Handelsbanken arranged a capital market day today to present the impact of a possible demutualisation of its subsidiary SPP into a profit-distributing company.

 

In 2001, Handelsbanken acquired SPP with the purpose of demutualising the company. The guiding principle for this was the Bank's experience of the demutualisation of Handelsbanken Liv which was planned at the time, but had not yet been implemented. At the time of acquisition, the Bank stated that demutualisation would take place in 2005. Due to the weak capital markets in 2001 and 2002 and the ambition to rationalise SPP's administration and thus its administrative costs, the planned date of demutualisation has been postponed to 2006.

 

When a company run on mutual principles is to be demutualised, formally it is sufficient to inform the policyholders. However, the Bank considers that it is crucial that the policyholders (around 325 000 private individuals and companies) are allowed to express their opinion. A vote is therefore currently being held among the policyholders and this will be completed by the end of June. If the policyholders vote yes to a demutualisation, the earliest possible date for this is 1 January 2006. Before this, the Finansinspektionen (Swedish Financial Supervisory Authority) must give its permission to demutualise SPP and a final decision must be made by the board of Handelsbanken.

 

SPP has one insurance portfolio which is defined-benefit and one which is defined-contribution. The Bank intends to demutualise the whole of SPP.

 

The consolidation level for the defined-benefit portfolio was 112% as at 31 March and 93% for the defined-contribution portfolio. When a mutually run company is demutualised, the policyholders receive the company's collective reserves and the owner instead injects new equity. The amount of equity is based on the technical reserves. The goal is for SPP, like Handelsbanken Liv, to have a solvency ratio of 130%. The solvency ratio in the defined-contribution portfolio must also be restored as it is currently under-consolidated. If the demutualisation had been effected on 31 March 2004, a capital injection of SEK 6.5bn would have been required.

The capital injection to be made on 1 January 2006 is expected to be somewhat lower.

 

After demutualisation, at least 90% of the total return will accrue to the policyholders. The company will receive 10% if the total return exceeds the guaranteed rate of interest.

 

The policyholders' capital comprises a guaranteed part and a part which is not guaranteed. After demutualisation, the company will guarantee the part of the insurance capital which is guaranteed. If there is a deficit in an individual policy's guaranteed capital at the time it is paid out, the company will pay the difference.

 

SPP's administrative costs are still too high. SPP's administrative result is the difference between the charges paid by the policyholders and the company's administrative costs. In 2003, this result was SEK -605m (-1 019). During 2006 or 2007, the administrative result is expected to make a profit.

 

The capital adequacy rules for banks will be changed in the second half of this decade. Banks will be affected by the Basel II rules and also by the EU directive on Financial conglomerates. The changed rules will have both positive and negative effects for Handelsbanken. Our overall assessment however is that the new rules will significantly improve the Bank's already healthy Tier I capital situation.

 

According to current rules, the Bank does not have to allocate any Tier I capital either for the demutualised Handelsbanken Liv or for the mutually run SPP. In the first quarter of 2004, Handelsbanken Liv's contribution to the Handelsbanken Group's overall results was SEK 54m. SPP already provides a small but positive contribution to the Group's results. This includes SPP's total impact on the results in the consolidated accounts, both in terms of results from asset management services and cross-selling, and in terms of expenses, for example, funding costs and amortisation of the brand name.

 

The Bank's assessment is that after Basel II has been fully implemented, the ability of the bank to free up Tier I capital will be enhanced. This is partly due to the Bank's very low level of loan losses and partly because a large proportion of the Bank's lending is mortgage loans which with the new regulations will require far less capital than today. According to the Basel II rules, which will probably come into force in 2007, all goodwill and half of the other capital invested in the insurance operations (the purchase price of SPP and the capital contributed to the company in connection with the demutualisation) will be deducted from the Bank's Tier I capital. The assessment is that SEK 8.4bn of the Bank's Tier I capital will be needed to cover the risks in SPP.

 

According to the EU directive on financial conglomerates, which may come into force in Sweden in 2006, the technical liabilities are recalculated into risk-weighted assets and also all goodwill has to be deducted from the Group's Tier I capital. This is expected to cause some SEK 7bn of the Bank's Tier I capital to be used for covering the commitment in SPP.

 

In summary, the Bank assesses that the aboved-escribed changes will have the effect that the decrease in capital, which must be reserved to cover credit risks, by a good margin exceeds the amount which will be used to cover the insurance risks.

 

After demutualisation and assuming normal conditions on the capital market, it is expected that in 2006, SPP will make a contribution of almost SEK 550m to the pre-tax profits. In 2008, the Group's total return on equity will increase through the positive effects of the SPP acquisition. Both profits and return on equity from the acquisition will then continue to increase significantly during the period for which the Bank has presented calculations.

 

 

 

Lennart Francke, Head of Control and Accounting

phone: +46 8-22 92 20, email: lefr01@handelsbanken.se

 

Stefan Nilsson, Head of Pension and Insurance       

phone: +46 8-556 85 019, email: stni03@handelsbanken.se

 

Göran Holgersson, Head of SPP

phone: +46 8-556 85 075, email: goho02@handelsbanken.se

 

Bengt Ragnå, Head of Investor Relations       

phone: +46 8-701 1216, email: bera02@handelsbanken