Handelsbanken's interim report January - September 2008 *

Summary of Q3 2008, compared with Q2 2008
  •         Operating profits increased by 9% to SEK 3,758m (3,433)
  •         Net interest income rose by 8% to SEK 4,856m (4,494)
  •         The average volume of loans to the public increased by 4% and household deposits in Sweden went up by
  •             4%
  •         Expenses decreased by 2% to SEK 3,133m (3,195)
  •         Loan losses were SEK 231m (571)
  •         Handelsbanken opened 5 new branches and acquired 14 branches through a public offer for Lokalbanken i
  •             Nordsjælland A/S which was completed in October
  •         Handelsbanken has the most satisfied customers in the Nordic countries according to the SKI/EPSI 2008
  •             survey
     
    Summary January - September 2008 compared with January - September 2007
  •         Operating profits were SEK 10,110m (11,631) and the period's profits after tax for total operations were
  •             SEK 7,576m (9,112)
  •         Net interest income rose by 19% to SEK 13,749m (11,598)
  •         The average volume of loans to the public increased by 15% and household deposits in Sweden went up by
  •             19%
  •         Income totalled SEK 20,378m (20,510)
  •         The capital ratio was 15.2%, and the Tier 1 capital ratio calculated according to Basel II was 10.0%
  •         Return on shareholders' equity for the total operations was 13.7% (18.4) and earnings per share for the total
  •             operation were SEK 12.16 (14.58)
     
    * All the comments and figures in the interim report refer to continuing operations, unless otherwise stated.
    This interim report has not been examined by the Bank's auditors.
     
    The Group
    JANUARY - SEPTEMBER 2008 COMPARED WITH JANUARY - SEPTEMBER 2007
     
    Operating profit was SEK 10,110m (11,631). The figure was negatively affected by realised and unrealised value changes in the liquidity portfolio of SEK -1,076m (-338). During the third quarter, the value changes in the liquidity portfolio were SEK -1,011m, of which SEK -24m was recognised in profit/loss and SEK -987m was recognised directly in equity. Parts of the liquidity portfolio were reclassified during the third quarter. For more details, see the Accounting policies etc. section on page 36.
     
    Return on equity for total operations after actual tax was 13.7% (18.4). The C/I ratio for continuing operations was 47.3% (44.0).
     
    The net profit from discontinued operations was SEK 143m (501), and the period's profit for total operations after tax was SEK 7,576m (9,112). Earnings per share were SEK 12.16 (14.58).
     
    Net interest income rose by 19%
    Net interest income rose by 19% to SEK 13,749m (11,598). Net interest income went up by 29% in the branch office operations outside Sweden, and by 13% in the Swedish branch office operations.
     
    The average volume of loans to the public increased by 15% to SEK 1,351bn (1,174). Average deposits rose by 8% to SEK 484bn (449). Growth in the Group's deposits from households continued to be strong, at 18%. Household deposits in Sweden went up by 19% to SEK 141bn (118).
     
    Net fee and commission income went down by SEK 688m or 12% to SEK 5,101m (5,789), which was due to a fall in equity-related commission income of SEK 801m to SEK 2,298m (3,099). Payment commissions continued to grow and net income from card payments increased by 13%.
     
    Net gains/losses on financial items at fair value went down to SEK 940m (2,531). The decrease was partly due to the value change in the liquidity portfolio of SEK 1,076m, and because in the third quarter of the previous year the Bank had realised capital gains of

    SEK 707m when selling shares. The translation differences due to exchange rate changes also affected profits by SEK -128m (9).
     
    Expenses
    Expenses rose by 7% to SEK 9,629m (9,019). Branch office operations outside Sweden accounted for six percentage points of the increase.
     
    The expansion costs for new branches outside Sweden were SEK 123m to SEK 333m higher than in the corresponding period the previous year.
     
    Staff costs rose by 7% to SEK 5,944m (5,533). Branch office operations outside Sweden accounted for five percentage points of this. The positive effect of calculating pension commitments according to IAS 19 was SEK 82m lower than in the corresponding period in the previous year. The provision for performance-related remuneration decreased by SEK 79m to SEK 184m (263). No provision was made to the Oktogonen profit-sharing foundation for the first nine months of 2008.
     
    Loan losses
    Loan losses were SEK 909m, as compared to net recoveries of SEK 139m in the corresponding period in the previous year.
     
    Provisions for collectively assessed receivables were SEK 112m (-51). Loan losses as a proportion of lending were 0.09% (-0.02). Net bad debts were 0.14% (0.05) of lending.
     
    Q3 2008 COMPARED WITH Q2 2008
    Operating profits increased by 9% to SEK 3,758m (3,433), chiefly due to higher net interest income and lower costs.
     
    Net interest income continues to increase
    Net interest income went up by 8% to SEK 4,856m (4,494) with larger volumes and improved lending margins making a positive contribution to this performance.
     
    Net interest income at Swedish branch office operations increased by 6%. The average volume of lending increased by 2% to SEK 938bn (921). The margin on the mortgage loan portfolio was 0.53%. The average volume of household deposits increased by 4% to SEK 147bn (141).
     
    Net interest income went up by 18% in the branch office operations outside Sweden and the average volume of lending and deposits grew by 9% and 2% respectively.
     
    Net fee and commission income decreased by SEK 50m or 3% to SEK 1,656m (1,706). Equity market-related income fell by SEK 126m, which was partly counteracted by a continuing positive performance for payment commissions and by higher lending commissions. Fee and commission income from cards and other payments increased by 6% during the quarter.
     
    Net gains/losses on financial items at fair value decreased to SEK 483m (634). The change in value due to Stadshypotek's hedge packages was SEK -192m (245). Translation difference due to exchange rate differences were SEK -156m (-17).
     
    Expenses decreased
    Expenses fell by 2% to SEK 3,133m (3,195). Staff costs increased by 3.5% to SEK 2,015m (1,946). The entire increase of SEK 69m was attributable to staff cost increases, including performance-related remuneration, at Handelsbanken Capital Markets.
     
    Performance-related remuneration rose to
    SEK 96m (59). The average number of employees rose by 3%, due to holiday relief staff during the period. No allocation was made to the Oktogonen profit-sharing foundation (0).
     
     
    Loan losses
    Loan losses decreased to SEK 231m (571), of which collectively assessed provisions were SEK 34m (73m).
     
    The Bank's internal credit analysis indicated a marginal increase in the credit risks during the third quarter. The average risk weight according to the Bank's internal risk classification model (IRB model) increased to 26.8% (26.2). A lower volume of interbank lending, which has low risk weights, accounts for just over half of the increase.
     
    Loan losses as a proportion of lending were 0.07% (0.16). Net bad debts increased to SEK 2,163m (1,680), equivalent to 0.14% (0.12) of lending. Exchange rate changes explain almost half of the increase.
     
    PERFORMANCE IN THE BUSINESS SEGMENTS
    (Q3 2008 compared with Q2 2008)
     
    Branch office operations in Sweden
    Operating profits rose by 1% to SEK 2,471m (2,439).
     
    Net interest income went up by 6% to SEK 3,377m (3,200) partly due to increased lending margins. The average volume of lending rose by 2% to SEK 938bn (921), while household deposits increased by 4% to SEK 147bn (141).
     
    Net gains/losses on financial items at fair value decreased by SEK 483m to SEK -96m (387) due to value changes in Stadshypotek's hedge packages.
     
    Expenses decreased by 4% to SEK 1,585m (1,658) and loan losses fell to SEK 70m (375).
     
    Branch office operations outside Sweden
    Operating profits rose by 19% to SEK 674m (568), and income increased by 7% to SEK 1,898m (1,777).
     
    Net interest income went up by 18% to SEK 1,480m (1,254), with larger volumes and improved lending and deposit margins making a positive contribution to this quarter. The average volume of lending increased by 9% to SEK 447bn (410).
     
    Expenses went up by 5% to SEK 1,062m (1,013), as a result of the continued expansion. Loan losses fell to SEK 161m (196).
     
    During the third quarter, 5 (10) branches were opened, and 18 branch managers have been appointed for further new branches. A further 14 branches in Denmark will be added in October as a result of the acquisition of Lokalbanken. Expansion costs in the third quarter were SEK 112m (116).
     
    Handelsbanken Capital Markets
    Operating profits increased to SEK 684m (75). The underlying operations reported higher profits, particularly in customer-driven fixed income and currency trading.
     
    Net fee and commission income was down by 12% to SEK 227m (258). Net gains/losses on financial items at fair value increased to SEK 830m (137).
     
    Expenses fell by 3% to SEK 721m (742), mainly due to other administrative expenses being lower.
     
    Handelsbanken Asset Management
    Operating profits decreased to SEK 70m (121), of which SEK 24m (44) stemmed from Handelsbanken Liv. The decrease in net fee and commission income by 14% to SEK 252m (292) was due to lower mutual fund volumes. Expenses decreased by 11% to SEK 252m (284).
     
    Handelsbanken Liv received no yield split during the period (0). A provision of SEK 65m (92) was made to the deferred capital contribution in Handelsbanken Liv.
     
    Discontinued operations
    The discontinued operations include the net amount of the compensation Handelsbanken receives for asset management assignments performed by the Bank on behalf of SPP/Storebrand and also the income and expenses Handelsbanken pays/incurs for the services that the Bank still sells to SPP.
     
    Net profits were SEK 51m (48).
     
    Good liquidity
    During the third quarter, Handelsbanken continued to have strong liquidity. Moreover, within 48 hours, the Bank can free up additional liquid funds of more than SEK 250bn. During the third quarter, the Bank continued to be a net lender in the overnight market for Swedish kronor.
     
    During the quarter, the Bank has regularly been able to issue covered bonds in the Swedish market. The Bank has also had a strong flow of deposits from households and credit institutions.
     
    Early in 2007, the Bank decided to extend the maturity of its funding, and this has proved to be an asset in the turbulence of the past year. Despite the growth in lending, the proportion of short-term funding from credit institutions has decreased by some 30% to 20%. The decrease in funding from other credit institutions has been replaced by long-term market funding.
     
     
    CAPITAL-RELATED MATTERS
    The capital base, including profits generated during the period, was SEK 108,018m. The capital ratio was 15.2% according to Basel II excluding the transitional rules, and the corresponding Tier 1 ratio was 10.0%.
     
    As a result of the major uncertainty which affected the market at the end of the quarter, the Bank downgraded several of its credit ratings for banks. This raised the capital requirement for market risks and reduced the Tier 1 capital ratio by 0.3 percentage points.
     
    The statutory capital requirement under fully implemented Basel II decreases by 42% compared to the requirement in accordance with Basel I.
     
    Tier 1 capital, excluding the profit for the period, rose to SEK 69,320m and was SEK 70,780m including the profit for the period. SEK 9,224m of the Tier 1 capital was Tier 1 hybrid capital.
     
    The Bank's equity increased during the period by SEK 1,842m to 71,352m (69,510).
     
    Calculated according to the transitional regulations, the Bank's capital ratio (including the profit for the period) was 10.3%, while the Tier 1 capital ratio was 6.7%.
     
    HANDELSBANKEN HAS THE MOST SATISFIED CUSTOMERS
     
    The Swedish Quality Index/EPSI rating measures customer satisfaction every year. The results of this year's survey published at the beginning of October show that Handelsbanken continues to be the major bank in Sweden with the most satisfied customers. The results apply for both private and corporate customers.
     
    Handelsbanken is also the major Swedish bank where customer satisfaction has increased the most, and is the only bank to have more satisfied corporate customers this year than in 2007.
     
    The results for the Nordic countries published so far also rank Handelsbanken highest in Norway and Finland in terms of customer satisfaction for both private and corporate customers.
     
    SALE OF NCSD
     
    The sale of NCSD (Nordic Central Securities Depositary) to Euroclear is expected to be completed in the fourth quarter and will result in a tax-free capital gain of some SEK 700m for Handelsbanken.
     
    ACQUISITION OF LOKALBANKEN COMPLETED
     
    During the third quarter, Handelsbanken made a public bid for all the outstanding shares in Lokalbanken i Nordsjælland A/S. On 8 October, an extraordinary shareholders' meeting of Lokalbanken resolved to remove the applicable restrictions in voting rights; shareholders representing 97.7% of the share capital had accepted the offer by the end of the bid period on 13 October. The transaction is expected to be completed during October. The total value of the bid is DKK 750m.
     
    RATING
     
    Handelsbanken's rating was unchanged with all 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.
     
    ACCOUNTING INFORMATION 
     
    As a result of a previous decision to close down its trading operations in New York, Handelsbanken has decided to reclassify parts of its liquidity portfolio so that the classification better reflects the purpose of the holding.
     
    In accordance with the decision, long-term holdings of bonds that are not listed on an active market have been reclassified as loans and receivables. Other long-term holdings of debt instruments which the Bank intends to hold to maturity have been reclassified to the held-to-maturity category. In addition, assets in the trading book have been reclassified as available-for-sale. In total, assets with a value of SEK 28bn have been reclassified.
     
    The reclassification is in line with the Bank's strategy to focus the liquidity portfolio on long-term holdings of high quality and it increases the stringency of the financial information by applying the same principles to equivalent holdings. The part of the liquidity portfolio that is hedged using derivatives is not affected by this reclassification.
     
    Pär Boman
    President and group chief executive

     
    For further information please contact:
     
    Pär Boman, President and group chief executive
    phone: +46 (0)8-22 92 20, pabo01@handelsbanken.se
     
    Ulf Riese, CFO
    phone: +46 (0)8-22 92 20, ulri02@handelsbanken.se
     
    Mikael Hallåker, Head of Investor Relations
    phone: +46 (0)8-701 2995, miha11@handelsbanken.se

    The full report including tables can be downloaded from the following link.
     

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