Highlights of annual report January - December 2006

Summary January - December
  • Operating profits rose by 10% to SEK 17.2bn (15.7)
  • Profits after tax increased by 16% to SEK 13.1bn (11.4)
  • Earnings per share increased by 20% to SEK 20.41 (16.98)
  • Return on shareholders' equity was 20.9% (17.9)
  • Income increased by 12% to SEK 29.6bn (26.3)
  • Operating profits for branch operations outside Sweden were more than SEK 2bn
  • Reduced financial risks in SPP
  • The board proposes an increase in dividend by 14% to SEK 8.00 (7.00)
  • The board proposes that the AGM be given a renewed mandate to repurchase shares
  • 30-40 new branches outside Sweden during 2007 - twice as many compared to 2006
    Summary of Q4
    (the comparison refers to the previous quarter)
  • Best quarterly profit ever - operating profit was SEK 5.0bn (3.0)
  • Profits after tax increased by 74% to SEK 3.7bn (2.1)
  • Earnings per share increased by 75% to SEK 5.79 (3.31)
  • Return on shareholders' equity was 23.2% (13.6)
  • Income went up by 48% to SEK 8.3bn (5.6)
    The Group

    Q4 compared to Q3
    Highest quarterly profit ever
    Operating profit was SEK 5,032m (3,002), an increase of 68%. Income increased by 48% to SEK 8,347m (5,633). Net fee and commission income rose by 33% to SEK 2,749m (2,072) and net gains/losses on financial items at fair value rose from SEK -247m to SEK 1,607m.
    All significant income items increased
    Net interest income in the Group rose by 1% to SEK 3,726m (3,696). The average margin on loan portfolios continued to fall in most countries. Net fee and commission income increased by 33% to SEK 2,749m (2,072). Insurance commissions rose by 61% and equity-market related commissions by 33%.
    Net financial items at fair value, which were negative during the third quarter, were SEK 1,607m. The increase between the quarters was mainly due to gains on assets available for sale and the change in value of the deferred capital contribution in the insurance operations.
    The Bank made gains on assets classified as available for sale, the total gain being SEK 733m (41).
    The change in value of the deferred capital contribution at SPP was SEK 135m (-495). When calculating the deferred capital contribution, the starting point for the Bank is the insurance liability. It is discounted using a long-term market yield and any underfunding is covered through a deferred capital contribution. Throughout the year, SPP has carried out transactions with the purpose of reducing the impact of changes in interest rates on the Bank's earnings.
    As reported in the third-quarter report, there was a negative impact on the results relating to the reporting of holdings of its own securities. Measures have been taken to eliminate the risk of effects of this nature ever arising again.
    The risk result increased to SEK 187m (38). At Handelsbanken Liv this was mainly due to fewer deaths while at SPP it was mainly due to the results from disability insurance.
    Expenses affected by a provision for a possible allocation to the Oktogonen Foundation
    Expenses rose by SEK 651m to SEK 3,260m (2,609). The increase in costs between the quarters is mainly due to the fact that during the third quarter the Bank reversed a previous provision for a possible allocation to the Oktogonen Foundation. At the end of the third quarter this allocation was SEK 102m and at the end of the year, it was SEK 135m. The writeback made during the third quarter was SEK 271m and thus the cost increase between the quarters was SEK 304m. Performance-related remuneration rose by SEK 95m to SEK 168m (73). Some SEK 150m of the remaining increase in costs was for costs of the type normally arising during the fourth quarter. The underlying increase in costs was thus approximately SEK 100m.
    Full year 2006
    (unless otherwise stated, comparisons refer to the previous year)
    Highest profit ever
    Operating profit increased by 10% to SEK 17,164m (15,650). Return on shareholders' equity increased to 20.9% (17.9). Income rose by 12% to SEK 29,559m (26,323). Expenses were SEK 12,451m (10,938). Starting on 1 January 2006, SPP is included in the Group's consolidated accounts, and thus affects both expenses and income. The cost/income ratio was 42.1% (41.6). Earnings per share were SEK 20.41 (16.98).
    Increasing business volumes but squeezed lending margins
    Average lending volumes in the Group rose by 13% and deposits by 14%. Branch office operations outside Sweden continued their rapid growth: lending rose by 25% and deposits by 22%.
    The rapid growth in lending volumes was unable to offset poorer lending margins, particularly for mortgage loans to households. Net interest income was positively affected by higher deposit margins but in total net interest income in the Group fell by SEK 118m to SEK 14,972m (15,090). Net interest income in the branch office operations outside Sweden increased by 17% to SEK 2,951m (2,525).
    Net interest income was lower in the Swedish branch office operations at SEK 10,722m (11,511). Net interest income includes the impact of previous decisions concerning repurchases of bonds, the funding of Stadshypotek's mortgage loans and other aspects of the operations which cannot be influenced by the branches directly.
    Record high net fee and commission income
    Net fee and commission income increased by 31% to SEK 9,232m (7,055). This high rate of increase was mainly due to higher insurance commissions and equity-related commissions. Insurance commissions totalled SEK 2,338m (937). SPP accounted for SEK 1,316m of this amount. The positive yield split was SEK 1,023m, with SPP's share being SEK 752m and Handelsbanken Liv's SEK 271m (263). Equity-related commissions - comprising equity commissions, equity-related income in mutual fund and custody operations, corporate finance and structured products - were SEK 4,151m (3,308), which was 25% higher, and the increase for structured products was 72% to SEK 279m (162). Total commissions from mutual fund management rose by 26% to SEK 1,548m (1,232).
    Consolidation of SPP increased net financial items at fair value
    Net gains/losses on financial items at fair value were SEK 4,261m (3,459), where most of the increase was due to the effects of SPP. At the time SPP became a profit-distributing company on 1 January 2006, certain insurance contracts were underfunded since the market value of the assets did not cover the insurance liability. This underfunding was reported in liabilities as a deferred capital contribution. When calculating the insurance liability, it is discounted by using a long-term market yield as the discount rate and fluctuations in this rate affect the amount of the liability. The deferred capital contribution is also affected by changes in the market value of the assets which mainly consist of equities and interest-bearing assets. The change in the deferred capital contribution was SEK 1,045m.
    Trading operations performed well, and net financial items at Capital Markets increased by 43% to SEK 1,378m (964). In particular, it was money market, currency trading and structured products which generated higher income.
    Reduced risks in SPP
    SPP's stated goal has been to reduce the effects on the company's results of the changes in interest rates. For this reason, in the second quarter, SPP started to conduct transactions with the purpose of hedging against changes in market value with respect to the deferred capital contribution.
    Value-at-Risk (VaR), which is the most common measurement of aggregated risks, was SEK 1,276m before SPP started to reduce its risks and at the end of 2006, the amount was SEK 259m. This means that with a confidence level of 99%, the maximum possible loss in an individual month has been reduced from SEK 1.3bn to SEK 0.3bn. VaR can be complemented by simulating the effect of an interest rate shock. In the case of a parallel shift in all interest rates in all currencies of 100bp, SPP's earnings would be affected by SEK 30m. Finally, it is also possible to view the capital requirement in relation to the Swedish Financial Supervisory Authority's traffic light model. At the end of the year, only SEK 1,078m, i.e. less than 10% of the company's capital base, was required to receive a green light in the traffic light model. At the end of Q1 2006, the corresponding figure was SEK 4,196m.
    SPP and performance-related remuneration accounted for most of the increase in costs
    Expenses were SEK 12,451m (10,938), an increase of 14%. The underlying increase in expenses was almost 2.6%, excluding SPP, performance-related remuneration and cost increases in operations outside Sweden. SPP's expenses, which were not included in the Bank in the previous year, were SEK 734m, or almost 6.7 percentage points of the cost increase. Performance-related remuneration rose by SEK 169m to SEK 589m, corresponding to 1.5 percentage points of the increase. Although the Bank opened more branches in 2006 than in the previous year, expenses for new branches were unchanged. However, the growth in operations outside Sweden meant that expenses, excluding performance-related remuneration, went up by SEK 327m, corresponding to 3.0 percentage points of the cost increase. Part of this is due to an increase of 145 in the number of employees outside Sweden. The total number of employees increased to 10,320 (9,922) at the year-end.
    Net recoveries on loan losses
    Recoveries exceeded loan losses and totalled SEK 55m (261). Gross losses continued to decline. The loan loss ratio was -0.01 (-0.03). Net bad debts decreased again - to SEK 876m (1,256), equivalent to 0.07% (0.12) of lending.
    Capital ratio and rating
    The Bank's capital ratio was 9.5% (11.6) and the Tier 1 capital ratio was 6.8%. The fact that the capital ratio fell from 2005 to 2006 is because at the end of 2005, the Bank raised subordinated debt with the purpose of contributing capital to SPP in connection with converting it into a profit-distributing company. Thus the capital ratio was unusually high at the end of 2005.
    Handelsbanken's rating was unchanged with all three rating agencies which rate the Bank and no bank in the Nordic region had a higher rating than Handelsbanken.
    Buyback and cancellation of shares
    At the 2006 annual general meeting, a resolution was passed to cancel 20.6 million shares which the Bank had previously repurchased. In connection with the cancellation, a bonus issue was performed whereby the quotient value per share increased from SEK 4.30 to SEK 4.45. The AGM also resolved to authorise the Board to repurchase a maximum of 40 million shares during the period until the 2007 AGM. During the second and third quarters, the Bank repurchased 14.8 million shares.
    The board is requesting the 2007 AGM to pass a resolution to cancel the repurchased shares as well as any shares which may be repurchased before the 2007 AGM, and, with the purpose of adjusting the capital structure, to authorise the board to repurchase a maximum of 40 million shares during the period up to the 2008 AGM.
    Earnings per share were SEK 20.41 (16.98). The board recommends that the AGM resolve on a dividend of SEK 8.00 per share for the class A and B shares, an increase of 14%.
    Branch operations outside Sweden earned over SEK 2bn
    Branch office operations outside Sweden boosted their total profits by SEK 205m to SEK 2,018m, an increase of more than 11%. This increase took place at the same time as 14 (9) new branches were opened. Income rose by SEK 571m or more than 14%, while the increase in expenses was slightly less.
    However, the Bank opened more branches than the 14 started on its domestic markets outside Sweden. Three new branches were opened in Sweden, two in Poland, and also two representative offices, one in Spain and one in Mumbai, India. Thus the Bank started up operations in 21 new locations during the year. The rate of expansion will increase. Some 30-40 branches will be opened during 2007 with the focus on Great Britain, Finland and Norway. New markets will be opened up for universal banking operations.
    Pär Boman
    President and Group Chief Executive
    Pär Boman, Group Chief Executive
    phone: +46 (0)8 - 22 92 20, pabo01@handelsbanken.se
    Ulf Riese, Head of Control and Accounting
    phone: +46 (0)8 - 701 1212, ulri02@handelsbanken.se
    Bengt Ragnå, Head of Investor Relations
    phone: +46 (0)8 - 701 1216, bera02@handelsbanken.se

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

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