company after taxes was SEK 4,354m (4,149). PROFITABILITY The profits correspond to return on equity of 16.0% (15.4). For a summary of income statements and balance sheets for the past five years, see page 38, and for key financial figures and ratios, see page 2. TOTAL ASSETS AND SHAREHOLDERS EQUITY Stadshypotek s total assets were SEK 421,126m (392,024) and shareholders equity was SEK 19,049m (19,695). CONTRIBUTION A Group contribution of SEK 6,047m (5,664) has been provided to Handelsbanken. IAS/IFRS From 1 January 2005, the company will adopt the new IAS/ IFRS accounting standards. A more in-depth description and quantification is provided under the heading Other disclosures on page 34. EVENTS AFTER THE BALANCE SHEET DATE On 1 January 2005, a subordinated loan of SEK 3,500m was raised, after which the capital ratio is 9.3%. Quarterly performance 31 December SEK m Q 4 Q 3 Q 2 Q 1 Q4 Net interest income Other operating income Total income General administrative expenses Total expenses Profit before loan losses Loan losses Operating profit STADSHYPOTEK ANNUAL REPORT 2004 DIRECTORS REPORT

21 Sensitivity analysis The factors which have the greatest impact on Stadshypotek s operating profit are the interest rate margin in the loan portfolio and the investment yield on own funds. Changes in the volume of lending, operating expenses and the loan loss level are also important. The table below shows the effect of changes in each one of these factors upon the result, assuming that all other parameters remain unchanged. The table is based on the balance sheet as at 31 December For the effect of a variation in loan volume, an interval is specified, since a loan volume which is added or deducted from the loan portfolio may have a different margin than the portfolio on average. The calculations comprise interest rate margins of 0.5% and 1.0%, respectively. It should be emphasised that changes in the interest rate level only gradually affect a portfolio of fixed rate loans. If the margin for new lending changes or if the general interest rate level changes, it will be a long time before the full impact is seen on the average lending margin and on the investment yield in the whole portfolio. Group Changing factor Change Impact on result, SEK m Average nominal lending margin 0.01%-point 41 Average interest level for own funds invested 1.0%-point 190 Volume of lending 1,0% Expenses 10% 15 Loan loss level 0.01%-point 39 Relatively large changes in the volume of lending or other investments are required in order to have a more significant impact on the capital ratio. For example, with the same risk weight spread as for Stadshypotek s loan portfolio on average, a volume increase of about SEK 59bn would be required in order to reduce the capital ratio by one percentage point. A corresponding decrease would result if there is a reduction in the capital base of SEK 2.4bn. The following table shows how the capital ratio is affected by changes in different forms of investment. Changing factor Investments Change in SEK m Impact on capital ratio, %-points Claims on financial institutions Loans secured by Residential property Housing co-operatives Offices and commercial buildings Capital base DIRECTORS REPORT 19

22 Income statement SEK m Interest income Note Interest expense Note Net interest income Commission income Note Commission expense Note Other operating income Total operating income General administrative expenses Staff costs Note Other administrative expenses Note Depreciation according to plan Note Total expenses before loan losses Profit before loan losses Net loan losses Note Operating profit Appropriations Note Profit before taxes Taxes Note Profit for the year Net earnings per share, SEK STADSHYPOTEK ANNUAL REPORT 2004 INCOME STATEMENT

23 Balance sheet 31 December SEK m ASSETS Lending to credit institutions Note Lending to the general public Note Shares and participations in Group companies Note Tangible assets Note Other assets Note Prepayments and accrued income Note Total assets of which Group claims Note LIABILITIES, PROVISIONS AND EQUITY Liabilities to credit institutions Note Issued securities, etc Note Other liabilities Note Accruals and deferred income Note Provisions for deferred taxes Note Total liabilities and provisions Untaxed reserves Note Equity Note 23 Share capital Statutory reserves Unrestricted reserves Profit for the year Total equity Total liabilities, provisions and equity of which Group liabilities Note Pledged assets none none none none Contingent liabilities none none none none Other commitments Note BALANCE SHEET STADSHYPOTEK ANNUAL REPORT

24 Changes in shareholders equity SEK m Share capital Statutory reserves Unrestricted reserves Total Shareholders equity 31 December Transfer between unrestricted and restricted equity Profit for the year Group contribution Tax on paid Group contribution Shareholders equity 31 December Transfer between unrestricted and restricted equity Profit for the year Group contribution Tax on paid Group contribution Shareholders equity 31 December SEK m Share capital Statutory reserves Unrestricted reserves Total Shareholders equity 31 December Merger difference Total changes in equity not reported in the income statement Profit for the year Group contribution Tax on paid Group contribution Shareholders equity 31 December Profit for the year Group contribution Tax on paid Group contribution Shareholders equity 31 December STADSHYPOTEK ANNUAL REPORT 2004 CHANGES IN SHAREHOLDERS EQUITY

25 Cash flow statement SEK m OPERATING ACTIVITIES Operating profit Adjustment for items in the operating result which do not affect the cash flow: Loan losses Depreciation and write-downs Paid income tax Change in assets and liabilities of operating activities: Lending to credit institutions Lending to the general public Liabilities to credit institutions Issued securities Other Cash flow on operating activities INVESTING ACTIVITIES Merger of subsidiaries Change in tangible fixed assets Cash flow on investing activities FINANCING ACTIVITIES Group contribution Cash flow on financing activities Cash flow for the year Liquid funds at beginning of year Cash flow on operating activities Cash flow on investing activities Cash flow on financing activities Liquid funds at end of year CASH FLOW STATEMENT STADSHYPOTEK ANNUAL REPORT

26 Accounting principles The accounting follows the regulations of the Annual Accounts Act for Credit Institutions and Securities Companies (ÅRKL), the Swedish Financial Accounting Standards Council s recommendations, and the directives issued by the Finansinspektionen (Swedish Financial Supervisory Authority, FFFS 2002:22). Classification of items in the balance sheets and income statements follows ÅRKL and the Finansinspektionen s accounting regulations. This classification differs from the Swedish Financial Accounting Standards Council s recommendation RR 22 Presentation of Financial Statements. The recommendation also states that assets and liabilities in credit institutions shall be classified in a different way. In other respects the format of the annual accounts has not been affected by differences between the Finansinspektionen s accounting regulations and the Swedish Financial Accounting Standards Council s recommendations. The accounting currency is Swedish kronor. Stadshypotek AB is a subsidiary of Svenska Handelsbanken AB. The Bank prepares consolidated accounts which include Stadshypotek AB. CHANGED ACCOUNTING PRINCIPLES During 2004, the Swedish Financial Accounting Standards Council s recommendation RR29 Employee benefits came into force implying a change in how and when various types of employee benefits are reported. This change means that interest rate benefits must be reported gross as interest income and staff costs respectively. Previously only the payroll tax on the benefit was reported as a staff cost. Previous years have been recalculated. CONSOLIDATED ACCOUNTS The consolidated accounts comprise all companies in which Stadshypotek has a participating interest and directly or indirectly has a controlling influence. Normally Stadshypotek has a controlling influence when the holding is more than 50% of the voting rights. Subsidiaries are consolidated in accordance with the acquisition accounting method REPORTING OF LENDING Lending is classified as a financial fixed asset and is reported in the balance sheet on the payment date at its acquisition price. Lending is reported net after deductions for probable loan losses. Provision for probable loan losses is made in accordance with the principles stated under the heading Loan losses below. When borrowers renegotiate the terms of loans or redeem fixed rate loans before the scheduled maturity, Stadshypotek is normally entitled to apply an early redemption charge. Early redemption charges received are distributed over the remaining life of the redeemed loan in cases where the loan receivable is part of a package of financial assets and liabilities which are subject to hedge accounting pursuant to accounting directives issued by the Finansinspektionen. Otherwise, the early redemption charge is immediately taken to income. The early redemption charge is reported under Net interest income. INTANGIBLE ASSETS An intangible asset is an identifiable, non-monetary asset without physical substance that is held for use in production, supply of goods or services, for hiring out to others or for administrative purposes. An asset is a resource that is expected to provide future economic benefit over which there is control as a result of past events. Investments in both software developed in-house and acquired software are carried as an expense on a current basis where the expenditure refers to maintenance of existing business operations or an existing intangible asset. In the case of development of new intangible assets, or new business operations for existing intangible assets, the costs accrued are capitalised from the time when it is probable that economic benefit that can be reliably measured will arise. For capitalisation of expenses referring to existing intangible assets, there is the additional requirement that the economic benefits must clearly exceed the economic benefits that were associated with the existing asset in its original state. TANGIBLE ASSETS Tangible assets are recorded at acquisition value. A review of write-down requirements is made if there is any indication of a decrease in value. REPORTING OF FINANCIAL INSTRUMENTS Purchases and sales of money market and capital market instruments on the spot market are subject to trade date accounting. Forward transactions are registered on the transaction date, but until the date of settlement are regarded as commitments off the balance sheet. On the date of settlement, they are reported on the balance sheet. Liabilities in connection with funding in respect of fixed interest discount, coupon and zero-coupon instruments are reported at their accrued acquisition value. For issues, premiums and discounts are allocated over the remaining fixed-rate period using the effective interest rate method. Realised price differences for repurchased bonds are distributed over the residual maturity of the repurchased bond according to the effective interest rate method in cases where the bond is part of a package of financial assets and liabilities which are subject to hedge accounting pursuant to accounting directives issued by the Finansinspektionen. Otherwise, the price differences are reported as interest immediately. Price differences are reported under Net interest income. Bonds negotiated in repurchase agreements (repos) are reported as short-term funding for which the contracted price difference is the interest cost over the period in question. 24 STADSHYPOTEK ANNUAL REPORT 2004 ACCOUNTING PRINCIPLES

27 Stadshypotek s derivative instrument transactions constitute a hedging of balance-sheet items and are reported using the accounting principles which apply to these balance-sheet items. When the hedged position is realised, the derivative transaction s impact on the result is distributed so that it corresponds to the reporting of the hedged position. Derivative instruments with positive accrued interest are reported under Other assets and transactions with negative accrued interest are reported under Other liabilities. ASSETS AND LIABILITIES IN FOREIGN CURRENCIES Assets and liabilities in foreign currencies are recorded at the price on the balance sheet date. Assets and liabilities in foreign currencies which are hedged by various means against exchange rate fluctuations are recorded with respect to the hedging method employed. In cases where assets and liabilities in foreign currency have been hedged through forward contracts, the premium is distributed over the life of the contract. DEPRECIATION Tangible and intangible equipment is depreciated on a straight-line basis over the useful life of the asset. This means that personal computers are depreciated over three years and other equipment over five years. INCOME Income is reported in the income statement when it is probable that the future economic benefits will be enjoyed and these benefits can be reliably measured. LOAN COSTS Loan costs are normally carried as expenses on a current basis. Where the expenditure refers to intangible assets developed by the Bank, the expenditure is capitalised from the date on which a decision is made to capitalise development costs. LOAN LOSSES Actual loan losses for the year and write-downs in respect of probable loan losses for loan receivables are reported as loan losses, after an individual assessment has been made. Reversals of previous write-downs are deducted from the loan losses for the year. Also reported as loan losses are write-downs of interest shown as income in previous annual accounts. Reported as actual loan losses are losses where the amounts have been finally determined or are more than likely. This is the case, for example, when a trustee in bankruptcy has estimated bankruptcy dividends, a scheme of arrangement has been accepted or the receivable has been reduced in some other way. An amount forgiven in connection with a reorganisation is always reported as an actual loss. Write-downs of probable loan losses are made down to the amount which is expected to be realised, taking into account the value of the collateral and the present value of expected payments from the customer. If the collateral consists of property mortgages, the property is valued at the lower of cost or market. By market value is meant the market value after deduction of selling expenses. This value is based upon an individual valuation using recognised and accepted valuation methods. A non-performing loan is a loan where interest, repayments or overdrafts have been due for payment for more than 60 days. A bad debt is a loan where payments will probably not be met according to the conditions of the contract and where the value of the collateral does not cover the principal amount, interest and penalties for late payments by a satisfactory margin. Unpaid interest on non-performing loans where the value of the collateral does not cover the principal amount and the accrued interest by a satisfactory margin is not taken up as income. Interest on these loans that was reported as income but not paid during the financial year is reversed. Interest payments received thereafter in respect of this type of credit are reported in the year of receipt. PROVISIONS Provisions are reported as a consequence of past events when it is probable that an outflow of resources will be required to settle the obligation. The provision is recorded in the amount estimated to be most probable taking into account the time of settlement. WRITE-DOWNS This section describes the criteria applied to write-downs of tangible and intangible assets as well as shares in subsidiaries. Write-downs are reported when the recovery value is less than the book value. The recovery value is calculated as the higher of an asset s value in use or net realisable value. The recovery value is determined when there is an indication that the asset has fallen in value. TAXES The tax expense for the period consists of current tax and deferred tax. Current tax refers to taxes relating to the period s taxable result. Deferred tax claims and liabilities are taxes based on temporary differences between the value of an asset or liability in the accounts and its taxable value. OTHER Reported income is entirely attributable to the Swedish market. The classification of balance sheet items into current assets and fixed assets is shown in note 28. The company does not administer, in its own name, any funds on behalf of a third party. ACCOUNTING PRINCIPLES STADSHYPOTEK ANNUAL REPORT

28 Notes (Amounts in SEK m unless otherwise stated.) Note 1 Interest income Note 4 Commission expense Lending to the general public Lending to credit institutions Average balance lending general public Average balance lending credit institutions During the year, the average interest rate on lending to the general public was 4.6% (5.2). Note 2 Interest expense Liabilities to credit institutions Commercial paper and other short-term borrowings Bond loans and other long-term borrowings Issued securities Commercial paper and other short-term borrowings Bond loans and other long-term borrowings Other Other interest expenses Average balance liabilities to credit institutions Average balance securities issued in SEK Average balance securities issued in foreign currency The average rate on funding during the year (liabilities to credit institutions and issued securities) was 3.5% (4.1). Note 3 Commission income Commission on lending Other commission income Commission on payments Commission on securities Note 5 Staff costs Salaries and other remuneration Social security costs Pension premiums paid Provision to profit-sharing foundation Other staff costs Gender distribution During the year, the average number of employees in the Group was 23 (27), of whom 23 (27) were employed by the parent company. Of the employees in the Group, 36% (35) were women and 64% (65) were men, with the same distribution in the parent company. The pension plans are defined-contribution plans. Pension premiums paid refer to premiums paid to the SHB Pension Fund for contractual pension insurance. Terms and remuneration of senior management Stadshypotek has no agreements on severance pay. The chief executive, Claes Norlén has a retirement age of 60. His retirement pension is 10% of his salary up to 7.5 index-linked base amounts. His pension is 65% on salary amounts between 7.5 and 20 base amounts, and 32.5% between 20 and 30 base amounts. For the Group, salaries and remuneration to the board members and chief executives of the companies are SEK 1.7m (1.6) of which SEK 70,000 (73,000) in benefits, and SEK 1.7m (1.6) in the parent company, of which SEK 70,000 (73,000) in the parent company. At the end of 2004, the following loans were outstanding at Stadshypotek with respect to senior management of the company: Chief executives in the parent company and subsidiaries: Other board members in the parent company and subsidiaries: Chief executives or executive vice presidents at other companies in the Handelsbanken Group: SEK 0m SEK 7m SEK 37m The loans in question are distributed among 25 people and are all secured by pledged collateral. Pension premiums paid for the present and former chief executives and executive vice presidents are SEK 0.5m (1.0) in the Group and SEK 0.5m (1.0) in the parent company. Sickness absence Total absence due to illness was 3.0% of the employees total working hours. Sickness absence distributed by men and women and per age group concerns fewer than ten employees so information is only given for total absence. % Men Women Chief executive Board of directors STADSHYPOTEK ANNUAL REPORT 2004 NOTES

29 Note 6 Other administrative expenses Note 8 Loan losses IT costs Cost of premises External and internal services Agent s commission 1) Other administrative expenses ) This item concerns agent s commission paid by Handelsbanken Hypotek to Handelsbanken. Auditing costs External auditing: KPMG Bohlins AB BDO Feinstein Revision AB/ PricewaterhouseCoopers AB Internal audit Operating lease contracts Leasing payments for the period Note 7 Depreciation and write-downs of tangible fixed assets Depreciation, equipment A. Specific provision for individually assessed loan receivables: This year s write-off for actual loan losses Write-back of previous provisions for probable loan losses which are reported as actual loan losses in the year s accounts The year s provision for probable loan losses Paid in from actual loan losses in previous years Write-back of provisions for probable losses which are no longer necessary Net expense for the year B. Provision by group for individually assessed loan receivables: Allocation to/dissolution of provision by group C. Collectively assessed homogeneous groups of loan receivables with limited value and similar credit risk: The year s write-off for actual loan losses Paid in from actual losses in previous years Allocation to/dissolution of reserve for loan losses Net expense for the year for collectively assessed homogeneous loan receivables D. Transfer risk: Allocation to/dissolution of reserve for transfer risks Net expense for the year for loan losses All written-down and recovered losses refer to lending to the general public. According to the Finansinspektionen s accounting directives, receivables which individually have been assessed as being posted at the correct value must also be assessed as to whether there may be a requirement for making a provision for probable loan losses for these receivables valued as a group. Over and above the risk assessment of individual loan receivables made quarterly by all units in the Handelsbanken Group with customer and credit responsibility, no such requirement for provision for the receivables as a group has been identified. Note 9 Appropriations Change in tax allocation reserve NOTES STADSHYPOTEK ANNUAL REPORT

30 Note 10 Taxes Tax paid Tax cost for the period Adjustment of tax relating to previous years Deferred tax Nominal tax rate in Sweden, % Deviations Adjustment of tax relating to previous years, % Effective tax rate, % Note 11 Lending to credit institutions CURRENT ASSETS Banks Other credit institutions FIXED ASSETS Other credit institutions Total lending Information concerning maturities Payable upon demand Remaining maturity: maximum three months Remaining maturity: over three months but maximum one year Remaining maturity: over one year but maximum five years Remaining maturity: over five years Total Note 12 Lending to the general public FIXED ASSETS Lending, gross Provision for probable loan losses Book value Information concerning maturities Payable upon demand Remaining maturity: maximum three months Remaining maturity: over three months but maximum one year Remaining maturity: over one year but maximum five years Remaining maturity: over five years Total Average remaining maturity (years) NON-PERFORMING LOANS, ETC Bad debts Provision for probable loan losses Bad debts, net Non-performing loans for which interest is accrued Book value of loan receivables restructured during the year before restructuring after restructuring Bad debts which have been reclassified during the year Average remaining maturity (years) Note 13 Shares and participations in Group companies FIXED ASSETS Shares in Group companies Name Registered office Corp. identity no Number of shares Nom value, SEK '000 Proportion of share capital, % Book value, SEK '000 Stadshypotek Delaware, Inc. Delaware Svenska Intecknings Garanti AB Sigab Stockholm The holdings consist exclusively of unlisted shares. 28 STADSHYPOTEK ANNUAL REPORT 2004 NOTES

31 Note 14 Tangible assets FIXED ASSETS Acquisition value, opening balance Acquisition value of new properties Acquisition value of properties sold during the year Total acquisition value Accumulated depreciation according to plan, opening balance Depreciation for the year Accumulated depreciation of properties sold during the year Total depreciation Residual value according to plan Note 17 Liabilities to credit institutions Banks Other credit institutions Information concerning maturities Payable upon demand Remaining maturity: maximum three months Remaining maturity: over three months but maximum one year Remaining maturity: over one year but maximum five years Remaining maturity: over five years Total Average remaining maturity (years) Note 15 Other assets CURRENT ASSETS Interest and fees due Settlement claims in respect of own securities Derivatives Other Note 18 Issued securities, etc Commercial paper 1) Bonds 2) ) Commercial paper in Sweden Foreign commercial paper Note 16 Prepayments and accrued income CURRENT ASSETS Accrued interest Other ) Bond loans in Sweden Retail bonds Foreign bonds Circulating bonds, nominal value Price differences Book value See page 39 for a list of bonds. Information concerning maturities Payable upon demand Remaining maturity: maximum three months Remaining maturity: over three months but maximum one year Remaining maturity: over one year but maximum five years Remaining maturity: over five years Total Average remaining maturity (years) NOTES STADSHYPOTEK ANNUAL REPORT

32 Note 19 Other liabilities Tax liability Settlement liabilities in respect of own securities issued Derivatives Other liabilities Note 20 Accruals and deferred income Accrued interest Other accruals and deferred income Note 21 Provisions for deferred taxes Tax allocation reserve 1) ) Change: brought forward 251, reported in income statement Note 22 Untaxed reserves Tax allocation reserve The balance for 2003 includes tax allocation reserves of SEK 188m taken over in connection with the merger of Handelsbanken Hypotek. Note 23 Equity At the balance sheet date, the share capital comprised A shares with a nominal value of SEK 25 each. There have been no changes during the year. Note 24 Other commitments Nominal amount Interest-rate related and currency-related contracts Interest rate swaps Currency swaps Interest rate options and futures Currency forwards Hedge loans Total commitments Interest rate swaps have been made in order to obtain a matching in terms of risk between borrowing and lending. Currency swaps and interest rate futures are used to convert borrowings in foreign currencies to corresponding borrowings in Swedish kronor. Interest rate options are used in connection with capped rate loans. Contracted future operating lease charges distributed by the year they fall due for payment Total 3.0 Note 25 Group claims/group liabilities Group claims Lending to credit institutions Other assets Prepayments and accrued income Total Group liabilities Liabilities to credit institutions Other liabilities Accruals and deferred income Total Income statement Interest income Interest expenses Commission expenses Other administrative expenses Total Intra-Group transactions, either between the companies within the Stadshypotek Group or between these and other companies in the Handelsbanken Group, are reported under the above headings in the balance sheet and income statement. 30 STADSHYPOTEK ANNUAL REPORT 2004 NOTES

33 Note 26 Derivative instruments Stadshypotek applies hedge accounting with acquisition valuation. Derivatives are used in order to avoid interest rate and exchange rate risks. This means that the book value of the derivatives consists of the accrued interest. In the case of swap contracts, accrued interest is reported in the balance sheet items Other liabilities/other assets. The difference between the fair value of the derivatives and the book value below corresponds to equally large, but opposite, differences between the fair value and the book value of the items in the balance sheet which are being hedged by the derivatives. INTEREST-RATE RELATED EXCHANGE-RATE RELATED Derivatives with positive values or zero values Fair value Book value Nominal amount Fair value Book value Nominal amount Futures with positive value Options with positive value Swaps with positive value Total of which cleared Derivatives with negative values Futures with negative value Options with negative value Swaps with negative value Total of which cleared INTEREST-RATE RELATED EXCHANGE-RATE RELATED Derivatives with positive values or zero values Fair value Book value Nominal amount Fair value Book value Nominal amount Futures with positive value Options with positive value Swaps with positive value Total of which cleared Derivatives with negative values Futures with negative value Options with negative value Swaps with negative value Total of which cleared NOTES STADSHYPOTEK ANNUAL REPORT

34 Note 27 Assets and liabilities in foreign currency The total value in SEK of assets and liabilites in foreign currencies is specified below Group USD EUR GBP Total ASSETS Lending to credit institutions LIABILITIES Liabilities to credit institutions Issued securities Derivative positions Net foreign currency positions Parent company USD EUR GBP Total ASSETS Lending to credit institutions LIABILITIES Liabilities to credit institutions Issued securities Derivative positions Net foreign currency positions The principal and interest amounts for liabilities in foreign currencies are hedged against exchange rate risk. Note 28 Disclosures concerning fair value ASSETS Book value Adjustment to fair value Lending to credit institutions: current assets fixed assets Lending to the general public: fixed assets Tangible assets: fixed assets 0 - Other assets: current assets Prepayments and accrued income: current assets Total assets LIABILITIES AND PROVISIONS Liabilities to credit institutions Issued securities etc Other liabilities Accruals and deferred income Total liabilities and provisions Total surplus value In accordance with the Financial Supervisory Authority s directives (2002:22), a comparison must be made between the fair value and book value for all assets and liabilities on the balance sheet and for financial items which are not reported on the balance sheet. The directives allow scope for choice of method and various calculation assumptions. Information of this type concerning the fair value of the various items does not constitute a corporate valuation. The following methods have been used to determine the fair value: For means of payment, current claims and liabilities and also claims and liabilities with variable interest rates, fair value has been taken to be equivalent to book value. Financial instruments which are traded on liquid markets have been valued at the quoted price on the balance sheet date. Financial instruments which are not traded on liquid markets have been valued on the basis of the current market rate for liquid instruments with corresponding maturities, adjusted for credit and liquidity risk. In the case of the valuation of fixed-rate loans, the credit and liquidity risk premiums have been assumed to correspond to the average margin for new lending at the balance sheet date. 32 STADSHYPOTEK ANNUAL REPORT 2004 NOTES

35 Note 29 Capital adequacy analysis On-balance-sheet commitments requiring capital cover Risk weight, % On-balance sheet items Risk-weighted amounts 2004 On-balance sheet items Risk-weighted amounts Off-balance-sheet commitments requiring capital cover Risk weight, % Nominal amounts Converted amounts Risk-weighted amounts 2004 Nominal amounts Converted amounts Risk-weighted amounts Total risk-weighted amounts, credit risks Risk weight, % Total risk-weighted amount Capital base Tier 1 capital: Taxed equity Untaxed reserves Tier 2 capital: Subordinated borrowings Total capital base Capital adequacy: Capital ratio, % Tier 1 ratio, % NOTES STADSHYPOTEK ANNUAL REPORT

36 Other disclosures CONTINGENT ASSETS Handelsbanken is currently conducting a number of legal disputes in various tax courts. For Stadshypotek, the total amounts in dispute in relation to the tax authorities are approximately SEK 23m, which in the case of a positive judgement would increase the Group s income by the same amount. CHANGEOVER TO IAS/IFRS STANDARDS From 1 January 2005, listed companies in the EU must harmonise their consolidated accounts with the accounting standards of the IASB (International Accounting Standards Board). Stadshypotek, which is not a listed company, has elected to apply the IAS/IFRS standards starting in Applied accounting principles have been harmonised with the accounting recommendations (IAS or IFRS) which the IASB has issued and the EU has adopted. Work is ongoing within the EU to adopt further accounting standards. In addition, work is ongoing within the IASB to adapt IAS 39 (classification and measurement principles for financial assets and liabilities), partly so that the EU is able to approve the recommendation in its entirety. It is still unclear when this harmonisation work will be completed, and whether further accounting standards will be adopted by the EU in Thus the expected effects on opening shareholders equity in 2005 are preliminary. Therefore, minor adjustments to the effects on shareholders equity stated here may be made before the annual accounts for 2005 are adopted. The impact on opening equity, which is estimated to be SEK -645m, is completely attributable to the application of IAS 39. No impact is expected on the comparative figures for Changes in accounting principles Classification and measurement principles for financial assets and liabilities The EU-adapted version of IAS 39 has been adopted. Lending was previously recorded at amortised cost. In the Group it is also possible, when recognising individual assets in the balance sheet, to irrevocably decide to carry this financial asset at fair value. When the borrower changed the interest rate or redeemed fixed-rate loans ahead of time, Stadshypotek previously distributed the early redemption charge received over the life of the redeemed loan. This early redemption charge will now be recognised as income when it is received. Liabilities will as previously be measured at amortised cost. For repurchased bonds, the realised price difference was previously distributed over the life of the repurchased bond in those cases where it was part of a package which was subject to hedge accounting. This price difference must now be recognised as income at the time of repurchase. Hedge accounting Previously hedge accounting packages were mainly recognised at amortised cost. In compliance with IAS 39, for hedge accounting, both the hedged item and the hedging instrument will be recognised at fair value. Changes in value are recorded directly in the income statement. Impact on shareholders equity from changeover to IAS/IFRS Shareholders equity Closing balance 2004 according to annual report for Net impact of changeover to measuring at fair value according to IAS Opening balance 2005 after recalculation STADSHYPOTEK ANNUAL REPORT 2004 NOTES OTHER DISCLOSURES

37 Recommendation for distribution of profits The Group s unrestricted equity according to the consolidated balance sheet is SEK 6,893m. No allocations to restricted reserves are necessary. The income statements and balance sheets of the Group and parent company will be adopted at the annual general meeting. After deduction for paid group contribution, the following amounts in the parent company are at the disposal of the annual general meeting. Profit brought forward SEK 2,539m Profit for the year SEK 4,354m SEK 6,893m The board of directors proposes that SEK 6,893m be carried forward to the next year. Stockholm, 22 February 2005 Curt Källströmer Chairman Björn Börjesson Lennart Francke Håkan Sandberg Magnus Uggla Björn Sjöberg Employee representative Claes Norlén Chief executive DIRECTORS REPORT STADSHYPOTEK ANNUAL REPORT

38 Audit report To the general meeting of the shareholders of Stadshypotek AB (publ), corporate identity number We have audited the annual accounts, the consolidated accounts, the accounting records and the administration of the board of directors and the chief executive of Stadshypotek AB (publ) for the year These accounts and the administration of the company and the application of the Annual Accounts Act for Credit Institutions and Securities Companies when preparing the annual accounts and the consolidated accounts are the responsibility of the board of directors and the chief executive. Our responsibility is to express an opinion on the annual accounts, the consolidated accounts and the administration based on our audit. We conducted our audit in accordance with generally accepted auditing standards in Sweden. Those standards require that we plan and perform the audit to obtain reasonable assurance that the annual accounts and the consolidated accounts are free of material misstatement. During the year, the internal auditing department of Handelsbanken has continuously examined the internal controls and accounts. We have received the reports that have been prepared. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the accounts. An audit also includes assessing the accounting principles used and their application by the board of directors and the chief executive and significant estimates made by the board of directors and the chief executive when preparing the annual accounts and consolidated accounts as well as evaluating the overall presentation of infor- mation in the annual accounts and the consolidated accounts. As a basis for our opinion concerning discharge from liability, we examined significant decisions, actions taken and circumstances of the company in order to be able to determine the liability, if any, to the company of any board member or the chief executive. We also examined whether any board member or the chief executive has, in any other way, acted in contravention of the Companies Act, the Annual Accounts Act for Credit Institutions and Securities Companies or the Articles of Association. We believe that our audit provides a reasonable basis for our opinion set out below. The annual accounts and the consolidated accounts have been prepared in accordance with the Annual Accounts Act for Credit Institutions and Securities Companies, and thereby give a true and fair view of the company s and the Group s financial position and results of operations in accordance with generally accepted accounting principles in Sweden. The statutory administration report is consistent with the other parts of the annual accounts and the consolidated accounts. We recommend to the general meeting of shareholders that the income statements and balance sheets of the parent company and the Group be adopted, that the profit of the parent company be dealt with in accordance with the proposal in the administration report and that the members of the board of directors and the chief executive be discharged from liability for the financial year. STOCKHOLM, 7 MARCH 2005 KPMG Bohlins AB Stefan Holmström Authorised public accountant Ulla Nordin Buisman Authorised public accountant Appointed by Finansinspektionen (Swedish Financial Supervisory Authority) 36 STADSHYPOTEK ANNUAL REPORT 2004 AUDIT REPORT

39 Board, auditors and senior management THE BOARD OF STADSHYPOTEK AB Members Curt Källströmer, Vice President at Handelsbanken, Chairman Chairman of the board since 1998 Board member since 1997 Björn Börjesson, Executive Vice President of Handelsbanken Board member since 2001 Lennart Francke, Executive Vice President of Handelsbanken Board member since 1998 SENIOR MANAGEMENT Claes Norlén, Chief Executive Employed since 2001 Bengt Edholm, Head of Treasury Employed at Handelsbanken Ralf Gustavsson, Head of Accounting and Control Employed since 1998 Mats Molander, Head of Credits Employed since 2002 Claes Norlén, Chief Executive Board member since 2001 Håkan Sandberg, Executive Vice President of Handelsbanken Board member since 2002 Magnus Uggla, Executive Vice President of Handelsbanken Board member since 2002 Björn Sjöberg, Employee Representative Board member since April 2004 AUDITORS KPMG Bohlins AB Chief auditor: Stefan Holmström Authorised public accountant, Täby Auditor of the company since the annual general meeting Ulla Nordin Buisman, PricewaterhouseCoopers AB Authorised public accountant, Sollentuna Auditor of the company since the annual general meeting 2004, appointed by Finansinspektionen (Swedish Financial Supervisory Authority). DIRECTORS REPORT STADSHYPOTEK ANNUAL REPORT

40 Five-year summary INCOME STATEMENTS SEK m Interest income Interest expense Net interest income Other operating income Total income Administrative expenses Profit before loan losses Loan losses Operating profit Taxes Minority interests Profit for the year BALANCE SHEETS SEK m ASSETS Lending to credit institutions Lending to the general public Tangible assets Other assets Prepayments and accrued income Total assets LIABILITIES, PROVISIONS AND EQUITY Liabilities to credit institutions Deposits and funding from the general public Issued securities, etc Other liabilities Accruals and deferred income Provisions Subordinated liabilities Minority interests Equity Total liabilities, provisions and equity Some minor reclassifications have been made in the income statement. Comparative figures have been revised. 38 STADSHYPOTEK ANNUAL REPORT 2004 DIRECTORS REPORT

41 Stadshypotek bond tables Bond loans for major funding Loan no. Interest rate, % Loan date Due dates for interest Maturity date Outstanding amount, SEK Total Older series of bonds 1) Loan no. Interest rate, % Loan date Original interest rate, % Due dates for interest Maturity date Outstanding amount, SEK Total ) The loans have been issued by Handelsbanken Hypotek to replace bonds in loans originally issued by BOFAB. SUPPLEMENTARY DISCLOSURES STADSHYPOTEK ANNUAL REPORT

42 Bond tables Retail bonds 1) Loan no. Interest rate, % Loan date Due dates for interest Interest adjustment date Maturity date Outstanding amount, SEK , , 06-01, , 06-01, 09-01, Zero coupon Zero coupon Zero coupon Zero coupon Zero coupon Zero coupon Zero coupon Zero coupon Zero coupon Zero coupon Zero coupon Zero coupon Zero coupon Zero coupon Zero coupon Zero coupon Total ) epurchase prices. Total bonds Change during 2004, SEK 000 Outstanding amount, SEK 000 ISSUED BY STADSHYPOTEK AB Bond loans for major funding Older series of bonds Retail bonds Total STADSHYPOTEK ANNUAL REPORT 2004 SUPPLEMENTARY DISCLOSURES

43 Facts about the company FACTS ABOUT THE COMPANY Registered name: Stadshypotek AB (publ). Extensive knowledge of the market where customers are active is ensured at Handelsbanken through a widespread branch network. Corporate identity number: Date of registration: 23 December Registered office: Stockholm. Share capital: SEK 4,050,000,000, registered 22 December The lowest and highest permissible share capital, according to the Articles of Association, is SEK 2,000,000,000 and SEK 8,000,000,000. Number of shares: 162,000,000 shares with a nominal value of SEK 25 per share. Number of votes per share: Each share carries one vote. Convertible debt, etc.: The company has not issued any debt instruments which can be converted into or exchanged for shares or which are linked with options for a subscription of new shares. Ownership: A subsidiary of Svenska Handelsbanken AB (publ), registered no The Bank publishes consolidated annual accounts in which Stadshypotek AB is included. ADDRESS Stadshypotek AB Street address: Kungsträdgårdsgatan 2 Postal address: SE Stockholm Phone: Fax: DIRECTORS REPORT PHOTOS: Johnér Bildbyrå, Getty Images and Bengt Wanselius PRINTING: Ekotryck Redners PAPER: Silverblade STADSHYPOTEK ANNUAL REPORT

44 a Svenska Handelsbanken company