Highlights of Stadshypotek s annual report JANUARY DECEMBER Lending increased by SEK 44bn (35) to SEK 524bn Operating profi t was SEK 3,926m (4,581) Recoveries exceeded new loan losses during the period.
Highlights of Stadshypotek s annual report January December Performance Stadshypotek s operating profit for was SEK 3,926m (4,851). The decrease was mainly due to the net interest income being SEK 477m lower than the previous year. For the past couple of years the competition for private customers mortgage loans has led to reduced margins, which has had a negative impact on the net interest income. However, for the past six months, the margins for newly-priced mortgage loans have remained stable. Stadshypotek s lending volume in the private market continued to perform well during the year. But the increase could not compensate for the lower lending margins. Net interest income was also negatively affected due to the remaining effects from previously repurchased bonds. Loan losses Recoveries exceeded new loan losses and the net amount recovered was SEK 70m (278), which corresponded to a loan loss ratio of -0.01 % (-0.06) of lending. debts before of the provision for loan losses amounted to SEK 267m (393) at the end of. SEK 41m (44) of the bad debts were non-performing loans, while SEK 226m (349) were loans on which the borrowers pay interest and amortisation, but which are considered doubtful in view of the uncertainty as to the borrowers repayment capacity and the value of the collateral. In addition, there were non-performing loans of SEK 318m (229) that are not assessed as being bad debts. After of the provision for loan losses, the volume of bad debts was SEK 190m (284). Growth in lending Lending to the public was SEK 524bn, an increase of 44bn. Stadshypotek s share of net growth in the private market developed favourably and the market share went up to 25.6% (25.5). Stadshypotek retained its position as a leading player on the Swedish corporate market, with a market share of 34.2% (34.8). Capital ratio On 1 February, new capital adequacy regulations were implemented the Basel II rules. The new rules entail major changes in how the capital requirement is to be calculated and how a satisfactory capital base is to be ensured. They will be implemented gradually, since the transitional rules allow for an adaptation over three years. As at 31 December, the capital ratio was 9.3% (8.3). As at 31 December, the Tier 1 capital ratio was 6.6% (7.1). Further information concerning capital adequacy is provided in the section entitled capital base and capital requirement. Rating Stadshypotek s rating was unchanged. Stadshypotek Long term Short term Moody s Aa1 P-1 Standard & Poor s AA- A-1+ Fitch AA- F1+ Covered bonds Moody s Accounting policies The accounts comply with the IASB accounting standards adopted by the EU. The regulations of the Annual Accounts Act for Credit Institutions and Securities Companies (ÅRKL) and the directives issued by the Swedish Financial Supervisory Authority are also applied. The same accounting policies have been applied as in the latest annual report. Stockholm, 27 February 2008 Aaa Lars Kahnlund Chief executive HIGHLIGHTS OF STADSHYPOTEK S ANNUAL REPORT JANUARY-DECEMBER 1
Income statement Group Change % Q4 Q4 Change % Interest income 21,787 17,645 23% 5,969 4,719 26% Interest expense -18,084-13,465 34% -5,152-3,747 37% Net interest income 3,703 4,180-11% 817 972-16% Net result on financial operations 360 312 15% 41 62-34% Fee and commission income 11 11 0% 3 3 0% Fee and commission expense -50-58 -14% -12-15 -20% Net fee and commission income -39-47 -17% -9-12 -25% Total income 4,024 4,445-9% 849 1,022-17% General administrative expenses Staff costs -35-20 75% -11-6 83% Other -133-122 9% -34-39 -13% Depreciation according to plan 0 0-0 0 - Total expenses -168-142 18% -45-45 0% Profit before loan losses 3,856 4,303-10% 804 977-18% Net loan losses Note 1 70 278-75% 12 196-94% Operating profit 3,926 4,581-14% 816 1,173-30% Tax -1,100-1,259-13% -229-328 -30% Profit for the year 2,826 3,322-15% 587 845-31% Net earnings per share, SEK 17.45 20.51 Balance sheet Group Assets Loans to credit institutions 5,600 5,495 Loans to the public Note 2 523,758 480,219 Derivatives Note 3 3,270 1,091 Property and equipment 0 0 Other assets 8,272 3,917 Total assets 540,900 490,722 Liabilities and shareholders equity Due to credit institutions 103,638 141,196 Issued securities etc. 392,807 311,687 Derivatives Note 3 3,606 4,368 Other liabilities and provisions 12,676 10,099 Subordinated loans 8,300 3,500 Total liabilities 521,027 470,850 Shareholders equity Note 4 19,873 19,872 Total liabilities and shareholders equity 540,900 490,722 2 HIGHLIGHTS OF STADSHYPOTEK S ANNUAL REPORT JANUARY-DECEMBER
Income statement Parent company Change % Q4 Q4 Change % Interest income 21,787 17,645 23% 5,969 4,719 26% Interest expense -18,084-13,465 34% -5,152-3,747 37% Net interest income 3,703 4,180-11% 817 972-16% Net result on financial operations 360 312 15% 41 62-34% Fee and commission income 11 11 0% 3 3 0% Fee and commission expense -50-58 -14% -12-15 -20% Net fee and commission income -39-47 -17% -9-12 -25% Total income 4,024 4,445-9% 849 1,022-17% General administrative expenses Staff costs -35-20 75% -11-6 83% Other -133-122 9% -34-39 -13% Depreciation according to plan 0 0-0 0 - Total expenses -168-142 18% -45-45 0% Profit before loan losses 3,856 4,303-10% 804 977-18% Net loan losses Note 1 70 278-75% 12 196-94% Operating profit 3,926 4,581-14% 816 1,173-30% Tax -1,100-1,259-13% -229-328 -30% Profit for the year 2,826 3,322-15% 587 845-31% Balance sheet Parent company Assets Loans to credit institutions 5,600 5,495 Loans to the public Note 2 523,758 480,219 Derivatives Note 3 3,270 1,091 Property and equipment 0 0 Other assets 8,272 3,917 Total assets 540,900 490,722 Liabilities and shareholders equity Due to credit institutions 113,875 164,484 Issued securities etc. 382,570 288,399 Derivatives Note 3 3,606 4,368 Other liabilities and provisions 12,676 10,099 Subordinated loans 8,300 3,500 Total liabilities 521,027 470,850 Shareholders equity Note 4 19,873 19,872 Total liabilities and shareholders equity 540,900 490,722 HIGHLIGHTS OF STADSHYPOTEK S ANNUAL REPORT JANUARY-DECEMBER 3
Notes The information in the notes refers to both the Group and the parent company. Note 1 Loan losses Specifi c provision for individually assessed loan receivables The period s write-down for actual loan losses -10-18 Writeback of previous provisions for loan losses reported as actual loan losses in the year accounts 5 8 The year s provision relating to loan losses -11-13 Recovered from actual loan losses in previous years 48 259 Write-back for loan losses which are no longer necessary 38 42 Net recoveries for the year for individually assessed loan receivables 70 278 Recovered from actual loan losses in previous years includes calculations relating to recoveries in the portfolio of overdue loans which is subject to monitoring. Previously these were only reported in Handelsbanken s consolidated accounts but from the fourth quarter of they are reported in each legal unit. For, this has resulted in an item in profit or loss of SEK 181m. Note 2 Loans to the public LOANS TO THE PUBLIC BY SECTOR Lending before Provisions for loan losses Lending after Lending before Provisions for loan losses Lending after Households 380,839-15 380,824 338,086-22 338,064 Public sector, municipal companies 5,732-5,732 6,787-6,787 Housing co-operative associations 82,992-35 82,957 74,822-55 74,767 Other legal entities 54,272-27 54,245 60,633-32 60,601 Total loans to the public 523,835-77 523,758 480,328-109 480,219 LOANS TO THE PUBLIC BY TYPE OF PROPERTY Lending before Provisions for loan losses Lending after Lending before Provisions for loan losses Lending after Single-family housing 284,693-7 284,686 256,730-10 256,720 Housing co-operatives 77,109-1 77,108 62,345-2 62,343 Private market 361,802-8 361,794 319,075-12 319,063 Multi-family housing 144,708-65 144,643 144,788-94 144,694 Offices and commercial buildings 17,325-4 17,321 16,465-3 16,462 Corporate market 162,033-69 161,964 161,253-97 161,156 Total loans to the public 523,835-77 523,758 480,328-109 480,219 NON-PERFORMING LOANS BY BORROWER which are included in bad debts which are included in bad debts which are not bad debts which are not bad debts Households 277 14 199 14 Public sector, municipal companies - - - - Housing co-operative associations 2 3 1 2 Other legal entities 39 24 29 28 Total 318 41 229 44 4 HIGHLIGHTS OF STADSHYPOTEK S ANNUAL REPORT JANUARY-DECEMBER
NON-PERFORMING LOANS BY TYPE OF PROPERTY which are included in bad debts which are included in bad debts which are not bad debts which are not bad debts Single-family housing 223 9 162 14 Housing co-operatives 54 0 35 1 Private market 277 9 197 15 Multi-family housing 32 31 28 27 Offices and commercial buildings 9 1 4 2 Corporate market 41 32 32 29 Total 318 41 229 44 BAD DEBTS BY BORROWER Provision for losses Provision for losses debts debts net debts debts net Households 33-15 18 56-22 34 Public sector, municipal companies - - - - - - Housing co-operative associations 120-35 85 199-55 144 Other legal entities 114-27 87 138-32 106 Total 267-77 190 393-109 284 BAD DEBTS BY TYPE OF PROPERTY Provision for losses Provision for losses debts debts net debts debts net Single-family housing 18-8 10 26-10 16 Housing co-operatives 0 0 0 3-2 1 Private market 18-8 10 29-12 17 Multi-family housing 185-65 120 299-94 205 Offices and commercial buildings 64-4 60 65-3 62 Corporate market 249-69 180 364-97 267 Total 267-77 190 393-109 284 The provision for losses refers to a specific provision for individually valued claims. Note 3 Derivatives, Interest-rate related instruments Currency-related instruments Total Fair value Book value Fair value Book value Fair value Book value Positive values 2,095 2,095 1,175 1,175 3,270 3,270 Negative values 3,490 3,490 116 116 3,606 3,606, Interest-rate related instruments Currency-related instruments Total Fair value Book value Fair value Book value Fair value Book value Positive values 1,038 1,038 53 53 1,091 1,091 Negative values 3,341 3,341 1,027 1,027 4,368 4,368 Stadshypotek mainly uses interest rate swaps as instruments to hedge against changes in value due to changes in market interest rates. Hedge accounting is applied for these hedges in accordance with the company s accounting policies. Interest rate swaps, currency futures and interest rate options are also used as hedges for fair value changes without hedge accounting being applied. HIGHLIGHTS OF STADSHYPOTEK S ANNUAL REPORT JANUARY-DECEMBER 5
Note 4 Change in shareholders equity Opening shareholders equity 19,872 19,049 Group contribution -3,925-3,471 Tax on group contribution 1,100 972 Profit for the year 2,826 3,322 Closing shareholders equity 19,873 19,872 CASH FLOW STATEMENT Cash flow from operating activities -1,223 9,236 Cash flow from investing activities -2 0 Cash flow from financing activities 197-8,736 Cash flow for the year -1,028 500 Liquid funds at beginning of year 1,462 962 Cash flow for the year -1,028 500 Liquid funds at end of year 434 1,462 TURNOVER OWN DEBT INSTRUMENTS Stadshypotek issues and repurchases debt instruments which it has issued on its account. This is for the purposes of financing its operations. Turnover during the year was as follows: Issued (sold): SEK 298 bn Repurchased: SEK 29 bn Maturity: SEK 185 bn Quarterly performance Q4 Q3 Q2 Q1 Q4 Interest income 5,969 5,559 5,240 5,019 4,719 Interest expense -5,152-4,641-4,280-4,011-3,747 Net interest income 817 918 960 1,008 972 Net gain/losses on financial items 41 6 205 108 62 Net operating income -9-10 -9-11 -12 Total income 849 914 1,156 1,105 1,022 General administrative expenses Staff costs -11-9 -9-6 -6 Other -34-33 -35-31 -39 Depreciation according to plan 0 0 0 0 0 Total expenses -45-42 -44-37 -45 Profit before loan losses 804 872 1,112 1,068 977 Loan losses 12 9 20 29 196 Operating profit 816 881 1,132 1,097 1,173 6 HIGHLIGHTS OF STADSHYPOTEK S ANNUAL REPORT JANUARY-DECEMBER
Segment information Jan Dec Private Corporate Total Private Corporate Total Net interest income 2,744 959 3,703 3,073 1,107 4,180 Net gain/losses on financial items 267 93 360 229 83 312 Net operating income -29-10 -39-35 -12-47 Total income 2,982 1,042 4,024 3,267 1,178 4,445 Total expenses -125-43 -168-104 -37-142 Profit before loan losses 2,857 999 3,856 3,163 1,141 4,303 Loan losses 34 36 70 212 66 278 Operating profit 2,891 1,035 3,926 3,375 1,207 4,581 Private market is defined as lending secured by mortgages in single-family or two-family houses, second homes, housing co-operative apartments or residential farms. Corporate market is lending secured by mortgages in multi-family dwellings, family farms, commercial and office buildings or state and municipal loans. Related party transactions Group Parent Company GROUP CLAIMS/GROUP LIABILITIES BALANCE SHEET Group claims Loans to credit institutions 5,569 5,471 5,569 5,471 Derivatives 3,079 1,038 3,079 1,038 Other assets 41 35 41 35 Total 8,689 6,544 8,689 6,544 Group liabilities Due to credit institutions 91,979 141,196 102,216 164,484 Derivatives 3,545 3,420 3,545 3,420 Other liabilities and provisions 4,177 3,702 4,177 3,702 Subordinated loans 8,300 3,500 8,300 3,500 Total 108,001 151,818 118,238 175,106 INCOME STATEMENT Interest income 332 183 332 183 Interest expense -4,110-3,545-4,787-4,424 Fee and comission expense -24-41 -24-41 Other administrative expenses -106-101 -106-101 Total -3,908-3,504-4,585-4,383 The above-mentioned inter-company transactions are either between the companies in the Stadshypotek Group or between these and other companies in the Handelsbanken Group. HIGHLIGHTS OF STADSHYPOTEK S ANNUAL REPORT JANUARY-DECEMBER 7
Key fi gures Jan Dec Jan Dec Overall interest margin, % 0.72 0.89 C/I ratio before loan losses, % 4.20 3.20 C/I ratio after loan losses, % 2.40-3.00 Loan loss ratio, % -0.01-0.06 Proportion of bad debts, % 0.04 0.06 debt provision ratio, % 28.70 27.70 Return on shareholders equity, % 12.6 15.1 Capital ratio, % 9.3 8.3 Tier 1 capital ratio, % 6.6 7.1 Disclosures - risk Stadshypotek s operations are conducted with a controlled low level of risk. Stadshypotek s risks are credit risk, market risk, liquidity risk, operational risk and business risk. Credit risk is the risk that an individual borrower cannot fulfil his or her commitments. Market risk is the risk of price changes in the financial markets. The market risks affecting Stadshypotek are interest rate risk and currency risk. Liquidity risk is the risk that Stadshypotek will not be able to meet its payment obligations when they fall due. Operational risk is the risk of human errors and errors in procedures and systems and business risk is the risk of unexpected changes in financial performance. The credit risk is considered to be the most significant risk for Stadshypotek. The Stadshypotek board establishes policy documents and instructions describing how various risks should be managed and reported. Stadshypotek s risk management aims to ensure that the strict approach to risk that the board has established is guaranteed. Stadshypotek s lending operations and treasury function are integrated with those of Handelsbanken, which means that Stadshypotek s lending is carried out via the Bank s branch network. A collaboration agreement regulates the overall relationship between the parties and relates to the services which the branches are to perform on behalf of Stadshypotek. Thus the business operations at Stadshypotek are conducted according to the same fundamental principles which apply at Handelsbanken. The Bank s culture is based on the responsibility of each employee who makes business decisions. The person who best knows the customer and the market conditions is also in the best position to assess the risk. The branch responsible for the customer carries the entire risk and in the Bank s decentralised organisation the positive and negative outcomes of each branch are evaluated, which provides a natural risk limitation and caution in business operations. The responsibility of those who make business decisions is supplemented by checking that excessive risks are not taken in individual transactions or local operations. In lending this means that limits are set for large loans and these loans are assessed in a special credit organisation. Decisions on limits are made at branch, regional or central level, depending on the size of the credit limit. For market risks and liquidity risks from treasury function, the corresponding control at Stadshypotek implies that the board of the company establish limits which restrict these risks. There is also risk control at stadshypotek s Accounting and Control Department which is independent from the tresury function. It is responsible for regular follow-up and monitoring of the market risks, liquidity risks and counterparty risks. The risk control function carries out daily measurements and checks to ensure that risk exposure remains within the limits set. Limit utilisation is reported internally within the company, and to the parent company s central risk control function. In addition, limit utilisation is reported regularly to the chief executive and board of the company. Stadshypotek is also covered by the central risk control at Handelsbanken, which is designed to identify the Group s risks, gauge them, and ensure that management of these risks complies with the Group s low risk tolerance. Moreover Stadshypotek has a procedure for regular capital planning to ensure that Stadshypotek has a sufficient amount of capital to secure the company s survival if a serious loss were to occur, despite the measures taken to manage the risks. The method for calculating economic capital ensures that all risks are considered in a uniform manner when the need for capital is assessed Information about credit risks regarding loan losses and non-performing loans and bad debts can be found in note 2 of this report. As at 31 December, Stadshypotek s interest rate risk in the case of a parallel increase in the yield curve of one percentage point was SEK -226m (-184). 8 HIGHLIGHTS OF STADSHYPOTEK S ANNUAL REPORT JANUARY-DECEMBER
Capital base and capital requirement CAPITAL BASE Shareholders equity 19,873 19,872 Special reduction for IRB institutions -190 - Tier 1 capital 19,683 19,872 CAPITAL ADEQUACY ANALYSIS Capital requirement in Basel II 22% compared to Basel I Capital requirement in Basel II compared to transitional rules 23% Perpetual subordinated loans 4,800 - Fixed-term subordinated loans 3,500 3,500 Special reduction for IRB institutions -190 - Tier 2 capital 8,110 3,500 Capital base 27,793 23,372 CAPITAL REQUIREMENT Credit risk according to standardised approach 118 Credit risk according to IRB approach 4,776 Operational risk, reduced in accordance with transitional rules 630 Total capital requirement according to Basel II 5,524 Adjustment according to transitional rules Capital requirement according to Basel II, transitional rules 18,327 23,851 Capital ratio according to Basel II 40.3% Capital ratio according to Basel I 8.9% 8.3% Capital ratio according to transitional rules 9.3% Tier 1 ratio according to Basel II 28.5% Tier 1 ratio according to Basel I 6.3% 7.1% Tier 1 ratio according to transitional rules 6.6% Capital base in relation to capital requirement Basel II 503% Capital base in relation to capital requirement Basel I 111% Capital base in relation to capital requirement according to transitional rules 117% Figures reported in this section refer to the minimum capital requirements under Pillar 1 of the new capital adequacy rules, Basel II. In the table, According to Basel II means that the figures are based on the minimum capital requirements in 2010, i.e. after the end of the period of transitional rules for the minimum capital requirements. In 2010, Stadshypotek intends to use the advanced IRB method for corporate exposures which is expected to further reduce the minimum capital requirement. Risk-weighted assets according to Basel I 313,824 281,431 Capital requirement according to Basel I (8% of risk-weighted assets) 25,106 Transitional rules result in lowest permitted capital requirement 23,851 Operational risk, according to Basel II 666 CREDIT RISKS IRB, Standardised approach IRB approach Capital requirement Exposure after credit risk protection (EAD) Average risk weight Capital requirement Institutions 104 - - - Companies - 147,374 29.2% 3,440 Households 14 364,715 4.6% 1,336 Total IRB 118 512,089 11.7% 4,776 The capital requirement according to Basel II is 78% lower than the requirement in accordance with Basel I. Households represent about 87% of the reduction and companies about 13%. Due to a large proportion of credits to households with property as collateral, the capital requirement is smaller. Capital requirements are also lower for corporate loans and the average risk weight was almost 29% of the exposure, EAD. The capital requirement is smaller because the company has a selective customer base and high-quality borrowers. HIGHLIGHTS OF STADSHYPOTEK S ANNUAL REPORT JANUARY-DECEMBER 9
FACTS ABOUT THE COMPANY Registered name: Stadshypotek AB (publ). Corporate identity number: 556459-6715. Ownership: A subsidiary of Svenska Handelsbanken AB (publ), corporate identity number 50-7862. The Bank publishes consolidated annual accounts in which Stadshypotek AB is included. Annual general meeting of shareholders: 17 April 2008. Next interim report: Published 22 April 2008. Annual report: will be available on Stadshypotek s website (www.stadshypotek.se) at the beginning of April. ADDRESSES Stadshypotek AB Street address: Torsgatan 12 Postal address: SE-103 70 Stockholm Telephone: +46 8 701 54 00, Fax: +46 8 701 55 40 Website: www.stadshypotek.se
2008 Stadshypotek Production: Börstryck Photo: Håkan Flank