2 Handelsbanken HIGHLIGHTS OF ANNUAL REPORT Handelsbanken Group - Overview

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2 Handelsbanken Group - Overview Q 4 Q 3 Change Q 4 Change Jan-Dec Jan-Dec Change SEK m % 2006 % % Total operations Net interest income 4,098 4, , ,954 14,972 7 Net fee and commission income 2,226 2, , ,910 8,956-1 Net gains/losses on financial items at fair value , ,835 4, Capital gain disposal discontinued operations 4, ,082 - Other income , Total income 11,053 6, , ,636 29, Staff costs -2,115-1, , ,055-7,714 4 Administrative expenses -1,412-1, , ,172-4,737 9 Total expenses -3,527-3, , ,227-12,451 6 Profit before loan losses 7,526 3, , ,409 17, Loan losses, net Gains/losses on disposal of property and equipment and intangible assets Operating profit 7,360 3, , ,383 17, Taxes , ,875-4,036-4 Profit for the period 6,396 2, , ,508 13, Q 4 Q 3 Change Q 4 Change Jan-Dec Jan-Dec Change SEK m % 2006 % % Summary continuing and discontinued operations separated Net interest income 4,010 3, , ,608 14,727 6 Net fee and commission income 1,956 1, , ,745 7,316 6 Net gains/losses on financial items at fair value , ,054 3, Other income Total income 6,616 6, , ,126 26,347 3 Staff costs -1,995-1, , ,528-7,184 5 Administrative expenses -1,354-1, , ,840-4, Total expenses -3,349-2, , ,368-11,505 8 Profit before loan losses 3,267 3, , ,758 14,842-1 Loan losses, net Gains/losses on disposal of property and equipment and intangible assets Operating profit 3,101 3, , ,732 14,898-1 Taxes , ,879-3,970-2 The period's profits from continuing operations 2,242 2, , ,853 10,928-1 Profit for the period from discontinued operations, after tax , Capital gain from disposal of discontinued operations, after tax 4, ,082 - Profit for the period 6,396 2, , ,508 13, Summary balance sheet, SEK m Loans to the public 1,292,988 1,240,771 1,100,538 1,292,988 1,100,538 of which mortgage loans 523, , , , ,219 Deposits and borrowing from the public 512, , , , ,885 of which households 186, , , , ,759 Assets held for sale , Liabilities related to assets held for sale ,047 0 Shareholders' equity 74,491 68,646 66,226 74,491 66,226 Total assets 1,859,382 1,962,831 1,790,008 1,859,382 1,790,008 1 See Note 5 Discontinued operations. 2 Handelsbanken

3 Handelsbanken Group Key figures Q 4 Q 3 Q 4 Jan-Dec Jan-Dec Return on equity, total operations, after actual tax % 15.4% 23.2% 23.3% 20.9% Return on equity, total operations, after standard tax % 15.4% 22.9% 20.9% 19.7% Return on equity, total operations, after actual tax, excl. capital gains SPP % 17.1% Return on equity, total operations, after standard tax, excl. capital gains SPP % 16.5% Return on equity, continuing operations, ater actual tax % 15.7% 18.3% 16.3% 17.4% Return on equity, continuing operations, ater standard tax % 15.3% 19.6% 15.9% 17.1% C/I ratio, total operations 31.9% 46.8% 39.0% 40.5% 42.1% C/I ratio, total operations, incl. loan losses 33.4% 46.7% 39.7% 40.6% 41.9% C/I ratio, remaining operations 50.6% 45.1% 41.0% 45.6% 43.7% C/I ratio, remaining operations, incl. loan losses 53.1% 45.0% 41.7% 45.7% 43.5% Earnings per share, total operations, SEK Earnings per share, continuing operations, SEK Earnings per share, discontinued operations, SEK Ordinary dividend, SEK ,00 Extra dividend, SEK Adjusted equity per share, SEK Average number of outstanding shares 621,816, ,092, ,209, ,248, ,284,311 Capital ratio according to transitional rules % 9.4% 10.4% Tier 1 ratio according to Basel II 10.6% 11.2% 10.6% Tier 1 ratio according to transitional rules % 6.9% 6.5% Capital base in relation to capital requirement Basel II 212% 190% 212% Capital base in relation to capital requirement Basel I 122% 110% 122% Capital base in relation to capital requirement - trans rules % 117% 129% Average number of employees, total operations 10,898 11,108 10,265 10,768 10,163 Average number of employees, continuing operations 10,386 10,535 9,691 10,209 9,589 Number of branches in Sweden Number of branches outside Sweden When calculating return on equity, shareholders' equity is adjusted for the impact of unrealised changes in the value of financial assets classified as "Available for Sale" and for cash flow hedges. 2 No dilution as recommended by the Board. 4 When calculating equity per share, shareholders' equity is adjusted for the impact of cash flow hedges. Handelsbanken 3

4 The Group The Bank sold SPP to Storebrand ASA on 21 December The purchase price was SEK 18.2bn and the Bank s capital gain after restructuring and transaction costs was SEK 4.1bn. According to the current rules, the Bank must report continuing and discontinued operations. Note 5 describes what is included in discontinued operations. All comments in the end-of-year report refer to the continuing operations, unless otherwise stated. JANUARY-DECEMBER 2007 COMPARED WITH JANUARY-DECEMBER 2006 Operating profits for operations including discontinued operations increased by 13% to SEK m (17,164). The return on shareholders equity increased to 23.3% (20.9). The C/I ratio was 40.5% and earnings per share rose to SEK (20.41). In accordance with IFRS 5, accounting for continuing operations is separate from discontinued operations. The operating profit for continuing operations totalled SEK 14,732m (14,898). Income rose by 3%, and both net interest income and fee and commission income increased by 6%. Expenses rose by 8% to SEK 12,368m (11,505). Loan losses were SEK 27m (+55). Return on equity was 16.3% (17.4). The C/I ratio was 45.6% (43.7). Earnings per share were SEK (16.99). One consequence of complying with IFRS 5 is that almost all the funding costs for discontinued operations are reported under continuing operations, while the income generated is reported under discontinued operations. In 2007, the funding cost for discontinued operations was SEK 723m (498), this mainly being costs for subordinated loans raised in connection with the demutualisation of SPP. Volume and income increases Demand for credit remained strong from both companies and private individuals. The average volume of lending to the public increased by 14%, while in branch office operations outside Sweden it went up by over 26%. In Sweden, household deposits increased by 15% to SEK 121bn (105). Total net interest income from lending was lower than the previous year, since greater volumes did not make up for lower margins. However, net interest income from deposits grew due to higher volumes and improved margins. This resulted in the net interest income in the continuing operations increasing by 6% to SEK 15,608m (14,727). The net interest income has been reduced by SEK 723m (498) related to interest costs for funding the discontinued operations. Net fee and commission income increased by 6% to SEK 7,745m (7,316). The increase was mainly from mutual fund and custody commissions, brokerage income and payment commissions. At SEK 2,153m (1,983), payment commissions were the single largest source of income among commission income. Card commissions, which are included in payment commissions, have never been higher. Insurance commissions decreased by SEK 166m to SEK 531m, which was due to the yield split being SEK 0 (SEK 196m). Net gains/losses on financial items at fair value decreased by 11% to SEK 3,054m (3,448). The main reasons were that capital gains from the available-for-sale portfolio were SEK 228m lower than the previous year, and that the value change arising through increased credit spreads on bonds in the Bank s liquidity portfolio reduced the figure by SEK 490m (30). Increased rate of expansion outside Sweden Expenses increased by SEK 863m to SEK 12,368m (11,505). More than one third of this was due to expansion at the regional banks outside Sweden and at Handelsbanken International. In addition, Capital Markets had higher costs and an increased presence, particularly in Norway. Staff costs, which were SEK 7,528m (7,184), were affected by new pension regulations in Norway and accruals of actuarial gains brought forward. The new regulations in Norway reduced expenses by SEK 69m and accruals of actuarial gains in the rest of the Group reduced expenses by SEK 159m. More than one half of the increase in staff costs is due to the expansion outside Sweden. Performance-related remunerations were SEK 708m (651). The number of employees increased and at the yearend totalled 10,464 (9,823), with 2,859 (2,425) of this number outside Sweden. The increase in other administrative costs was due to the international expansion, higher costs for premises and IT costs. Loan losses still low Loan losses were SEK 27m (+55). The net loan loss ratio was 0.00% (-0.01). Bad debts continued to fall, the net amount being SEK 624m (876). The proportion of bad debts was 0.05% (0.07) of lending. Q COMPARED WITH Q Operating profits for total operations were SEK 7,360m (3,544) This profit figure includes a capital gain of SEK 4,082m from the sale of SPP. Loan losses totalled SEK 166m, as opposed to previous quarters, which had shown net recoveries on loan losses. Return on shareholders equity for the total operations was 37.4% (15.4) and earnings per share were SEK (4.10). 4 Handelsbanken

5 Operating profits for continuing operations were SEK 3,101m (3,532). Return on shareholders equity was 13.1% (15.7) and earnings per share were SEK 3.61 (4.19). Continued increase in net interest income Income increased by 3% to SEK 6,616m (6,427). Business volumes continued to grow. Average lending volumes rose by just under 3% and deposits by 1.5%. Net interest income increased by 1%, chiefly due to higher deposit margins. Net interest income was negatively affected by SEK 44m, due to the remaining effects from previously repurchased bonds. In Sweden, the margin for mortgages where the rate is newly set or reset was stable during the second half of the year, while the average margin for the whole mortgage loan portfolio decreased. Net interest income rose in Norway, but in the other regional banks outside Sweden it declined somewhat. Net fee and commission income went up by 1%. Brokerage income increased, as did mutual fund commissions. Net gains/losses on financial items at fair value increased by 26% to SEK 523m (415). Changes in value in the Bank s liquidity portfolio due to changes in credit spreads, had a less negative effect on earnings during the fourth quarter than in the previous quarter: SEK 152m, compared with SEK 338m. The bank realised profits of SEK 2m (220) from divestments from the available for sale portfolio. Expenses were SEK 3,349m (2,899). Staff costs, which are low in seasonal terms in the third quarter, rose by 11% to SEK 1,995m (1,802). The increase was mainly attributable to higher performance-related remunerations in Capital Markets. For the group as a whole, performancerelated remunerations amounted to SEK 332m, a rise of SEK 219m. The change in the Norwegian pensions system was reported in its entirety in the fourth quarter, and this reduced costs by SEK 69m. Other administrative expenses rose by SEK 257m to SEK 1,354m. External IT services and purchased services accounted for SEK 80m of the increase, and the cost of premises and properties for SEK 71m. Bad debts continued to decrease Loan losses remained low, at SEK 166m (+4), where two exposures accounted for loan losses of approximately SEK 125m. The net loan loss ratio was 0.05% (0.00). Bad debts continued to fall, the net amount being SEK 624m (680). The proportion of bad debts was 0.05% (0.05) of lending. TRENDS IN THE BUSINESS SEGMENTS (refer to January December 2007 unless otherwise stated) Branch office operations in Sweden Operating profit increased by 1% to SEK 9,869m (9,766). Net interest income grew by 4%, due to higher business volumes. The average volume of mortgage loans rose by 12% to SEK 358bn (319), while household deposits increased by 15% to SEK 121bn (105). Branch office operations outside Sweden Operating profit increased by 27% to SEK 2,641m (2,086), which corresponded to 18% of Group operating profits (14). Forty-one new branches were opened during the year, thirty of them in the Bank s domestic markets outside Sweden and the remainder in five other European countries. The average volume of lending increased by 26% to SEK 329bn (261); this was just under 28% of Group loans to the public. The corresponding figure for the previous year was 25%. Handelsbanken Capital Markets Operating profits fell to SEK 761m (1,183). The changes in value of the bonds in the part of the Bank s liquidity portfolio reported within Capital Markets had a SEK 364m negative effect on earnings. Apart from this, during the second half of 2007, Capital Markets generated higher income than the previous year. Handelsbanken Asset Management Operating profits fell to SEK 1,029m (1,137). Since the last quarter, Handelsbanken Liv has been reported under the Asset Management business segment; the decrease in operating profits was due to Handelsbanken Liv not receiving a yield split. The previous year, the split had been SEK 196m. The average value of the mutual funds managed by the Bank increased by 15%. Discontinued operations Discontinued operations include the activities the Bank sold to Storebrand ASA and the net amount of the compensation Handelsbanken received for asset management assignments that it carried out on behalf of SPP/Storebrand. The operating profit for the full year decreased by SEK 1,697m to SEK 569m. This was due partly to the change in the deferred capital contribution and hedges, and partly to a lower yield split. The effect of the changes in the deferred capital contribution and hedges was SEK 1,246m lower than the previous year, and the yield split was SEK 538m lower. The capital gain from the sale of SPP is included in discontinued operations. The net capital gain totalled SEK 4,082m, after restructuring and transaction costs of SEK 357m and a tax expense of SEK 0.2m. The Bank s funding cost for the discontinued operations, which totalled SEK 723m (498), are reported under continuing operations. BRANCH OFFICE OPERATIONS OUTSIDE SWEDEN GROW A NEW BRANCH OPENING EVERY 8 DAYS One year ago, the Bank announced its intention to open more branches. In 2007, 46 new branches were opened, 41 of them outside Sweden. Thirty of these were opened in the Bank s domestic markets outside Sweden: 16 in Great Britain, 8 in Finland, 4 in Norway and 2 in Denmark. The remaining 11 branches were opened within Handelsbanken International; in three of these cases, established representative offices were converted into full branches. Handelsbanken 5

6 By the end of 2007, in addition to the 41 new branches, a further 15 branch managers had been recruited, with the task of establishing new branches. For 2008, the objective is to open between 35 and 45 new branches outside Sweden. FUNDING AND LIQUIDITY Credit market turbulence had an impact on the Bank in the second half of The impact on earnings was mainly due to changes in credit spreads altering the value of the bonds the Bank keeps in a liquidity portfolio. The Bank s net interest income is mainly affected by customer margins, possible increases in the Bank s funding costs and to what extent these increases can immediately be transferred to the borrowers. The assessment is that the overall impact of the two last-mentioned factors negatively affected net interest income by some SEK 100m. As in the previous quarter, the Bank was able to fund its day-to-day operations in the normal way. Various types of funding instruments have been issued on a regular basis. The Bank s liquidity portfolio comprises bonds that are eligible as collateral with central banks in order to create immediate liquidity. The bonds have high credit quality and most of the holdings were rated AAA or AA, with none lower than A. The impact on earnings that is, the realised and unrealised value changes arising through wider credit spreads for the bonds which were or are in the Bank s trading portfolio was SEK 490m, of which SEK 152m affected the fourth quarter. Bonds in the available-for-sale portfolio affected the Bank s equity negatively by SEK 476m, with SEK 208m of this during the fourth quarter. The total market value of the Bank s liquidity portfolio was SEK 88.2bn, of which 41% was available for sale. CAPITAL ISSUES Starting on 1 February 2007, the Bank reports the capital requirement and capital base in accordance with the Basel II rules. The changed capital requirements have a gradual impact, since the transitional rules allow for an adaptation over a period of three years and in the first year, the Bank is only allowed to include 5% as a reduction. Tier 1 capital increased to SEK 65,600m (59,272). SEK 6.8bn of the Tier 1 capital was Tier 1 hybrid capital. Calculated according to the transitional rules, the Bank s capital ratio was 10.4%, while the Tier 1 capital ratio was 6.5%. The corresponding figures, excluding the transitional rules, were 16.9% and 10.6% respectively. If no transitional rules had applied, the statutory capital requirement under Basel II would have been reduced by 42% compared to the requirement in accordance with Basel I. According to what is known as Pillar 2 in Basel II, the Bank has designed a model for its internal capital adequacy assessment process (ICAAP). In this internal assessment, the Bank must take a broader approach to risks than is the case in Pillar 1. The capital requirement for risks is expressed in terms of economic capital (EC) and as a proportion of available financial resources (AFR). AFR consists of Handelsbanken s equity and other available financial values on and off the balance sheet, with a oneyear time horizon. As at 31 December 2007, the AFR/EC ratio was 215% and EC was SEK 55bn. The board established minimum and maximum target requirements for the Bank s Tier 1 capital ratio until further notice. Taking into consideration stress tests and the Bank s conservative attitude to risk, the board has decided that the Bank s Tier 1 capital ratio under Basel II must be at least 6% according to the current floor rules; and in 2010 when the Basel II transition rules cease to apply, the Tier 1 capital ratio must be between 9% and 11%. DIVIDEND, REPURCHASES AND ISSUE OF SUBORDINATED CONVERTIBLE LOAN The board proposes that the 2008 annual general meeting authorise an ordinary dividend on the class A and B shares of SEK In addition, the board is proposing that the AGM pass a resolution on an extra dividend of SEK 5.00 on the class A and B shares. In order to adjust the capital structure, the board is also requesting that the 2008 AGM mandate the board to repurchase a maximum of 20 million shares until the 2009 AGM. The board is also proposing that the AGM resolve that the shares that may come to be repurchased if the AGM votes in favour of the board s proposal, can be used to finance possible acquisitions. The board is also proposing that the AGM authorise an issue of a subordinated convertible loan directed at Handelsbanken employees on market terms. The aim is to offer the loan to all employees; however, legal or other reasons may exist in certain countries that prevent the offer. The loan is calculated at a maximum of SEK 2.3bn; it will have hybrid status and can be converted to shares in Handelsbanken. Assuming that the share price at the time of maturity is higher than the conversion price, the dilution is calculated to be about 1.8%. At the 2007 AGM, a resolution was passed to cancel 20.4 million shares which the Bank had previously repurchased. In connection with the cancellation, a bonus issue was performed which increased the quota value of the share from SEK 4.45 to SEK At the AGM in April 2007, the Bank s board received a mandate to repurchase up to 40 million shares during the period until the 2008 AGM. So far the Bank has repurchased 4.8 million shares. The board is requesting the 2008 AGM to resolve to cancel the repurchased shares as well as any shares that may be repurchased during the period until the 2008 AGM. RATING Handelsbanken s rating was unchanged with the three rating agencies which rate the Bank. Moody s rating for the Bank was Aa1, and from Fitch and Standard & Poor s AA-. All three agencies consider the Bank s outlook to be stable. 6 Handelsbanken

7 ANNUAL GENERAL MEETING AND ANNUAL REPORT The Bank s annual general meeting in 2008 will be held at the Grand Hôtel s Winter Garden, Stockholm, at a.m. on 23 April The annual report and/or annual review will be sent late March/early April to shareholders who request to receive such publications. Both publications will be available on the Bank s website ( in mid-march. Pär Boman President and group chief executive Handelsbanken 7

8 Segment information After SPP and related operations were reported as Discontinued operations, the Pensions & Insurance segment no longer exists. Handelsbanken Liv is part of the Asset Management segment. In other respects, the segment distribution is unchanged. Branch Continuing Discontinued Total Branch offices operations operations operations offices in outside Capital Asset Other Elimina- Jan-Dec Jan-Dec Jan-Dec Jan-Dec SEK m Sweden Sweden Markets Mgmt operations tions Net interest income 11,462 4, ,608 14, ,954 Net fee and commission income 3,616 1,278 1,564 1, ,745 7,316 1,165 8,910 Net gains/losses on financial items at fair value ,054 3, ,835 Capital gain disposal discontinued operations 4,082 Risk result - insurance Other income ,705-4, Total income 16,167 6,402 3,635 2,229 3,531-4,838 27,126 26,347 1,639 32,636 Total expenses -6,226-3,807-2,874-1,200-3,099 4,838-12,368-11,505-1,070-13,227 Profit before loan losses 9,941 2, , ,758 14, ,409 Loan losses, net Gains/losses on disposal of property and equipment and intangible assets Operating profit 9,869 2, , ,732 14, ,383 Capital gain disposal discontinued operations 4,082 Return on equity, % Average number of employees 4,649 2, ,695 10,209 9, ,768 Internal income and expenses are included in the respective items on the income statement. Internal income consists of interest, commissions and payment for services rendered according to the cost price principle. Expenses also include the distribution of costs made internally within the Group for services from business support operations. The Other operations business segment includes Treasury and the Central Head Office departments. It also includes capital gains/losses, dividends, and income and expenses that are not attributable to a specific business segment. Return on shareholders' equity for the business segments is computed after standard tax while for the whole Group, it is computed after actual tax. 8 Handelsbanken

9 Branch office operations in Sweden Branch office operations in Sweden comprise six regional banks, Handelsbanken Finans s operations in Sweden and Stadshypotek. At Handelsbanken, the branches are the base of all operations: they co-ordinate services for all customers, including major corporations. The regional banks are responsible for their own profits and pursue the goal of providing universal banking services with a higher service level and at lower cost than comparable banks. Handelsbanken Finans has a full range of finance company services. Handelsbanken Finans works through the Bank s branches and in financing collaborations with retailers and vendors. Stadshypotek is the Bank s mortgage company, and is completely integrated with the branch operations. Income statement Q 4 Q 3 Change Q 4 Change Jan-Dec Jan-Dec Change SEK m % 2006 % % Net interest income 2,905 2, , ,462 11,020 4 Net fee and commission income ,616 3,316 9 Net gains/losses on financial items at fair value Other income Total income 4,063 3, , ,167 15,429 5 Total expenses -1,681-1, , ,226-5,796 7 Profit before loan losses 2,382 2, , ,941 9,633 3 Loan losses, net Gains/losses on disposal of property and equipment and intangible assets Operating profit 2,314 2, , ,869 9,766 1 Return on equity, % Average number of employees 4,595 4, , ,649 4,500 3 JANUARY-DECEMBER 2007 COMPARED WITH JANUARY-DECEMBER 2006 Earnings performance Operating profits went up by 1% to SEK 9,869m (9,766) while profits before loan losses went up by 3%. Loan losses were SEK 72m (+133). Total income increased by 5% to SEK 16,167m (15,429). Net interest income rose by 4% to SEK 11,462m (11,020). This change was chiefly attributable to larger business volumes and better margins for household deposits. The increase in lending volumes was unable to compensate for the weakening margins. Net interest income was negatively affected by SEK 172m due to the remaining effects from previously repurchased bonds. Net fee and commission income increased by 9% to SEK 3,616m (3,316). Brokerage fees and payment commissions contributed the most to the increase in fee and commission income. Net gains/losses on financial items at fair value also increased, totalling SEK 917m (880). Expenses rose by 7% to SEK 6,226m (5,796). The cost/income ratio for Swedish branch office operations was 38.5% (37.6). Business development During the year, 5 new branches were opened: Vadstena, Gnesta, Gothenburg (Lindholmen), Strömstad and Malmö (Västra Hamnen). Two branches in Borås were merged. Thus the Bank had 461 branches in Sweden (457). The average volume of deposits grew more rapidly than lending: over 12% for deposits compared with nearly 10% for lending. Household deposits grew by over 15%, with margins improving. The average volume of mortgage loans rose by more than 12% to SEK 358bn (319). In recent years, the margin in the mortgage loan portfolio has decreased, because new loans have been taken out at gradually lower margins. This also applied to the first half of 2007, but since then the margin on newly priced loans has been stable. The average margin for the whole mortgage loan portfolio was 60 bp (77) for the full year and 50 bp for the fourth quarter. The internet is becoming increasingly important when buying and selling property. Handelsbanken s online property bidding service, called e-bud, is a vital part of the local collaboration between estate agents and the Bank s local branches. In total, e-bud was used in more than 13,500 property sales, an increase of 45%. Handelsbanken Finans, whose profit and volume figures for Swedish operations are presented within Swedish branch operations, had a successful year. In addition to Handelsbanken 9

10 traditional finance company products, Handelsbanken Finans was responsible for the Bank s deposit services. Handelsbanken Finans further developed the Bank s range of cards and card products. Examples of this were the opportunity for customers to choose their own image for most of the Bank s cards, the launch of Safesale, the new e-commerce package, and just over 50,000 ATM cards being replaced by Frikort cards. The Bank s Allkort card retained its position as the classic credit card with the highest sales per card in Europe. Volumes at Handelsbanken Finans increased; among other things, leasing and conditional sales business grew by 14%. Average credit volumes were approximately SEK 51bn (44). Q COMPARED WITH Q Earnings performance Operating profits decreased by 7% to SEK 2,314m (2,496), chiefly due to higher loan losses and expenses. In seasonal terms, expense levels during the third quarter are lower than the average for the year, and thus the fluctuations between the quarters are normally fairly large. Net interest income went up by 2% to SEK 2,905m (2,854), mainly due to a continued improvement in deposit margins. The margin on floating rate household deposits rose by 10 bp quarter-on-quarter. Net interest income was negatively affected by SEK 42m due to the remaining effects from previously repurchased bonds. Net fee and commission income was unchanged, while net gains/losses on financial items at fair value rose by 42%. Business development Both lending volumes and household deposits increased by 2%. The margin for mortgage loans where the rate is newly set was stable between the quarters, while the margin for the whole mortgage loan portfolio went down by 6 bp. Business volumes, Sweden Q 4 Q 3 Change Jan-Dec Jan-Dec Change Average volumes, SEK bn % % Deposits and borrowing from the public Household Corporate Total Loans to the public * Household of which mortgage loans Corporate of which mortgage loans Total * excl. loans to the National Debt Office 10 Handelsbanken

11 Branch office operations outside Sweden Branch office operations outside Sweden comprise the regional banks in Great Britain, Denmark, Finland and Norway, these being the countries which, together with Sweden are regarded as the Bank s domestic markets. The branch operations in these countries are run according to the same concept as in Sweden to provide universal banking services with a higher service level and at lower cost than comparable banks. This business segment also includes Handelsbanken International and Handelsbanken Finans s operations outside Sweden. Handelsbanken International is responsible for branch operations outside the Bank s domestic markets, trade finance, export finance and project finance. Income statement Q 4 Q 3 Change Q 4 Change Jan-Dec Jan-Dec Change SEK m % 2006 % % Net interest income 1,134 1, ,205 3, Net fee and commission income ,278 1,176 9 Net gains/losses on financial items at fair value Other income Total income 1,659 1, , ,402 5, Total expenses -1, ,807-3, Profit before loan losses ,595 2, Loan losses, net Gains/losses on disposal of property and equipment and intangible assets Operating profit ,641 2, Return on equity, % Average number of employees 2,589 2, , ,448 2, JANUARY-DECEMBER 2007 COMPARED WITH JANUARY-DECEMBER 2006 Earnings performance Operating profit increased by 27% to SEK 2,641m (2,086). In Norway, profits grew by SEK 202m or 21%. In Denmark where, in the second quarter of the year, write-backs of provisions were made for probable loan losses of just over SEK 200m, operating profit improved by SEK 186m, or 41%. Before loan losses, profits in Denmark rose by 4%, or SEK 19m. In Finland, profits increased by 17%, or SEK 78m. In Great Britain, income grew by 31%, but earnings were burdened by a 36% increase in costs, chiefly because the number of branches increased from 26 to 42 during the year. Loan losses were also higher. Profits in Great Britain rose by 1% to SEK 154m. The aggregate deficit, before loan losses, for the branches outside Sweden which have not yet broken even was SEK 138m (86), 107m of which (75) referred to branches in the Bank s domestic markets outside Sweden. Business development Handelsbanken had a total of 199 (158) branches outside Sweden. Of these, 171 (141) were in Great Britain and in the Nordic countries outside Sweden. There is also a branch in Tallinn, Estonia which is part of Regional Bank Finland. During the year, 41 new branches were opened outside Sweden: Sixteen in Great Britain, eight in Finland, four in Poland, four in Norway, three in Spain, two in Denmark, two in Germany and one each in the Netherlands and Russia. Two of the new branches in Spain (Alicante and Marbella) and the St. Petersburg branch in Russia were formerly representative offices, but became full branches during the year. Average lending volumes in the branch office operations outside Sweden increased by 26% to SEK 329bn (261). Corporate lending increased by 30% to SEK 227bn (174). Deposits from the public rose by 13%, and average volumes during the year were SEK 132bn (117). Q COMPARED WITH Q Earnings performance Operating profit decreased by 22% to SEK 497m (635) while profits before loan losses went down by 9% to 595m (653). The decrease in profits is attributable to expenses being 13% higher than the previous quarter, due to new branches in mainly Great Britain, Finland and in Handelsbanken International. During the quarter, the average volume of lending rose by 6% to SEK 360bn (339). Lending to companies rose by 7%. Deposits from the public rose by 6% to SEK 141bn (133), mainly due to increased corporate deposits. Handelsbanken 11

12 Branch office operations in Great Britain JANUARY-DECEMBER 2007 COMPARED WITH JANUARY-DECEMBER 2006 Earnings performance Operating profit increased by 1% to SEK 154m (152). Income rose by 31% or SEK 181m, to 772m (591). Net interest income improved by SEK 160m due to larger business volumes. Expenses rose by 36%, or SEK 151m. The increase came mainly from staff costs which made up two thirds of the rise in expenses and from higher system investments. In the last 12-month period, the number of employees went up by 129 to 396. In the fourth quarter, a provision was made for a probable loan loss in a single exposure. Business development The average volume of lending rose by 46% to GBP 3,497m (2,403), where corporate lending went up by 47%, and lending to private individuals by 40%. The previously decided division of the regional banking operations into two regional banks was implemented at the beginning of The regional head offices are located in London and Manchester. During 2007, the Bank opened 16 new branches, bringing the total at the end of the year to 42. Branches were opened in the following towns during the year: Brighton, Preston, Bath, Doncaster, Stockton On Tees, Wakefield, Portsmouth, Northampton, Coventry, Croydon, London West End, Milton Keynes, Enfield, Basingstoke, Carlisle and Chester. The last eight of these opened in the fourth quarter. A further eight branches are scheduled to open in the near future: Of the opened and planned branches, 20 belonged to the Northern Great Britain regional bank, and 30 to the Southern Great Britain regional bank. Q COMPARED WITH Q Earnings performance Operating profit weakened to SEK -25m (50), mainly due to higher loan losses. Income fell by SEK 6m to SEK 190m. Business volumes went up but the funding cost was higher in the last quarter, which led to a lower net interest income in the last quarter compared to the third quarter. Expenses rose by SEK 27m to SEK 170m. The increase in expenses is due to the accrual effects of costs for development projects, and to increased staff costs attributable to the expansion. The number of employees rose to 396 (359). Business development Deposits increased at a considerably higher pace than lending. Average deposits went up by 23% while average lending grew by 13%. Branch office operations in Great Britain Q 4 Q 3 Jan-Dec Jan-Dec SEK m Net interest income Net fee and commission income Net gains/losses on financial items at fair value Other income Total income Total expenses Loan losses, net Operating profit Business volumes, Great Britain Q 4 Q 3 Change Jan-Dec Jan-Dec Change Average volumes, GBP m % % Deposits and borrowing from the public Household Corporate 1,308 1, ,188 1,152 3 Total 1,519 1, ,369 1,254 9 Loans to the public Household Corporate 3,322 2, ,891 1, Total 3,967 3, ,497 2, Handelsbanken

13 Branch office operations in Denmark JANUARY-DECEMBER 2007 COMPARED WITH JANUARY-DECEMBER 2006 Earnings performance Profits before loan losses improved by 4% to SEK 444m (425). Due to writebacks of previous provisions for probable loan losses, the operating profit increased by 41% to SEK 641m (455). Net interest income went up by 15% to SEK 737m (642) due to larger business volumes. Expenses grew by 11%, mainly due to the increase in staff numbers, and higher IT costs. Business development The average volume of lending increased by 13% to DKK 29.6bn. Household lending also went up by 13% to DKK 13.1bn, mainly due to continuing high demand for Priority Loans. The total volume of Priority Loans the mortgage loan which Handelsbanken was the first bank to introduce in Denmark in 2000 was DKK 11.5bn. Three new structured products were launched where the customers invested a total of DKK 379m. Two new branches were opened in 2007: a second branch in Aalborg, and a branch in Slagelse in western Zealand. As a result, the Bank had a total of 39 branches in Denmark. Q COMPARED WITH Q Earnings performance Profits before loan losses were down 18%, partly due to higher expenses. Net gains/losses on financial items at fair value and net fee and commission income rose while net interest income went down slightly. Expenses went up by 17%, mainly attributable to higher costs for premises and staff. The average volume of lending increased during the quarter to DKK 29.9bn. Loans to households increased by 2% to DKK 13.5bn. The average volume of deposits increased by 13% to DKK 24.5bn. Corporate deposits rose significantly during the period while the deposit volume from households was unchanged. Branch office operations in Denmark Q 4 Q 3 Jan-Dec Jan-Dec SEK m Net interest income Net fee and commission income Net gains/losses on financial items at fair value Other income Total income , Total expenses Loan losses, net Operating profit Business volumes, Denmark Q 4 Q 3 Change Jan-Dec Jan-Dec Change Average volumes, DKK bn % % Deposits and borrowing from the public Household Corporate Total Loans to the public Household Corporate Total Handelsbanken 13

14 Branch office operations in Finland JANUARY-DECEMBER 2007 COMPARED WITH JANUARY-DECEMBER 2006 Earnings performance Operating profit improved by 17% to SEK 529m (451). Larger business volumes, particularly for lending, led to net interest income growing by 14% to SEK 899m (788). The 8% increase in expenses is largely attributable to newly opened branches and higher IT costs. The IT costs derive from an ongoing change of system, which will be carried out during the first quarter of Business development The average volume of lending rose by 16% to EUR 8.4bn. The Bank expanded its range of credit card products by launching its own MasterCard. During the fourth quarter, focus on developing the Cash Management and Trade Finance services commenced, areas where the Bank sees opportunities for extra business. In addition, Handelsbanken s telephone service was launched, where customers can obtain advice on their banking business every banking day between 8 a.m. and 8 p.m. During the year, 8 new branches were opened: in Espoo-Matinkylä, Mikkeli, Vantaa Aviapolis, Jävenpää, Turku- Hämeenkatu, Lohja, Kirkkonummi, Kotka. This brought the number of branches in Finland to 44. Q COMPARED WITH Q Earnings performance Quarterly profits fell to SEK 102m (154). Income was virtually unchanged while costs went up by 23%. The cost increase is mainly attributable to the opening of new branches and IT projects. Branch office operations in Finland Q 4 Q 3 Jan-Dec Jan-Dec SEK m Net interest income Net fee and commission income Net gains/losses on financial items at fair value Other income Total income ,307 1,173 Total expenses Loan losses, net Operating profit Business volumes, Finland Q 4 Q 3 Change Jan-Dec Jan-Dec Change Average volumes, EUR m % % Deposits and borrowing from the public Household 1,122 1, , Corporate 1,032 1, ,026 1,025 0 Total 2,154 2, ,082 1,967 6 Loans to the public Household 2,851 2, ,704 2, Corporate 5,873 5, ,726 4, Total 8,724 8, ,430 7, Handelsbanken

15 Branch office operations in Norway JANUARY-DECEMBER 2007 COMPARED WITH JANUARY-DECEMBER 2006 Earnings performance Operating profit increased by 21% to SEK 1,174m (972). Rising business volumes, with lending growing by 25% and deposits by 16%, caused net interest income to improve by SEK 157m, or 11%. Lending margins were more or less unchanged during the year, but compared to the previous year the average margin was lower. Deposit margins improved slightly. Net interest income was adversely affected by about SEK 80m due to Norges Bank hiking key rates on seven occasions by a total of 1.75 percentage points. These rate hikes did not have an impact on customer rates until after a six-week delay, due to the notice periods that banks must observe under Norwegian legislation. Expenses were somewhat higher than the previous year, although they were positively affected in the fourth quarter by a write-back of pension costs of SEK 69m. Business development Lending increased by 25% to NOK 113bn (90). Household lending went up by 15% which meant that Handelsbanken continued to take market share. Handelsbanken opened four new branches during the year: Bodø, Lillehammer, Jessheim, Kongsberg, following which the Bank had a total of 46 branches in Norway. Q COMPARED WITH Q Earnings performance Earnings went up by 22% to SEK 360m (296), attributable to income rising by 5%, and expenses being 52m lower in the fourth quarter. Expenses were positively impacted by a write-back of pension costs in the fourth quarter of SEK 69m. Branch office operations in Norway Q 4 Q 3 Jan-Dec Jan-Dec SEK m Net interest income ,550 1,393 Net fee and commission income Net gains/losses on financial items at fair value Other income Total income ,019 1,809 Total expenses Loan losses, net Operating profit , Business volumes, Norway Q 4 Q 3 Change Jan-Dec Jan-Dec Change Average volumes, NOK bn % % Deposits and borrowing from the public Household Corporate Total Loans to the public Household Corporate Total Handelsbanken 15

16 Handelsbanken International At the end of 2007, Handelsbanken had 28 branches and four representative offices in 15 countries outside the Nordic region and Great Britain. JANUARY-DECEMBER 2007 COMPARED WITH JANUARY-DECEMBER 2006 Earnings performance Operating profit increased by 66% to SEK 256m (154). Income grew by 25%. Expenses rose by 18%, due to continuing expansion. Business development During the second half of the year the Bank opened branches in Wroclaw, Katowice East, Katowice West and Warsaw Mokotow. As a result, the Bank had a total of seven branches in Poland. During the fourth quarter, two new branches in Germany were opened. Including these new branches in Stuttgart and Munich, the Bank had four branches in Germany. In the Netherlands, Handelsbanken opened a branch in Rotterdam in October. The Bank already has a branch in Amsterdam. At the end of 2007, the Bank received a licence to pursue banking operations in Spain. A new branch was opened in Madrid, while the representative offices in Marbella and Alicante became full branches. Thus the Bank had a total of three branches in Spain. In September, the Bank s representative office in Kuala Lumpur, Malaysia was opened. In March, the Bank s representative office in St Petersburg was turned into a full branch. Q COMPARED WITH Q Earnings performance Earnings fell to SEK 33m (75). The decrease is attributable to costs going up by 36% due to the opening of new branches. The Bank has liquidity commitments to special purpose vehicles that obtain short-term funding on the securities markets. In February 2008, USD 129m was utilised of the Bank s commitment to a company which has subprime loans among its assets. This commitment totalled USD 165m. Handelsbanken International and Financial Institutions Q 4 Q 3 Jan-Dec Jan-Dec SEK m Net interest income Net fee and commission income Net gains/losses on financial items at fair value Other income Total income ,389 1,115 Total expenses , Loan losses, net Operating profit Business volumes, Handelsbanken International and Financial Institutions Q 4 Q 3 Change Jan-Dec Jan-Dec Change Average volumes, SEK bn % % Deposits and borrowing from the public Household Corporate Total Loans to the public Household Corporate Total Handelsbanken

17 Handelsbanken Capital Markets Capital Markets is Handelsbanken s investment bank. The investment bank focuses on investors and risk managers in the Nordic countries and beyond. Capital Markets includes advisory services within corporate finance, including debt capital markets, equities, fixed income, commodities and foreign exchange trading, structured products, and macro and financial research. There were just over 980 employees in seven countries. Income statement Q 4 Q 3 Change Q 4 Change Jan-Dec Jan-Dec Change SEK m % 2006 % % Net interest income Net fee and commission income ,564 1,470 6 Net gains/losses on financial items at fair value , Other income Total income ,635 3,710-2 Total expenses ,874-2, Profit before loan losses , Loan losses, net Gains/losses on disposal of property, equipment and intangible assets Operating profit , Return on equity, % Average number of employees JANUARY-DECEMBER 2007 COMPARED WITH JANUARY-DECEMBER 2006 Earnings performance Profits were SEK 761m (1,183), a decrease of 36%. Income fell to SEK 3,635m (3,710). The decrease in earnings is partly due to lower net gains on financial items at fair value and partly to higher expenses. The change on net gains/losses on financial items at fair value was mainly due to value changes, realised and unrealised, in a portfolio of securities eligible as collateral which is part of the Bank s liquidity portfolio. This was responsible for SEK 364m of the total decrease in profits. The portfolio has a high credit quality and most of the holdings were rated AAA or AA, with no part less than A. Expenses rose by 14% to SEK 2,874m (2,527). The increase was primarily attributable to costs in Norway, where the increase in staff costs was SEK 108m. An increase in performance-related remuneration also contributed to the increased costs. The average number of employees increased by 12% to 935 (837). Equity trading Brokerage income increased by 5%, and the Bank was the second largest player on the Stockholm Stock Exchange. Handelsbanken became a member of the London Stock Exchange. The number of institutional customers outside the Nordic region increased to over 300, and the proportion of brokerage income generated from business with non-nordic investors rose to 41% (38). The number of organised road shows, that is, arrangements where companies or institutions meet international investors, was 649, representing a 12% increase. For the first time, institutional customers ranked the Bank no. 1 for Swedish equities trading and no. 2 for Danish equities trading. In Finland, the Bank retained its first place from the previous year. Prospera conducted the surveys. In addition, the international survey company AQ Research ranked Handelsbanken Capital Markets as best in the analysis of Scandinavian equities. Corporate Finance including Debt Capital Markets Income rose and Capital Markets was the largest in providing advisory services for corporate acquisitions with a Swedish connection, and it was the largest Nordic player on the Nordic market. The Bank was an advisor to 36 public transactions for a value of approximately EUR 14bn. A new share issue and five IPOs were carried out on the Nordic stock exchange with a total value of EUR 1.7bn. Capital Markets served as the mandated lead arranger for 22 syndicated loans for a total value of EUR 19.9bn, of which it was the book runner for 10 transactions for the amount of EUR 13.4bn. This made Handelsbanken the largest player in terms of arranging and placing investment grade syndicated loans (at least BBB-) in Sweden and the Nordic region. Handelsbanken 17