Highlights of Handelsbanken's annual report 2008
Summary of Q4 2008, compared with Q3 2008
Summary January - December 2008 compared with January - December 2007
* All the comments and figures in this report refer to continuing operations, unless otherwise stated.
THE GROUP
JANUARY - DECEMBER 2008 COMPARED WITH JANUARY - DECEMBER 2007
Last year was characterised by an increased demand for the Bank's services, particularly for products related to lending and deposits.
Earnings per share for continuing operations rose by 10% to SEK 19.16 (17.39) and operating profits went up by 4% to SEK 15,326m (14,732). The improvement in profits is chiefly attributable to higher deposit and loan volumes combined with a favourable funding situation.
Return on shareholders' equity on continuing operations after actual tax amounted to 16.0% (16.3) and the C/I ratio improved to 44.3% (45.6).
The net profit from discontinued opertions was SEK 187m (4,655 including the capital gain from SPP), and the period's profit for total operations after tax was SEK 12,131m (15,508). Earnings per share for total operations were SEK 19.46 (24.84).
Income
Net interest income rose by 23% to SEK 19,223m (15,608). Net interest income went up by 33% in the branch office operations outside Sweden, and by 17% in the Swedish branch office operations.
The average volume of lending to the public grew by 15% to SEK 1,379bn (1,194), while the average volume of deposits increased by 7% to SEK 490bn (456). Growth in the Group's deposits from households remained strong, particularly in Sweden, where deposits rose by 20% to SEK 145bn (121).
Net fee and commission income fell by SEK 950m to SEK 6,795m (7,745). The decrease was entirely attributable to a reduction of SEK 1,154m in equity-related commission income, to SEK 3,024m (4,178). Commissions from card operations and lending and deposit commissions both rose by 8% during the year.
Net gains/losses on financial items at fair value rose to SEK 3,169m (3,054). Profits were adversely affected by realised and unrealised value changes in the liquidity portfolio amounting to SEK -1,115m (-490), but this was offset by higher profits from fixed income and foreign exchange trading. The net amount of capital gains of a non-recurring nature was SEK 701m (707), of which SEK 716m was attributable to a non-taxed capital gain on the sale of the Bank's shares in NCSD. Translation differences due to exchange rate movements at international units also affected profits by SEK -241m (28).
Expenses
Expenses rose by 7% or SEK 861m to SEK 13,229m (12,368). The costs of expansion for new branches outside Sweden rose by SEK 96m to SEK 327m. In total, expenses for branch operations outside Sweden increased by SEK 878m.
Staff costs rose by 8% to SEK 8,114m (7,528), with branch office operations outside Sweden accounting for seven percentage points of this increase.
The positive corridor effect of calculating pension costs according to IAS 19 decreased by SEK 156m in 2008 and amounted to SEK 48m (204).
Provisions for performance-related remuneration decreased by SEK 279m to SEK 277m (556). Since the board is proposing that the dividend be lowered to SEK 7.00, no allocation was made to the Oktogonen profit-sharing foundation for 2008.
Other administrative expenses rose by 4% to SEK 4,688m (4,487). More than half of this SEK 201m increase is attributable to a one-off expense of SEK 93m arising in connection with the separation of the management organisation following the sale of SPP and to costs of SEK 32m associated with Lokalbanken. Excluding these items, administrative expenses rose by just under 2%.
Loan losses
Loan losses were SEK -1,605m (-27).
Provisions for collectively assessed receivables were SEK 188m (-46). Loan losses as a proportion of lending were 0.11% (0.00). Net bad debts were SEK 2,622m (624), equivalent to 0.17% (0.05) of lending.
Continued good liquidity
The international credit market was negatively affected during the past year by the financial crisis. Nevertheless, Handelsbanken was still able to report good liquidity in the fourth quarter. The inflow of deposits remained strong from both households and credit institutions.
The Bank is in a position to free up additional liquid funds of more than SEK 300bn at very short notice. This liquidity would secure the Bank's financing requirements for just over a year and enable it to continue normal business operations, even if the credit market were to shut down entirely. Throughout the entire period, the Bank has been a net lender to the Riksbank and also on the Swedish overnight market.
Handelsbanken has been able to issue covered bonds in the Swedish market on a regular basis and the volume of its issues peaked during the fourth quarter. The proportion of bond financing in the Group amounted to 33% and at the year-end was higher than it was at the beginning of the financial crisis in 2007. Moreover, the Bank's healthy position on the US interbank market has created an attractive useful source of funds in USD, which has reduced the cost of the Bank's funding.
The market value of the Bank's liquidity portfolio was SEK 71bn (65).
CAPITAL-RELATED MATTERS
The capital base, including profits generated during the period, was SEK 115,505m. The capital ratio according to Basel II increased during the fourth quarter to 16.0% (15.2) and Tier 1 capital increased by SEK 5,074m to SEK 75,854m. SEK 11,579m of the Tier 1 capital was Tier 1 capital contributions (hybrid capital). During the fourth quarter, the Tier 1 capital ratio increased to 10.5% (10.0) and the Bank issued Tier 1 capital loans for SEK 2,550m, of which SEK 200m were of the non-innovative type[1]. This had a positive effect of 0.2 percentage points. Earnings made a positive contribution of 0.4 percentage points and the migration of credit risks adversely affected the Tier 1 capital ratio by 0.2 percentage points during the quarter.
Value changes in the liquidity portfolio affected equity by SEK -541m after tax in the fourth quarter.
RATING
Handelsbanken's rating was unchanged with all three rating agencies which rate the Bank. Moody's rating for the Bank was Aa1, while the rating from Fitch and Standard & Poor's was AA-. All three agencies consider the Bank's outlook to be stable. Both Standard and Poor's and Moody's confirmed the Bank's rating during the fourth quarter.
Q4 2008 COMPARED WITH Q3 2008
Operating profits rose by 39% to SEK 5,216m (3,758). Excluding the capital gain of SEK 716m from the sale of shares in NCSD, operating profits rose by 20%, chiefly due to higher net interest income and an increase in net gains/losses on financial items at fair value.
For continuing operations, earnings per share rose to SEK 7.24 (4.43). Excluding the capital gain from the sale of NCSD, earnings per share amounted to SEK 6.09.
Net interest income continues to increase
Net interest income rose by 13% to SEK 5,474m (4,856). One reason for the increase in net interest income is the rise in deposit and loan volumes. Moreover, amidst the turbulence that has characterised the credit market, the Bank's strong position in the interbank market has meant a steady inflow of deposit volumes from other credit institutions. A good position on the funding market has also meant that the Bank has had access to funding in USD, which has then been exchanged into local currency. This has resulted in a lower funding cost, which has also had a positive impact on net interest income during the quarter.
The average volume of lending rose by 5%, or SEK 63bn, to SEK 1,462bn (1,399), which is the largest ever increase reported by the Bank during a single quarter.
Net interest income at Swedish branch office operations increased by 12% and the average volume of household deposits rose by as much as 7%, to SEK 157bn (147). The margin on the mortgage loan portfolio was 0.51% (0.53). The average volume of lending rose by 2% to SEK 960bn (938).
Net interest income went up by 10% in the branch office operations outside Sweden and the average volume of deposits and lending grew by 11% and 9% respectively.
Net fee and commission income rose by 2% to SEK 1,694m (1,656) as the result of an increase in equity-related commission income. Brokerage income rose by SEK 110m. Net gains/losses on financial items at fair value increased to SEK 2,229m (483). This increase is chiefly attributable to the capital gain of SEK 716m from the sale of the Bank's shares in NCSD and from an improvement in profits from fixed income and foreign exchange trading.
Expenses increased
Expenses rose by SEK 467m to SEK 3,600m (3,133), of which exchange rate movements accounted for just under SEK 100m. Expenses in Lokalbanken, which was acquired during the quarter, and fees relating to the Danish state deposit guarantee added a further SEK 72m to expenses.
Staff costs rose by SEK 155m to SEK 2,170m (2,015), with branch office operations outside Sweden accounting for SEK 73m of this increase. Performance-related remuneration dropped to SEK 93m (96).
Other administrative expenses rose by SEK 298m to SEK 1,309m (1,011). More than half of this increase was attributable to branch office operations outside Sweden.
Loan losses
Loan losses rose to SEK -696m (-231), with collectively assessed receivables accounting for SEK 77m (34). Loan losses as a proportion of lending were 0.20% (0.07).
Net bad debts increased to SEK 2,622m (2,163), equivalent to 0.17% (0.14) of lending.
The loan loss reserve ratio was 51.1% (55.0). The reduction is due to the fact that bad debts do not take the value of collateral into consideration combined with the fact that the provision requirement for certain additional exposures has been low.
PERFORMANCE IN THE BUSINESS SEGMENTS
(Q4 2008 compared with Q3 2008)
Branch office operations in Sweden
Operating profits rose by 7% and amounted to SEK 2,633m (2,471). Operating profits before loan losses rose by 19% to SEK 3,020m (2,541).
Net interest income rose by 12% to SEK 3,777m (3,377) due to higher deposit and loan volumes. The average volume of lending rose by 2% to SEK 960bn (938), while deposits increased by 7% to SEK 303bn (283).
Lower equity-related commission income contributed to a 5% reduction in net fee and commission income to SEK 774m (811). Net gains/losses on financial items at fair value rose by SEK 168m to SEK 72m (-96).
Expenses went up by 4% to SEK 1,652m (1,585), as a result of an increase in administrative expenses and the C/I ratio was 35.4% (38.4). Staff costs remained unchanged during the quarter. Loan losses rose to SEK -387m (-70).
Branch office operations outside Sweden
Operating profits fell to SEK 466m (674) mainly due to higher expenses. Income rose by 10% to SEK 2,090m (1,898), due mainly to a 10% increase in net interest income to SEK 1,629m (1,480). Higher volumes and improved lending margins made a positive contribution to the quarter. The average volume of lending grew by 9% to SEK 489bn (447), while deposits increased by 11% to SEK 157bn (142).
Net fee and commission income rose by 8% to SEK 345m (319) and net gains/losses on financial items at fair value rose to SEK 65m (25).
Expenses went up by 24% to SEK 1,315m (1,062), largely as a result of the continued expansion. During the fourth quarter, eight (five) new branches were opened. The acquisition of Lokalbanken added a further 14 branches. The costs of expansion for new branches rose to SEK 134m (112) and the costs in Lokalbanken amounted to SEK 60m.
Loan losses were SEK -309m (-161).
Handelsbanken Capital Markets
Operating profits increased to SEK 1,140m (684). Net fee and commission income increased by 28% to SEK 291m (227), largely due to higher brokerage commissions. Customer-driven fixed income and foreign exchange trading continued to show positive developments and contributed to an increase in net gains/losses on financial items at fair value to SEK 1,304m (830).
Expenses went up by 13% to SEK 818m (721).
Handelsbanken Asset Management
Operating profits rose to SEK 329m (70), of which SEK 297m (24) stemmed from Handelsbanken Liv. Net fee and commission income was down by 2% to SEK 246m (252). Expenses rose by 5% to SEK 264m (252).
Handelsbanken Liv received no yield split during the period (0). A reversal was made of the deferred capital contribution made to Handelsbanken Liv the amount being SEK 139m (-60).
Discontinued operations
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.
The net profit was SEK 44m (51).
In the autumn of 2006, an efficiency drive was launched in the Swedish branch operations, with the aim of increasing the amount of time for meeting customers by 50% up to 2010.
During the spring of 2008, surveys carried out showed that the time spent on administration had decreased and that the time spent with customers had risen by 34%. During the summer, there was a further upgrade in system support aimed at simplifying several of the more common branch office tasks. A new survey carried out during the fourth quarter revealed that the increase in time spent on customer contacts has now reached 40%.
Despite a high level of cost efficiency in the Swedish branch operations, the drive shows that there is scope for further improvement. For the full year 2008, the C/I ratio for Swedish branch operations improved by 0.8 percentage points to 37.7% (38.5).
STABILITY FUND
During the autumn, the Swedish government decided to set up a stability fund, which through the acquisition of preference shares in individual companies, could be used to secure adequate capitalisation in the Swedish banking system. The fund, which includes the current state deposit guarantee, will be financed by the banks and credit market companies and for 2009 and 2010, half the fee will be charged. No fee was charged in 2008.
The individual fees to be levied have not yet been decided. In 2008, the Bank's cost for the Swedish deposit guarantee scheme was SEK 130m.
EVENTS AFTER THE END OF THE REPORTING PERIOD
In February, the Bank issued Tier 1 capital loans for a further SEK 1.1bn. These loan instruments are of the non-innovative type and thus lack any incentive to seek premature repayment.
In January, the Bank submitted an application to the Swedish Financial Supervisory Authority for permission to use the advanced method when calculating credit risks in the Bank's internal ratings based model.
In 2008, the corridor effect used in the calculation of pension costs according to IAS 19 was positive, and amounted to SEK 48m (204). Under current accounting regulations, the corresponding effect for the full year 2009 will be negative and amount to SEK -262m.
Pär Boman
President and group chief executive
President and group chief executive
For further information please contact:
Pär Boman, President and group chief executive
phone: +46 (0)8-22 92 20, pabo01@handelsbanken.se
Ulf Riese, CFO
phone: +46 (0)8-22 92 20, ulri02@handelsbanken.se
Mikael Hallåker, Head of Investor Relations
phone: +46 (0)8-701 2995, miha11@handelsbanken.se
The full report including tables can be downloaded from the following link.