Year-end report for FöreningsSparbanken for 1997

Year-end report for FöreningsSparbanken for 1997 February 13, 1998 FöreningsSparbanken's first full-year results reflect the transition to a single bank Underlying business operations develop positively Operating income amounts to SEK 2,400 M (6,282) Operating income excluding merger-related costs was SEK 6,524 M 'Change-over' costs of SEK 1,235 M are charged to operating income Revaluations of the assets of the former Föreningsbanken Group affect operating income by SEK 2,889 M Earnings per share SEK 1.07 (13.40) Proposed cash dividend of SEK 6.00 per share confirmed Mandamus to be distributed in accordance with previous announcement Return on equity 1.4 percent (16.1) 1,400 employees opt for early retirement Robur and SparLiv/SparFond grow rapidly Bank card with integrated CASH function is introduced The number of Internet customers doubles in the fourth quarter CONTINUED SUCCESS IN THE MARKET Strong position in savings The Group has experienced substantial growth in the area of savings and investments and is noting a continued increase in market shares in several important product areas. The aggregate value of deposits, securities funds, private market bonds, public savings accounts and the Group's various forms of pension savings rose by SEK 43 billion, or 12 percent, to slightly more than SEK 402 billion on December 31, 1997. Consequently, the Group further strengthened its position in the savings market in 1997. During the year Robur's and Föreningsbanken Fond's asset volume with respect to fund management operations rose from SEK 105 billion to SEK 158 billion. In 1997 net fund contributions, excluding value appreciation, amounted to approximately SEK 32 billion, representing nearly half the total net fund contributions in Sweden during the year. Sales of pension and life insurance continued to rise substantially. Assets under management by SparLiv/SparFond rose by slightly more than SEK 7 billion, or nearly 90 percent, to around SEK 16 billion on December 31, 1997. Lending rose FöreningsSparbanken strengthened its position in the credit market in 1997. The Spintab Group's share of household mortgage lending rose to 37 percent. During the year the Group's lending to households rose by approximately SEK 8 billion, to SEK 228 billion, of which about SEK 2 billion was in the fourth quarter. Mortgage lending accounted for approximately SEK 5 billion of the increase during the year. The Group's aggregate lending to the public and other credit institutions amounted to SEK 494 billion (472) at year-end 1997. Lending to businesses, excluding real estate management companies and repurchase agreements, increased in 1997 by slightly more than SEK 11 billion. Lending, the Group December 31, 1997 December 31, 1996 SEK M pro forma Households 227,719 219,817 Real estate 118,515 117,727 management Credit institutions, 1,292 2,902 excl. banks Retail, hotels, 17,716 16,280 restaurants Construction 9,217 10,214 Manufacturing 13,349 12,543 Transportation 5,857 7,040 Agriculture and 23,136 19,499 forestry Municipalities 16,157 15,488 Other 48,192 39,327 Total 481,150 460,837 Repurchase agreements 13,178 11,297 (repos) Total lending 494,328 472,134 Positive trend in card use - bank card with integrated CASH card function introduced The number of outstanding debit cards issued by FöreningsSparbanken rose by 12 percent to 1.7 million. Card use also increased, as a result of which redemption operations for card transactions rose by 30 percent. In 1997 the CASH card, a smart card, was launched in an additional five locations, which will be followed in 1998 by a nationwide launch. In a strategically important development, ordinary debit cards will be equipped in 1998 with smart card functions. Also, in-store terminals will be introduced that handle all types of cards. In 1998 customers will also be able to "deposit" cash in their bank card from home. Substantial increase in Internet customers Use of both FöreningsSparbanken's telephone bank and Internet bank are on the rise. There are now two million telephone bank customers, of whom around 380,000 have signed up for the personal service. In 1997 the Internet bank grew substantially, and at the end of January 1998 around 84,000 customers had signed on. MERGER INTO ONE LEGAL UNIT COMPLETED The work involved in merging the two banks is progressing well. All legal issues have been resolved and the Group's new organization is in place. Extensive work is under way to create uniform computer systems for the new bank. This is being coordinated with efforts to resolve Year 2000 problems and make the adjustments that are necessary to offer customers EURO-related services. The Bank's management as well as local managers have been appointed and commitments have been made at the local level with respect to cost-cutting measures prior to the year 2000. The planned scale-down in personnel has already begun, and 1,400 employees accepted an offer of early retirement in 1998/1999. Prior to the year 2000 intensive work will be devoted to creating a new bank. In 1998 and 1999 much of the focus will be on the development and introduction of new working methods, further skills training for Bank employees and increased revenue-generating opportunities, so-called revenue synergies. Branch sales complete Agreements have been reached with the independent savings banks on the sale of 140 branch offices of the former Föreningsbanken. The sales proceeds, which are accounted for in the acquisition analysis, are expected to be received during the first four months of 1998. The branches are being handed over to the new owners according to plan. As a result of the sales, future cooperations with the independent savings banks will be broadened and a joint market presence strengthened. As a whole, the sales should have a slightly negative impact on Group income, since the loss of revenue and costs, net, associated with the branch operations that were sold will not fully compensate for the additional interest generated on the sales proceeds. In connection with the sale of the branch operations, more than 50 properties were sold in 1997 for a total of approximately SEK 135 M, largely in line with their book value. Coordination of branches already begun The aim is to coordinate the branch operations of the former Föreningsbanken and Sparbanken Sverige in locations where FöreningsSparbanken's market presence is not adversely affected. So far this year, decisions have already been made to coordinate the operations of 48 branches. Moreover, four new branches were opened in 1997 and 16 were closed. Five former savings bank branches were sold to, and one acquired from, independent savings banks. Four branches were reorganized as a partly owned bank, Eskilstuna Rekarne Sparbank AB. Mandamus to be distributed Prior to the planned distribution of Mandamus, its assets and structure have been adjusted to what is required of an independent, listed real estate management company. These adjustments during 1997 have led to a total revaluation of SEK 2,490 M, of which SEK 2,365 M has been applied to the acquisition analysis and SEK 125 M charged against income. The deficit that arises in Mandamus has been covered through stockholder contributions of SEK 2,793 M from the Bank. At the time of distribution, the Bank's stockholders' equity will be charged with SEK 1,057 M, corresponding to the book value of the stockholding in Mandamus. Further information on Mandamus is provided in an appendix to the year-end report. Acquisition analysis - writedown of acquired assets The merger with Föreningsbanken is reported according to the purchase accounting method as of the acquisition date, June 1, 1997. The acquisition analysis is based on an evaluation of acquired assets and liabilities at market value. The resulting revaluations related primarily to mortgaged properties, loan receivables and assets earmarked for sale. These revaluations have given the Banken cause to reassess the goodwill value motivated by expected future cash flows in Föreningsbanken's remaining operations, excluding Mandamus, the branch operations sold and other miscellaneous assets sold. In the cash flow analysis, consideration has been given to all restructuring costs and to the expected synergies attributable to Föreningsbanken's operations. Future cash flows have been calculated at present value with a 12- percent cost of capital. Based on these calculations, a goodwill value of SEK 2 billion has been considered appropriate. Against this background, a writedown of SEK 2,889 M has been made in income statement, as reported under the heading "writedown of acquired assets." Thus, goodwill attributable to the acquisition is reported as SEK 2 billion. A specification of the acquisition analysis is provided in Note 3. OPERATING INCOME AFFECTED BY TRANSITION TO A SINGLE BANK Consolidated operating income amounted to SEK 2,400 M (6,282). The decrease compared with the previous year is attributable to the writedown of acquired assets of SEK 2,889 M and change-over costs of SEK 1,235 M. The return on equity therefore amounted to only 1.4 percent (16.1). Earnings per share (after estimated tax) amounted to 1.07 kronor (13.40), based on the average number of shares during the year. Lower net interest income Group income amounted to SEK 19,311 M (20,036) in 1997. The Group's net interest income amounted to SEK 12,791 M (13,917). The decrease is due to, among other things, the doubling of expenses for the state's compulsory deposit guarantee compared with 1996, to SEK 680 M (346). A lower return on the Group's financial assets, lower deposit volumes and pressure on both deposit and lending margins also contributed to the decrease. The lower margins were offset to some extent by higher lending and lower financing costs for problem loans and the Group's property holdings. Higher net commission income Net commission income amounted to SEK 4,225 M, an increase of SEK 872 M or 26 percent compared with 1996. Growth in the savings area, primarily contributions to the investment and insurance products offered by Robur and SparLiv/SparFond, contributed strongly to this increase. Moreover, the high level of trading on the Stockholm Stock Exchange led to a higher commission income compared with 1996. Payment and lending operations also contributed to some extent to the increase. Other operating income Other operating income declined by SEK 157 M due to the gradual sell-off of the properties in Mandamus. Lower net income from financial operations The Group's net income from financial operations amounted to SEK 930 M (1,363). The decrease is primarily the result of the stable interest rates that prevailed throughout 1997, compared with the substantial decline in rates in 1996. In June the Bank sold approximately SEK 10 billion in bonds which were previously included among financial fixed assets. The sale gave rise to a capital gain of nearly SEK 600 M during the second quarter. As of year-end 1997 the Bank's portfolio of securities had a book value of approximately SEK 46 billion, of which SEK 9 billion relates to financial fixed assets. The surplus value in the portion of the portfolio that is classified as fixed was SEK 137 M at year-end. An increase in market interest rates of one percentage point on December 31, 1997 would have reduced the value of the Group's assets and liabilities in SEK with fixed interest rates, including derivatives, by approximately SEK 600 M. The corresponding effect on the value of the Bank's positions in foreign currency was approximately SEK 20 M. An increase in interest rates of one percentage point would reduce the Group's net income from financial operations by approximately SEK 100 M. Costs are affected by the change-over Costs increased by SEK 1,487 M, to SEK 12,510 M, or by 13 percent compared with 1996. The increase is primarily due to higher costs in connection with the merger of Föreningsbanken and Sparbanken Sverige. Change-over costs amounted to SEK 1,235 M in 1997 and related primarily to early retirement costs approximately 1,400 employees, marketing costs and consulting fees. Excluding change-over costs, the cost increase was SEK 252 M, or approximately 2 percent. Aside from the change-over costs mentioned above, restructuring costs of SEK 464 M arose as a result of the merger. These costs are taken into account in the acquisition analysis. Personnel expenses rose by approximately SEK 843 M, or 15 percent, compared with 1996, of which SEK 819 M relates to change-over costs. During the past year the number of full-time positions has declined by 295 and on December 31, 1997 amounted to 12,454. The Group's depreciation declined by SEK 77 M to SEK 596 M. Scheduled goodwill amortizations of SEK 58 M resulting from the merger are included in this amount. Loan losses and revaluations Aggregate loan losses and revaluations amount to SEK 5,558 M for the consolidated banking group. Revaluations in Mandamus amount to SEK 2,365 M and in Föreningsbanken Kredit to SEK 399 M. Revaluations of SEK 715 M were made in connection with the sale of other property taken over from Föreningsbanken and branch sales to independent savings banks. Additional revaluations in the remaining banking operations of the former Föreningsbanken amounted to SEK 567 M. These adjustments, totaling SEK 4,046 M, have been applied in the acquisition analysis. Of the loan losses of SEK 1,512 M reported in the income statement, SEK 347 M relates to the former Sparbanken Sverige Group and SEK 1,165 M to the former Föreningsbanken Group. The loan loss level, excluding the writedown of acquired assets, amounted to 0.3 percent (0.6), and including the writedown of acquired assets to 1.2 percent. A specification of loan losses is provided in Note 4. Tax expense The tax on net income for the year reported in the income statement was primarily affected by the fact that the SEK 2,889 M expense to write down certain acquired assets is not tax deductible. The tax effect has, however, been taken into account in the acquisition analysis. The Bank's tax expense has also been affected by the fact that the costs for the deficit that arise in the former Föreningsbanken AB, as well as certain provisions, are not tax deductible in 1997, though they will be deductible in subsequent years. However, deferred prepaid tax has been reported in the Group, though not in the Bank, based on future deduction rights, because of which the tax expense there is lower than in the Bank. Capital adequacy ratio was 11.8 percent The capital adequacy ratio amounted to 11.8 percent on December 31, 1997 (13.0 for the old financial companies group Sparbanken Sverige), of which the primary capital ratio was 6.1 percent (7.0). Primary capital was reduced in these calculations by SEK 3,473 M related to goodwill, by SEK 2,111 M related to the preliminary proposed dividend and by SEK 1,057 M related to the proposed distribution of Mandamus. Market risks as a share of the total capital adequacy ratio amounted to 0.4 percentage points.