Handelsbanken - Highlights of annual report January-December 2005

Handelsbanken's operating profit increased by 16% to SEK 15,665m (13,553). Income rose by 10%, while costs increased by 7%. The return on shareholders' equity improved to 18.0% (16.6). Earnings per share rose to SEK 17.00 (14.55).

 

Income increased by 10% to SEK 26,338m (23,963). Net interest income, net fee and commission income and net gains/losses result of financial items at fair value were all higher. Net interest income rose by 2% to SEK 15,090m (14,808), not least due to higher business volumes in branch office operations outside Sweden. Lending volumes rose by SEK 123bn to SEK 984bn, an increase of 14%. Of the increase in lending, SEK 57bn was to households, and SEK 66bn to corporate customers. More than SEK 50bn of the increase came from branch operations outside Sweden. Net fee and commission income rose by 18% to SEK 7,055m (6,000). Fees and commissions relating to the insurance and stock markets increased the most. Due to a change in the regulations, unrealised gains in the Available for Sale portfolio may no longer be included in the calculation of Tier 1 capital. The Bank therefore realised most (SEK884m) of the increase in value which arose in this portfolio during the year. In total, net gains/losses on financial items at fair value rose by 45% to SEK 3,459m (2,390).

 

Expenses rose by 7% to SEK 10,938m (10,245). Higher IT costs, expansion outside Sweden, the acquisition of SPP Liv Fondförsäkring AB and exchange rate differences accounted for over half of the increase. The remainder of the increase was essentially due to higher staff costs, particularly performance-related remuneration. The total number of employees rose to 9,413 (9,226). More than half of the increase in staff was in units outside Sweden, while the number of employees in branch operations in Sweden decreased. Total IT costs were SEK 2.7bn (2.6).

 

The cost/income ratio before loan losses improved further to 41.5% (42.8). This is the lowest figure in modern times for Handelsbanken.

 

Gross losses continued to decrease, while recoveries were at a more or less unchanged level. Recoveries exceeded loan losses and net recoveries totalled SEK 261m (-167). The loan loss ratio was thus -0.03% (0.02). Bad debts (net) decreased to SEK 1,256m (1,952), equivalent to 0.12% (0.21) of lending.

 

The Bank's capital ratio was 11.6% (10.0) and the Tier 1 capital ratio was 7.6% (7.6). Tier 1 capital rose by SEK 8.5bn to SEK 58.4bn (49.9). The increase in the capital base was due to profits generated during the year and subordinated loans issued, including subordinated loans classified as Tier 1 capital contributions, reduced by the proposed dividend and the repurchase of the Bank's own shares. The Bank's capital situation ahead of the demutualisation of SPP, which was carried out immediately after year-end, was therefore fully satisfactory.

 

Handelsbanken's rating was unchanged with all three rating agencies which rate the Bank, and no bank in the Nordic region has a higher rating than Handelsbanken.

 

At the 2005 annual general meeting a resolution was passed to cancel 23.7 million shares which the Bank had repurchased during 2004. The AGM also resolved to increase the nominal value of the Bank's share from SEK 4.15 to SEK 4.30 by means of a bonus issue. In connection with this, it was also resolved to authorise the Board to repurchase a maximum of 40 million shares during the period until the 2006 AGM. This mandate was used during the period 26 October 2005 to 9 January 2006, when the Bank repurchased 14.7 million shares, of which 13.2 million were repurchased in 2005.

 

The board is requesting that the 2006 AGM resolve to cancel the repurchased shares as well as any shares which may be repurchased before the AGM, and, with the purpose of adjusting the capital structure, to authorise the board to repurchase a maximum of 40 million shares.

 

Earnings per share were SEK 17.00 (14.55) The board recommends that the AGM resolve on a dividend of SEK 7.00 per share (6.00) for the class A and B shares, an increase of 17%.

 

The profits of branch office operations rose by 12% to SEK 12,416m (11,108). The profit increase was 9% for branch office operations in Sweden and 45% for the regional banks outside Sweden.

 

Income in the branch operations rose by 6% to SEK 20,088m (18,943), while costs increased by only 4%. Volume increases compensated for the margin pressure in many markets. Income increased more than expenses in branch operations both in and outside Sweden. In branch office operations in Sweden, income rose by 5% and expenses by 1%. The corresponding rates of increase for branch operations outside Sweden were 15% and 9% respectively. The increase in costs in branch office operations outside Sweden was almost entirely due to the continued expansion of the branch network.

 

Four new branches were opened in Sweden during the year, and twelve outside Sweden. The expansion outside Sweden will continue during 2006. The current assessment is there will be at least ten new branches in the non-Swedish regional banks and also two in Poland, one in Estonia and one in Spain. The Bank has also submitted an application to the Indian authorities to open a representative office in Mumbai.

 

Handelsbanken Liv's profits increased by 156% to SEK 580m (227). Policyholders received a return of 10.49% on their insurance assets; this is well in excess of the return that Handelsbanken Liv's closest competitor among mutual life insurance companies was able to give its policyholders. This was the third successive year that Handelsbanken Liv's customers have received better returns than other companies' policyholders. Over a three-year period, Handelsbanken Liv's customers have received twice as high returns on their pension savings as the customers of the companies that have had the second best returns. The financial result increased to SEK 258m (135), while the risk result rose to SEK 209m (44). The main reason for the improvement in the risk result was a significantly better outcome as regards disability insurance. The administration result, which shows how efficiently the company is run, increased to SEK 101m (41).

 

After the policyholders in SPP had voted in favour of demutualising the company in early summer 2004, the Finansinspektionen gave its permission for the demutualisation in April 2005.

In October, the board of the Bank decided that it was also in the interests of the Bank and the shareholders to demutualise. In December, the board resolved on the capital contribution to SPP required for the demutualisation. As had been previously announced, the Bank injected SEK 11.2bn as a shareholders' contribution, of which approx. SEK 3.5bn was used to cover the shortfall in the insurance portfolios. The capital injection was made on 2 January 2006. It will enable SPP to increase its exposure to the equity market above the level it had when the company was run on mutual principles.

 

 

 

Lars O Grönstedt

President and Group Chief Executive

  

 

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