Handelsbanken's Interim Report January - June 2008 *

Operating profits were SEK 6,352m (8,099). These were negatively affected by realised and unrealised value changes in the liquidity portfolio of SEK -1,052m (-22). The amount includes the capital loss of SEK 767m in the first quarter arising from the sale of the US asset-backed securities secured by credit card receivables. During the second quarter, the value change in the liquidity portfolio was SEK -11m, of which SEK -90m was recognised in profit/loss and SEK 79m was recognised in equity (AFS).

 

During the first quarter, the Bank sold a property, which boosted profits by SEK 272m.

 

Return on equity for total operations after actual tax was 12.9% (20.0). The C/I ratio for continuing operations was 49.0%, and 45.4% excluding the above-mentioned effects on profit/loss.

 

The net profit from discontinued operations was SEK 92m (552), and the period's profit for total operations after tax was SEK 4,766m (6,564). Earnings per share were SEK 7.66 (10.47).

 

Net interest income rose by 17% to SEK 8,893m (7,631). In branch operations outside Sweden, net interest income rose by 26%, or SEK 519m. In Swedish branch operations, net interest income rose by 10%, or SEK 555m.

 

The average volume of lending to the public grew by 16% to SEK 1,328bn (1,149), while deposits increased by 11% to SEK 487bn (438). Lending in branch office operations outside Sweden increased by 29% to SEK 399bn (309). Household deposits in Sweden went up by 21% to SEK 138bn (114).

 

Net fee and commission income went down by 10% to SEK 3,445m (3,844), which was mainly due to a fall in equity-related commission income by 22% to SEK 1,613m (2,056).

 

Net gains/losses on financial items at fair value went down to SEK 457m (2,116). The decrease was partly due to the value change in the liquidity portfolio of SEK 1,052m and partly because in the second quarter of the previous year the Bank realised capital gains of SEK 487m when selling shares.

 

Expenses

Expenses rose by 6% to SEK 6,496m (6,120). Expansion costs for new branches outside Sweden were SEK 91m higher than in the corresponding period in the previous year. This is equivalent to 1.5 percentage points of the Group's increase in expenses of 6%. The operating deficit for new branches which have not yet broken even was SEK 192m (43).

 

Staff costs rose by 5% to SEK 3,929m (3,731). The whole increase was attributable to operations outside Sweden. As at 30 June, 34% of the Group's staff costs were for employees outside Sweden, as compared to 27% one year ago.

 

The positive effect of recognition to the appropriate period of actuarial gains when calculating pension commitments (IAS 19) was SEK 57m lower than in the first half of the previous year. The provision for performance-related remuneration was SEK 88m (188). No provision was made to the Oktogonen profitsharing foundation for the first half of the year.

 

Loan losses were SEK 678m, as compared to net recoveries of SEK 135m in the same period in the previous year. The increase is mainly related to a few exposures, one of which is in Sweden. This exposure represents over half of the loan losses.

 

In the second quarter, the allocation to collectively assessed provisions amounted to SEK 78m (-28). Loan losses as a proportion of lending were 0.10% (-0.02). Net bad debts were 0.12% (0.07) of lending.

 

Operating profits increased by 18% to SEK 3,433m (2,919). The impact on earnings of value changes in the liquidity portfolio was SEK -90m (-962), while equity was positively affected by SEK 79m (-359). The first quarter included capital gains of SEK 272m due to the sale of a property.

 

Net profits from discontinued operations were SEK 48m (44).

 

Net interest income rose by 2% to SEK 4,494m (4,399). Payment of the year's dividend reduced net interest income growth by some 1.5 percentage points.

 

Swedish branch office operations increased their net interest income by 5% and improved lending margins also made a positive contribution in the second quarter. The margin on the mortgage loan portfolio during the quarter was stable. Deposit margins increased. Net interest income in branch office operations outside Sweden rose by 3%.

 

Net fee and commission income fell by 2% to SEK 1,706m (1,739), due to lower equityrelated commission income. Although equity commissions rose by 2%, mutual fund and custody commissions fell by 5%. Card commissions continued to grow, increasing by 7%.

 

Net gains/losses on financial items at fair value increased to SEK 634m (-177). The increase is due to the value changes in the liquidity portfolio.

 

Expenses fell by 3% to SEK 3,195m (3,301). Staff costs fell by 2% to SEK 1,946m (1,983). Performance-related remuneration increased to SEK 59m (29).

 

Other administrative expenses fell by 6% to SEK 1,147m (1,221).

 

Loan losses increased to SEK 571m (107). Around two-thirds of the loan losses derive from one exposure in Sweden. In addition, collective provisions represented SEK 73m (5). Loan losses as a proportion of lending were 0.16% (0.03). Net bad debts increased to SEK 1,680m (1,330), equivalent to 0.12% (0.09) of lending.

 

(Q2 2008 compared with Q1 2008)

Income rose by 11% to SEK 4,472m (4,039), and operating profits increased by 2% to SEK 2,439m (2,401).

 

Net interest income went up by 5% to SEK 3,200m (3,058) mainly due to larger business volumes, but as in the first quarter, higher lending margins also made a positive contribution to the net interest income. The average volume of lending rose by 2% to SEK 921bn (903), while household deposits increased by 4% to SEK 141bn (135).

 

Net fee and commission income was unchanged, while net gains/losses on financial items at fair value rose to SEK 387m (96). Expenses rose by 1% to SEK 1,658m (1,636), mainly due to increased costs for branch security.

 

Loan losses were SEK 375m (2) with the increase being almost entirely due to one exposure.

 

Operating profits were unchanged at SEK 565m (565). Total income rose by 7% to SEK 1,867m (1,742), and net interest income increased by 3% to SEK 1,261m (1,221). The average volume of lending increased by 6% to SEK 410bn (387). Expenses rose by 3% to SEK 1,106m (1,072), which was mainly attributable to a 3% increase in the average number of employees to 2,861 (2,767). Loan losses rose to SEK 196m (106) and are the result of two individual exposures.

 

During the second quarter 10 (5) branches were opened, and 18 branch managers have been appointed for further new branches. The costs for expansion in the second quarter were SEK 116m (106) and total deficit for the new branches which have not yet broken even was SEK 119m (73).

 

In addition, the IT platform for the Finnish banking operations was completely replaced.

 

Operating profits rose to SEK 78m (-535); the increase was entirely due to the decrease in negative value changes in the Bank's liquidity portfolio.

 

Net fee and commission income increased by 5% to SEK 267m (254), partly due to higher equity commissions. Net gains/losses on financial items at fair value increased to SEK 136m (-343).

 

Expenses were SEK 649m (743). The decrease of 13% was mainly due to lower staff costs.

 

Operating profits were SEK 121m (46), of which SEK 44m (49) were from Handelsbanken Liv. The decrease in net fee and commission income by 2% to SEK 292m (297) was due to lower mutual fund volumes. Expenses were SEK 284m (374).

 

Handelsbanken Liv did not receive any yield split during the period (0). A provision of SEK 92m (49) was made to the deferred capital contribution at Handelsbanken Liv.

 

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 48m (44).

 

 

To date, many major and minor simplifications have been achieved. A study of productivity at branches during the spring showed that the time branch staff devote to discussions with customers has increased by 34%, both as a consequence of more efficient customer systems and less administration.

 

The capital base was SEK 104,951m and the capital ratio according to Basel II excluding the transitional rules was 16.1%. The corresponding Tier 1 ratio was 10.6%. For Handelsbanken, if no transitional rules had applied, the statutory capital requirement under Basel II would have been reduced by 43% compared to the requirement in accordance with Basel I.

 

Tier 1 capital rose to SEK 68,900m. SEK 8,850m of the Tier 1 capital was Tier 1 hybrid capital. In June 2008, the Bank issued a convertible subordinated loan for SEK 2.3bn directed at the staff of the Bank. This is classified as   Tier 1 capital. The loan was issued on market terms and its dilution effect is almost 2% at the normal conversion price.

 

Calculated according to the transitional rules, the Bank's capital ratio (including the profit for the period) was 10.7%, while the Tier 1 capital ratio was 7.1%.

 

The staff convertible loan increased the Tier 1 capital ratio by 0.2 percentage points. In conjunction with the implementation of the internal capital adequacy assessment process (ICAAP), the Bank entered into an agreement on the future possibility of utilising a guarantee to speed up the transition to Basel II. This raised the Tier 1 capital ratio by 0.3 percentage points.

 

During the quarter, the Bank issued various types of funding instruments on competitive terms, and funding operations have been possible in the normal way. Liquidity remained good and in the second quarter, the Bank continued to be a net lender of Swedish kronor in the Swedish interbank market. The Bank has also extended the average maturity of its funding.

 

In addition, the Bank has been able to issue securities in the US market on a regular basis.

 

Handelsbanken has continued to reduce the exposure in its liquidity portfolio. The market value was SEK 58bn (66), of which 41% was placed in available for sale instruments (AFS).

 

ISSUE OF SUBORDINATED CONVERTIBLE LOAN 

In accordance with the resolution of the AGM, during the second quarter, the Bank issued a subordinated convertible loan for SEK 2.3bn directed at the Group's employees.

 

There was great interest in the loan and the Group's employees subscribed for a total of SEK 6.5bn, meaning that the convertible was heavily oversubscribed.

 

In June, Handelsbanken, together with other owners, expressed its intention to sell its ownership share in NCSD Nordic Central Securities Depositary (owner of the Swedish VPC and the Finnish APK) to Euroclear. The deal is expected to be completed in the third quarter and will result in a capital gain of some SEK 700m.

 

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.

 

 

Pär Boman

President and group chief executive