Highlights of Annual Report 1998
Summary
· The Handelsbanken Group results were SEK 7.7 billion
· Return on shareholders' equity was 18.6 %
· Income rose by 6 %
· Loan losses still at low level
· The result of branch office operations increased to SEK 6 billion
· Net interest income in branch office operations rose by 7 %
· The Board of Directors recommends
- that the dividend is raised to SEK 8.00 (6.50) per share
- a redemption of the index and preference shares
- a bonus issue and split
Result continues to be strong
The Handelsbanken Group's profits for 1998 were SEK 7 711m (7 820) and return on shareholders' equity was 18.6 % (20.1). It has been possible to retain the Bank's profits at a high level in spite of reduced yield on the Bank's Central Treasury due to falling interest rates and IT costs being SEK 600m higher than the previous year. Branch office operations continue to put in a strong performance and their result increased to over SEK 6bn.
Increasing net interest income in branch office operations
The Group's income rose by 6 %.
Net interest income in branch office operations, which is by the far the largest income item for the Group, increased by 7 % or SEK 588m to SEK 9 480m. This was due to continued increases in volume and market share. The average volume of mortgage loans went up by 4 % in spite of a expected loss of volume, mainly for loans to municipalities. In the important private customer market, volumes have increased since summer 1998. In view of the fact that Stadshypotek has continually been losing volumes in private banking since the beginning of the 1990s, this was a historical break in trend. It proves the importance of the integration of Stadshypotek and Handelsbanken's branch office networks.
The average volume of bank loans rose by as much as 21 %. Extra business from the new Stadshypotek customers has played an important role in this respect. 40 000 customers of Stadshypotek have moved their other banking business to Handelsbanken since the acquisition.
The branches are greatly helped by Handelsbanken's position as the most popular bank in Sweden for people who are considering changing banks, according to a recently published survey in a financial periodical, Privata Affärer. As many as 31 % said that they would like to change to Handelsbanken. The bank which came second received only half as many votes. The fact that Handelsbanken treats its customers well is also proved by the proportion of complaints to the National Board for Consumer Complaints which throughout the 1990s has been lower than the Bank's share of the bank market. During 1998, Handelsbanken's proportion of the complaints fell even more to only 8 % - which can be compared with the Bank's 30 %-share of the lending market. Handelsbanken has the lowest figure for complaints of all the major Swedish banks.
The interest spread fell compared to 1997 but stabilised during the second half of 1998, partly because the volume of bank loans with a higher spread increased more quickly than the volume of mortgage loans.
Net interest income for the Central Treasury fell by 38 % or SEK 381m as a result of lower yield on the Bank's liquidity due to falling interest rates. Markets' net interest income fell by 35 % or SEK 367m. However, this was balanced by an even larger increase in the net result on financial operations for interest-rate related trading, and thus the overall result was better than last year.
The decrease in net interest income for the Central Treasury and Markets meant that the Group's total net interest income was unchanged at SEK 11.2bn.
Net commission income increased by 2 % to SEK 3 408m. Payment commission and investment banking commission reported good results in 1998. Deposit commission has fallen because the Swedish banks no longer receive remuneration from the National Debt Office for national savings accounts (Allemansspar). Brokerage commission on shares rose by 2 %.
Markets - Swedish biggest money market bank in the euro zone and member of Euribor panel
The net result on financial operations increased substantially from SEK 927m to SEK 1 520m. Less than half of the increase balanced the above-mentioned decrease in net interest income at Markets. Nevertheless this is a substantial increase. It is mainly due to a better result for Markets' trading operations. Markets' result before loan losses rose by 67 % to SEK 432m. At the end of 1998, Markets was the biggest trading bank in Sweden with 35 % of Swedish corporate sales in the foreign exchange market and 20 % in the money market. Handelsbanken is also the biggest Swedish bank in the money market in the euro zone. As a consequence of this, the Bank is on the Euribor panel which fixes the Euribor interest rate. This panel includes the Swedish bank with the highest volume in the euro zone money markets.
Fastighets AB Balder
Other income includes capital gains of SEK 338m on the sale of real property to Fastighets AB Balder which was distributed to the Bank's shareholders during the year. The distribution of Balder to the Bank's shareholders has also reduced the Handelsbanken Group's operating profit. The overall impact on the result by Balder is therefore SEK 238m during 1998.
Lowest expenses of major Swedish banks - despite sharply increased
IT costs
Expenses rose by 14 %. Increased IT costs represent 8 percentage points of the increase.
Two percentage points can be attributed to the acquisition of Stadshypotek. Despite the increases in expenses, Handelsbanken has by far the lowest expenses of the major Swedish banks and a
cost-effectiveness level which is among the best of the European universal banks.
IT costs are SEK 2.6bn, an increase of SEK 600m compared to 1997. This is 30 % of the Bank's total expenses and implies that Handelsbanken spends a higher proportion of its total expenses on information technology than any other bank in Sweden. In absolute figures, however, the Bank's IT costs are lower than those of other major banks. The fact that the proportion is nevertheless higher is explained by the fact that Handelsbanken's other expenses are so much lower than those of the other banks.
Of these SEK 2.6bn, approximately half is for running the Bank's systems and communication lines and the other half is new development. At the beginning of the 1990s, IT costs were approx. SEK 1bn. IT expenses culminated in 1998, partly because mandatory preparations and adaptations for EMU and the new millennium coincided with other major system changes for the purpose of enhancing competitiveness.
During the next few years, IT costs as a proportion of the Bank's total expenses are expected to fall to around 25 %, which is nevertheless a high figure in an international perspective. IT costs are expected to be approx. SEK 2.3bn in 1999 and SEK 2.1bn in 2000. This will have a favourable effect on the Group's expenses trend in the next few years.
Loan losses still at low level
Loan losses, including changes in value for property taken over amounted to SEK 319m (302) or 0.05 % (0.05) of lending.
The proportion of bad debts was 0.45 % (0.64) of lending. The volume of collateral taken over was SEK 193m (7 251). This decrease is related to the distribution of Fastighets AB Balder.
The Bank's exposure to the problem countries in South-East Asia (The Philippines, Indonesia, Malaysia, South Korea and Thailand) was SEK 1.6bn in mid-February. At the same date, exposure to Russia was SEK 0.1bn, and to Latin America SEK 0.5bn, including SEK 0.2bn to Brazil. In relation to Handelsbanken's size, the Bank's exposure in these countries is small and the necessary provisions have been made.
Capital ratio and rating
The Handelsbanken Group's capital ratio is 9.8 % (10.4). The Tier 1 capital ratio was 6.3 % (6.2). Handelsbanken continues to have the highest rating of the Swedish banks.
Earnings per share and dividend
Net earnings per ordinary share were SEK 25.22 (25.15). The Board recommends a dividend on the ordinary shares, class A and B of SEK 8.00 (6.50). The dividend on the index shares, which according to the Bank's Articles of Association is to follow the consumer price index, will be
SEK 0.80 (0.80). In accordance with the Articles of Association, the dividend on preference shares will be SEK 0.45 (0.45) on class A and SEK 0.60 (0.60) on class B.
The Board is also recommending to the annual general meeting to redeem the index and preference shares. As a result of new legislation, these shares prevent the Bank from carrying out new issues with preferential rights for the shareholders. The redemption also leads to a welcome reduction in the number of share classes. The high level of the Bank's result means that the Bank no longer needs this capital. The redemption amount will be determined in accordance with the rules in the Articles of Association. The amount is SEK 10.00 per preference share and SEK 25.25 per index share. Interest is payable on the preference shares from the beginning of the year. It is expected that payment will be made on 12 August.
Bonus issue and split
The Board is proposing to the annual general meeting that the nominal value of the ordinary shares is increased from SEK 10 to SEK 12. Each share will then be split into three new shares with a nominal value of SEK 4 each. If the above proposal is accepted, only ordinary shares will remain, the number being 714 746 940.
EMU
Handelsbanken's preparations for the start of the economic and monetary union in January 1999 have been pursued on a large scale since spring 1996.Development and adaptation of the Group's products and computer systems ready for this event have gone according to plan and on 4 January 1999, the Bank was able to offer customers in Sweden a number of new euro services for payments, investment and financing. At the Bank's units outside Sweden, adaptations required for the new currency were achieved as planned. In Finland, which is part of the Bank's Nordic domestic market, the Bank has its most comprehensive operations within the EMU.
EMU will lead to Europe having a money market which functions much better than before.
The fact that Handelsbanken has gradually reinforced its position on the money market - also in the euro zone - has therefore been an important feature of the EMU preparations.
Adaptations for year 2000 running to plan
In 1996, Handelsbanken started a project to ensure that all necessary adaptations would be made ready for the year 2000. However, since 1989, the Bank has made sure that every new system and every system that has undergone major changes has been made Year 2000 compliant. At the end of January 1999, 90 % of the Bank's central application systems in Sweden had been analysed, adapted, tested and launched into production. Nine percent of the systems will be removed or replaced by other systems which are already compliant. The remaining one percent of the systems are expected to be completed during the first quarter of 1999.
Adaptations of technical platforms, PC systems and embedded systems are progressing according to plan. During the first half of 1999, supplementary tests will be run on the interfaces between systems at the Bank and on external interfaces. No special difficulties have arisen in the adaptation work, and schedules are being met. All adaptation measures within the Group will be completed by 30 June 1999 at the latest.
Stockholm, 23 February 1999
Arne Mårtensson
President and Group Chief Executive
The full highlight of Annual report including tables can be downloaded from the enclosed link.
For further information please contact Arne Mårtensson, Group Chief Executive of Svenska Handelsbanken, or <br>Sven Grevelius, Head of Accounting and Control, tel: +46 8 22 92 20 <br> <br>Lars Lindmark, Head of Corporate Communications tel: +46 8 701 10 36 <br>Gustaf Elmstedt, Head of Investor Relations tel: +46 8 701 51 42 <br>