Summary January - December 2007, compared with January - December 2006

Operating profits for total operations* increased by 13% to SEK 19.4bn (17.2), while profits after tax rose by 18% to SEK 15.5bn (13.1)

Return on shareholders' equity for total operations* was 23.3% (20.9)

Earnings per share for total operations* were SEK 24.84 (20.41)

Income for total operations* increased by 10% to SEK 32.6bn (29.6)

Operating profits in branch office operations outside Sweden increased by 27% to SEK 2.6bn (2.1)

The board adopted targets for capital ratios adapted to Basel II

The board proposes that the dividend be raised to SEK 8.50, plus an extra dividend of SEK 5.00, an increase in the dividend to SEK 13.50

The board is proposing to the annual general meeting a new mandate to repurchase shares

The board proposes that the annual general meeting decide on an issue of a subordinated convertible loan directed at employees

 

Summary of Q4 2007, compared with Q3 2007  

Operating profits for total operations* were SEK 7.4bn (3.5)

Handelsbanken sold SPP to Storebrand ASA for SEK 18.2bn, with a capital gain of SEK 4.1bn

 

 

 

Operating profits for operations including "discontinued operations" increased by 13% to SEK 19.383m (17,164). The return on shareholders' equity increased to 23.3% (20.9). The C/I ratio was 40.5% and earnings per share rose to SEK 24.84 (20.41). In accordance with IFRS 5, accounting for "continuing operations" is separate from "discontinued operations".

 

The operating profit for "continuing operations" totalled SEK 14,732m (14,898). Income rose by 3%, and both net interest income and fee and commission income increased by 6%. Expenses rose by 8% to SEK 12,368m (11,505). Loan losses were SEK 27m (+55). Return on equity was 16.3% (17.4). The C/I ratio was 45.6% (43.7). Earnings per share were SEK 17.39 (16.99).

 

One consequence of complying with IFRS 5 is that almost all the funding costs for "discontinued operations" are reported under "continuing operations", while the income generated is reported under "discontinued operations". In 2007, the funding cost for "discontinued operations" was SEK 723m (498), this mainly being costs for subordinated loans raised in connection with the demutualisation of SPP.

 

Demand for credit remained strong from both companies and private individuals. The average volume of lending to the public increased by 14%, while in branch office operations outside Sweden it went up by over 26%. In Sweden, household deposits increased by 15% to SEK 121bn (105). Total net interest income from lending was lower than the previous year, since greater volumes did not make up for lower margins. However, net interest income from deposits grew due to higher volumes and improved margins. This resulted in the net interest income in the continuing operations increasing by 6% to SEK 15,608m (14,727). The net interest income has been reduced by SEK 723m (498) related to interest costs for funding the discontinued operations.

 

Net fee and commission income increased by 6% to SEK 7,745m (7,316). The increase was mainly from mutual fund and custody commissions, brokerage income and payment commissions. At SEK 2,153m (1,983), payment commissions were the single largest source of income among commission income. Card commissions, which are included in payment commissions, have never been higher.

 

Insurance commissions decreased by SEK 166m to SEK 531m, which was due to the yield split being SEK 0 (SEK 196m).

 

Net gains/losses on financial items at fair value decreased by 11% to SEK 3,054m (3,448). The main reasons were that capital gains from the available-for-sale portfolio were SEK 228m lower than the previous year, and that the value change arising through increased credit spreads on bonds in the Bank's liquidity portfolio reduced the figure by SEK 490m (30).

 

Expenses increased by SEK 863m to SEK 12,368m (11,505). More than one third of this was due to expansion at the regional banks outside Sweden and at Handelsbanken International. In addition, Capital Markets had higher costs and an increased presence, particularly in Norway.

 

Staff costs, which were SEK 7,528m (7,184), were affected by new pension regulations in Norway and accruals of actuarial gains brought forward. The new regulations in Norway reduced expenses by SEK 69m and accruals of actuarial gains in the rest of the Group reduced expenses by SEK 159m. More than one half of the increase in staff costs is due to the expansion outside Sweden. Performance-related remunerations were SEK 708m (651).

 

The number of employees increased and at the year-end totalled 10,464 (9,823), with 2,859 (2,425) of this number outside Sweden. The increase in other administrative costs was due to the international expansion, higher costs for premises and IT costs.

 

Loan losses were SEK 27m (+55). The net loan loss ratio was 0.00% (-0.01). Bad debts continued to fall, the net amount being SEK 624m (876). The proportion of bad debts was 0.05% (0.07) of lending.

 

Operating profits for total operations were SEK 7,360m (3,544) This profit figure includes a capital gain of SEK 4,082m from the sale of SPP. Loan losses totalled SEK 166m, as opposed to previous quarters, which had shown net recoveries on loan losses. Return on shareholders' equity for the total operations was 37.4% (15.4) and earnings per share were SEK 10.29 (4.10).

 

Operating profits for continuing operations were SEK 3,101m (3,532). Return on shareholders' equity was 13.1% (15.7) and earnings per share were SEK 3.61 (4.19).

 

Income increased by 3% to SEK 6,616m (6,427). Business volumes continued to grow. Average lending volumes rose by just under 3% and deposits by 1.5%. Net interest income increased by 1%, chiefly due to higher deposit margins. Net interest income was negatively affected by SEK 44m, due to the remaining effects from previously repurchased bonds. In Sweden, the margin for mortgages where the rate is newly set or reset was stable during the second half of the year, while the average margin for the whole mortgage loan portfolio decreased. Net interest income rose in Norway, but in the other regional banks outside Sweden it declined somewhat.

 

Net fee and commission income went up by 1%. Brokerage income increased, as did mutual fund commissions. Net gains/losses on financial items at fair value increased by 26% to SEK 523m (415). Changes in value in the Bank's liquidity portfolio due to changes in credit spreads, had a less negative effect on earnings during the fourth quarter than in the previous quarter: SEK 152m, compared with SEK 338m. The bank realised profits of SEK 2m (220) from divestments from the "available for sale" portfolio.

 

Expenses were SEK 3,349m (2,899). Staff costs, which are low in seasonal terms in the third quarter, rose by 11% to SEK 1,995m (1,802). The increase was mainly attributable to higher performance-related remunerations in Capital Markets. For the group as a whole, performance-related remunerations amounted to SEK 332m, a rise of SEK 219m. The change in the Norwegian pensions system was reported in its entirety in the fourth quarter, and this reduced costs by SEK 69m.

 

Other administrative expenses rose by SEK 257m to SEK 1,354m. External IT services and purchased services accounted for SEK 80m of the increase, and the cost of premises and properties for SEK 71m.

 

Loan losses remained low, at SEK 166m (+4), where two exposures accounted for loan losses of approximately SEK 125m. The net loan loss ratio was 0.05% (0.00). Bad debts continued to fall, the net amount being SEK 624m (680). The proportion of bad debts was 0.05% (0.05) of lending.

 

 

Operating profit increased by 1% to SEK 9,869m (9,766). Net interest income grew by 4%, due to higher business volumes. The average volume of mortgage loans rose by 12% to SEK 358bn (319), while household deposits increased by 15% to SEK 121bn (105).

 

Operating profit increased by 27% to SEK 2,641m (2,086), which corresponded to 18% of Group operating profits (14).

 

Forty-one new branches were opened during the year, thirty of them in the Bank's domestic markets outside Sweden and the remainder in five other European countries. The average volume of lending increased by 26% to SEK 329bn (261); this was just under 28% of Group loans to the public. The corresponding figure for the previous year was 25%.

 

Operating profits fell to SEK 761m (1,183). The changes in value of the bonds in the part of the Bank's liquidity portfolio reported within Capital Markets had a SEK 364m negative effect on earnings. Apart from this, during the second half of 2007, Capital Markets generated higher income than the previous year.

 

Operating profits fell to SEK 1,029m (1,137). Since the last quarter, Handelsbanken Liv has been reported under the Asset Management business segment; the decrease in operating profits was due to Handelsbanken Liv not receiving a yield split. The previous year, the split had been SEK 196m. The average value of the mutual funds managed by the Bank increased by 15%.

 

Discontinued operations include the activities the Bank sold to Storebrand ASA and the net amount of the compensation Handelsbanken received for asset management assignments that it carried out on behalf of SPP/Storebrand.

 

The operating profit for the full year decreased by SEK 1,697m to SEK 569m. This was due partly to the change in the deferred capital contribution and hedges, and partly to a lower yield split. The effect of the changes in the deferred capital contribution and hedges was SEK 1,246m lower than the previous year, and the yield split was SEK 538m lower.

 

The capital gain from the sale of SPP is included in discontinued operations. The net capital gain totalled SEK 4,082m, after restructuring and transaction costs of SEK 357m and a tax expense of SEK 0.2m. The Bank's funding cost for the discontinued operations, which totalled SEK 723m (498), are reported under "continuing operations".

 

One year ago, the Bank announced its intention to open more branches. In 2007, 46 new branches were opened, 41 of them outside Sweden. Thirty of these were opened in the Bank's domestic markets outside Sweden: 16 in Great Britain, 8 in Finland, 4 in Norway and 2 in Denmark. The remaining 11 branches were opened within Handelsbanken International; in three of these cases, established representative offices were converted into full branches.

 

By the end of 2007, in addition to the 41 new branches, a further 15 branch managers had been recruited, with the task of establishing new branches. For 2008, the objective is to open between 35 and 45 new branches outside Sweden.

 

Credit market turbulence had an impact on the Bank in the second half of 2007. The impact on earnings was mainly due to changes in credit spreads altering the value of the bonds the Bank keeps in a liquidity portfolio. The Bank's net interest income is mainly affected by customer margins, possible increases in the Bank's funding costs and to what extent these increases can immediately be transferred to the borrowers. The assessment is that the overall impact of the two last-mentioned factors negatively affected net interest income by some SEK 100m. As in the previous quarter, the Bank was able to fund its day-to-day operations in the normal way. Various types of funding instruments have been issued on a regular basis.

 

The Bank's liquidity portfolio comprises bonds that are eligible as collateral with central banks in order to create immediate liquidity. The bonds have high credit quality and most of the holdings were rated AAA or AA, with none lower than A.

 

The impact on earnings - that is, the realised and unrealised value changes arising through wider credit spreads for the bonds which were or are in the Bank's trading portfolio - was SEK 490m, of which SEK 152m affected the fourth quarter. Bonds in the available-for-sale portfolio affected the Bank's equity negatively by SEK 476m, with SEK 208m of this during the fourth quarter. The total market value of the Bank's liquidity portfolio was SEK 88.2bn, of which 41% was available for sale.

 

Starting on 1 February 2007, the Bank reports the capital requirement and capital base in accordance with the Basel II rules. The changed capital requirements have a gradual impact, since the transitional rules allow for an adaptation over a period of three years - and in the first year, the Bank is only allowed to include 5% as a reduction.

 

Tier 1 capital increased to SEK 65,600m (59,272). SEK 6.8bn of the Tier 1 capital was Tier 1 hybrid capital. Calculated according to the transitional rules, the Bank's capital ratio was 10.4%, while the Tier 1 capital ratio was 6.5%. The corresponding figures, excluding the transitional rules, were 16.9% and 10.6% respectively. If no transitional rules had applied, the statutory capital requirement under Basel II would have been reduced by 42% compared to the requirement in accordance with Basel I.

 

According to what is known as Pillar 2 in Basel II, the Bank has designed a model for its internal capital adequacy assessment process (ICAAP). In this internal assessment, the Bank must take a broader approach to risks than is the case in Pillar 1. The capital requirement for risks is expressed in terms of economic capital (EC) and as a proportion of available financial resources (AFR). AFR consists of Handelsbanken's equity and other available financial values on and off the balance sheet, with a one-year time horizon. As at 31 December 2007, the AFR/EC ratio was 215% and EC was SEK 55bn.

 

The board established minimum and maximum target requirements for the Bank's Tier 1 capital ratio until further notice. Taking into consideration stress tests and the Bank's conservative attitude to risk, the board has decided that the Bank's Tier 1 capital ratio under Basel II must be at least 6% according to the current floor rules; and in 2010 when the Basel II transition rules cease to apply, the Tier 1 capital ratio must be between 9% and 11%.

 

The board proposes that the 2008 annual general meeting authorise an ordinary dividend on the class A and B shares of SEK 8.50. In addition, the board is proposing that the AGM pass a resolution on an extra dividend of SEK 5.00 on the class A and B shares.

 

In order to adjust the capital structure, the board is also requesting that the 2008 AGM mandate the board to repurchase a maximum of 20 million shares until the 2009 AGM. The board is also proposing that the AGM resolve that the shares that may come to be repurchased if the AGM votes in favour of the board's proposal, can be used to finance possible acquisitions.

 

The board is also proposing that the AGM authorise an issue of a subordinated convertible loan directed at Handelsbanken employees on market terms. The aim is to offer the loan to all employees; however, legal or other reasons may exist in certain countries that prevent the offer. The loan is calculated at a maximum of SEK 2.3bn; it will have hybrid status and can be converted to shares in Handelsbanken. Assuming that the share price at the time of maturity is higher than the conversion price, the dilution is calculated to be about 1.8%.

 

At the 2007 AGM, a resolution was passed to cancel 20.4 million shares which the Bank had previously repurchased. In connection with the cancellation, a bonus issue was performed which increased the quota value of the share from SEK 4.45 to SEK 4.60. At the AGM in April 2007, the Bank's board received a mandate to repurchase up to 40 million shares during the period until the 2008 AGM. So far the Bank has repurchased 4.8 million shares. The board is requesting the 2008 AGM to resolve to cancel the repurchased shares as well as any shares that may be repurchased during the period until the 2008 AGM.

 

Handelsbanken's rating was unchanged with the 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.

 

The Bank's annual general meeting in 2008 will be held at the Grand Hôtel's Winter Garden, Stockholm, at 10.00 a.m. on 23 April 2008.

 

The annual report and/or annual review will be sent late March/early April to shareholders who request to receive such publications. Both publications will be available on the Bank's website (www.handelsbanken.se/ireng) in mid-March.

 

Pär Boman

President and group chief executive

 

 

 

 

 

 

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