Review of 1998 Results

MeritaNordbanken Group: Review of 1998 results Strong performance, successful integration Concentration on core business, sharpening of strategic focus * Operating profit was up 13 per cent at FIM 8,145 million (SEK 12,083 million). Excluding items affecting comparability, operating profit rose by 16 per cent to FIM 6,889 million; * Return on equity, excluding items affecting comparability, was 18.7 per cent; * Return on equity, after real estate write-downs of FIM 3,670 million, was 14.3 per cent; * After-tax profit for the year amounted to FIM 4,178 million; * Banking business sustained a strong performance; * Fourth-quarter result of banking operations remained stable; * Earnings per share were FIM 1.96 in Merita Plc, SEK 2.92 in Nordbanken Holding; * Proposed dividend: FIM 1.05 per share for Merita Plc, SEK 1.64 per share for Nordbanken Holding; * Coordination and integration of operations was successfully completed; * Non-core businesses continue to be divested through the sale of equity holdings and a disposal programme for real estate holdings in Finland; * In line with its strategy, the Group is firmly on course to become a leading bank in the Nordic and Baltic Sea region. Operating results, return on equity and earnings per share MeritaNordbanken's operating profit for 1998 was FIM 8,145 million, an increase of 13 per cent compared with the pro forma result for 1997. Despite major write-downs on real estate, presented on the income statement after operating profit, the return on equity was 14.3 per cent. In addition to real-estate write-downs, the year's result reflects the impact of a number of other items affecting comparability. Excluding these, the operating profit was FIM 6,889 million, up 16 per cent from the preceding year's figure, similarly adjusted, and the return on equity was 18.7 per cent. Earnings per share amounted to FIM 1.96 in Merita Plc (FIM 2.51 excluding items affecting comparability) and SEK 2.92 in Nordbanken Holding AB (SEK 3.74 excluding items affecting comparability). Synergy benefits being reaped as projected The coordination of banking operations in Finland and Sweden was largely completed under the year under review. It continues to be deepened further, notably in the fields of customer service and product development. Financial control, capital allocation, performance reporting and credit procedures were coordinated, and the integration projects of Treasury functions and International operations were both brought to completion. The downsizing of staff also continued according to plan. Despite major investments necessitated by the transition to the euro and the year 2000, combined information technology and system development expenses decreased by approximately FIM 50 million on an annual basis. Management maintains its estimate of merger-related synergy benefits, i.e. approximately FIM 700 million per year by the year 2001. Total restructuring expenses resulting from the merger, somewhat under FIM 590 million, were charged against the year's profit. Dividend The Board of Directors proposes that that a dividend of FIM 1.05 per share be paid to shareholders of Merita Plc and a dividend of SEK 1.64 per share be paid to shareholders of Nordbanken Holding AB. Total dividends proposed are thus FIM 2,184 million. Share price development During 1998, the price of the Merita A-share rose by 8.1 per cent to FIM 32.20 and that of Nordbanken Holding by 15.8 per cent to SEK 52.00. The total market capitalization of MeritaNordbanken at the end of the period was thus FIM 68.3 billion / EUR 11.5 billion / SEK 109.1 billion. (The comment of the Group Chief Executive Officer is presented in the following. The review of 1998 results continues on page 5.) Comment by the Group Chief Executive Officer: The merger offers increasing opportunities The result reported by MeritaNordbanken for its first year of operations sends a signal of strength. Group operating profit was up 13 per cent at FIM 8.1 billion (SEK 12.1bn). The return on equity was 14.3 per cent and, adjusted for non-recurring items, 18.7 per cent. In a year of intensive integration work, the Group achieved an excellent result while making significant progress in the disposal of non-core businesses. Regional banks contribute the bulk of earnings The Group's strong performance confirms that our strategic alignment holds potential for profitable growth. I see more opportunities in our chosen orientation and strategy today than a year ago. While the result has been positively impacted by interest rate developments, it also testifies to the Group's operational efficiency. The regional banks, which account for a predominant part of the Group's business volume and profit, demonstrated a strong earning capacity and good profitability. They continue to develop new solutions based on a cross-border exchange of products and new customer concepts which broaden the range of services and enhance Group earnings. The use of Internet banking facilities is rapidly gaining ground. The competitiveness of the Corporate business area was boosted significantly by the merger. However, its result for 1998 was not satisfactory owing to low- yield assets dating from the time of the financial crisis in Finland and to new provisions for international credit risks. The Markets business area was about to end the year with a satisfactory result but was adversely affected by unauthorized equity transactions revealed in Nordbanken's equity brokerage unit around the turn of the year. This serious incident came as a shock to the Group, and thorough investigations are being carried out to determine the exact circumstances in which it happened and the respective responsibilities. A provision of FIM 195 million was established in the closing of the 1998 accounts for the potential loss to be incurred by the unit concerned. Asset Management sustained high profitability and increased its business volumes, for example, through cross-selling of Finnish and Swedish products. A year of accomplishment - promised merger benefits being delivered While 1997 was the year of the merger decision, 1998 was one of implementation, with a focus on Finland and Sweden. With the first year now behind, Merita and Nordbanken constitute a single banking group with a shared financial language. Customers in Finland and Sweden continue to meet us under the familiar trademarks, the strength of which is further enhanced by the new family name MeritaNordbanken. Internally, the Group has been dominated by integration, however without any introspective or controversial features. Management and staff continue to be driven by customer needs and share a genuine interest in integration and cooperation designed to create value for customers. This also a merger for growth, not one based primarily on the stripping of double operations. Our Corporate organization can strengthen its competitiveness through integration, and the Retail network can retain its local features while being backed by new products and marketing support available from centralized service units. I believe that we will succeed in delivering the promised merger benefits. The projected cost and income synergies of FIM 700 million are gradually materializing and the estimated restructuring costs of FIM 590 million will not be exceeded. Disposal of non-core businesses - more focused approach In the past year, MeritaNordbanken restructured its real estate holdings in Finland and decided to accelerate its disposal programme. This called for major write-downs, the negative impact of which will be offset in part by lower operating costs in future years. Furthermore, the Group divested itself of a major part of its earlier strategic equity holdings in Finland. All this enables us to focus increasingly on our core businesses. A growth region The Nordic countries and the Baltic Sea region have emerged as an increasingly dynamic growth area in Europe. Political cooperation has increased, and a growing number of companies view this region as their home market. As the leading Nordic bank in the euro zone and the largest regional financial group in terms of market capitalization - over EUR 11 billion - MeritaNordbanken is well positioned to benefit from and contribute to this development. In 1999, expansion outside the national home markets, Sweden and Finland, will require more time and deliberation from Group management and the Board of Directors. We aim at profitable progress on our own in the Baltic states and Poland. This implies organic growth complemented by minor acquisitions. In Denmark and Norway, the structural focus of the financial sector is shifting towards cross-border cooperation. With a well functioning exchange of products and cross-border product development, we have much to offer to such structural development. Employees - a source of increasing value The Group's overriding objective is to create value for shareholders. This stems from the value that our employees create for customers. A motivated and skilled staff is a precondition for increasing customer value. We want to be the most attractive employer in the banking sector, with the market's highest customer satisfaction rate among our prioritized customer groups. Despite - and thanks to - the merger, our staff made special efforts last year to ensure a high standard of service. The commitment and dedication shown by them has benefited our shareholders and is gratefully recognized by Group Management and the Board of Directors. Almost FIM 130 million of the year's profit is transferred to profit-sharing foundations for Group personnel. This equals FIM 9,600 / SEK 14,000 per full- time employee. As the profit-sharing scheme in Finland was effective for only seven months during its first year of existence, the transfer to the personnel fund in Finland represents 7/12 of the full-year amount. Continued rationalization 1999 promises to be a year of moderate growth, low inflation and low interest rates in Finland and Sweden. Interest income and earnings from financial operations do not promise to reach the gratifying level of 1998. Increasing efficiency and productivity are therefore required in order that the Group could achieve its challenging profitability targets. While proceeding with our Baltic Sea strategy, we intend to implement further rationalization and efficiency projects in order to boost our operating results. We will also continue to strengthen our competitiveness through product and system integration. Economic developments In Sweden and Finland, the first half of 1998 was a period of continuing economic growth combined with moderate credit expansion. Interest rates continued to fall, notably in Sweden. The third quarter saw a change in the operating environment. Global turmoil and problems especially on the Asian and Russian financial markets led to a sharp deterioration in the performance of these economies. Against this background, economic forecasts for MeritaNordbanken's principal markets, Finland and Sweden, have successively been downgraded, while still pointing to a basically healthy rate of growth. Markets Asset management, mutual funds and insurance products At the end of 1998, private customers' savings under management with MeritaNordbanken totalled FIM 250 billion. This comprised all types of savings products, including bank deposits, mutual funds, insurance, retail bonds, share-index-linked bonds, etc. The net inflow of savings into the Group's mutual funds in Sweden during the year was SEK 0.7 billion, bringing total fund assets under management in Sweden (excluding discretionary management) to SEK 101.6 billion. The Group's mutual fund market share in Sweden at the year-end was 18.1 per cent. In Finland, mutual funds attracted increasing interest, and net investments in MeritaNordbanken's mutual funds during the year totalled FIM 3.7 billion. The Group's year-end market share was 42.8 per cent. It rose notably towards the end of the year, at times well exceeding 50 per cent of net savings. The combined asset value of of the Group's mutual funds in Finland at the end of 1998 was FIM 12.0 billion. Including discretionary management of institutional portfolios, total customer assets under management at the end of the year stood at FIM 109.7 billion (SEK 175 billion). MeritaNordbanken was thus one of the leading asset managers in the Nordic region, a position which we intend to strengthen in the future. The Group's life assurance business continued to make vigorous progress, with premium income totalling FIM 4.4 billion. Unit-linked insurance products, launched in Sweden in mid-year, accounted for FIM 2.1 billion of the total amount. Broadening range of Group-wide products Since the beginning of the year, MeritaNordbanken has launched a number of new cross-border products. In January, we offered our customers free Visa-card withdrawals from cash dispensers in Finland and Sweden. In February the Swedish long-term housing loan concept was introduced in Finland, and at the end of the year the volume of such loans was FIM 176 million. In March the Group announced a service enhancement for corporate payment transmission between the two countries, and in April the first Swedish equity fund was launched on the Finnish market. In June the unit-linked insurance products developed in Finland became available through the Swedish distribution network. In the first seven months, they generated premium income of SEK 1.1 billion. In June the Group also unveiled its first joint equity fund, Nordic Small Cap, followed by MeritaNordbanken Euroland Fund. Units of both funds are available in either FIM or SEK. The year-end capital invested in these funds was FIM 140 million and FIM 304 million, respectively. Continued rise in deposits In Finland, deposits increased only slightly, and the Group's market shares declined somewhat. The market share of household deposits was 37.6 per cent and that of FIM deposits from companies to 50.4 per cent. Deposits from the Swedish market increased by 10 per cent. Deposits from households displayed a stable trend, rising by 4 per cent, with the market share broadly unchanged at 22.5 per cent. Increase in lending Credit demand developed favourably during the year. Group lending at the end of 1998 stood at FIM 356 billion, a 12-month increase of 12 per cent, adjusted for the depreciation of the Swedish krona. In Sweden, the Group's market share of housing loans was up as much as 1.1 percentage points at 14.3 per cent, the fifth consecutive year of uninterrupted growth. The Group's market share of total lending to households increased by 0.7 percentage point to 14.1 per cent. In Finland, the Group's market share of lending to households was 35.2 per cent, against 36.7 per cent in the preceding year. The volume of problem loans, including low-interest-rate receivables, decreased by 29 per cent. The net amount at the year-end was FIM 6.1 billion. Provisions against these exposures represented 69 per cent of the total amount. Growing number of Internet customers The use of Internet banking facilities continued to increase at an accelerating pace. At the beginning of 1999, approximately 600,000 MeritaNordbanken customers had access to services provided via the Internet. This number is expected to rise to almost one million as new data capacity is introduced during spring 1999, thus sealing our position as the world's leading provider of Internet banking services. Brisk growth in Postbanken services The year saw successful continuation of cooperation with Sweden Post. Joint efforts to promote the Postbanken trademark attracted almost 150,000 new customers, and in January 1999 the total number of customers was 330,000. Unrealized gains At the close of the year, holdings of interest-bearing securities classified as financial current assets and carried at market value amounted to FIM 59.4 billion. The duration of the portfolio was 2.6 years. Securities held as financial fixed assets, carried at amortized acquisition value, totalled FIM 22.0 billion. Unrealized appreciation in this portfolio was FIM 0.7 billion. The year-end market value of the Group's actively traded equity portfolios was approximately FIM 0.4 billion. After the year's disposals, other equity holdings classified as financial current assets and valued at the lower of cost or market totalled FIM 2.3 billion at the year-end. Unrealized gains on this portfolio amounted to FIM 1.1 billion. Since then, the Group has disposed of its entire holding in the Pohjola Insurance Company, posting a gain of almost FIM 0.7 billion. Unrealized gains in the Group pension foundations and pension fund, after the surpluses refunded during the year, amounted to FIM 1.6 billion. Real estate disposal programme In view of market developments and future prospects, it was decided in December 1998 to embark on the restructuring and accelerated disposal of the Group's real estate holdings in Finland, excluding banking premises. This decision was in line with the strategy adopted in 1997, aimed at focusing on and expanding the Group's banking operations. Under the divestment programme, which includes a number of restructuring arrangements, the Group intends to dispose of most of its real estate portfolio during 1999-2001. The programme is scheduled to be completed by 2003. The accelerated disposal programme means, among other things, that the strain imposed by real estate holdings on Group performance will be gradually relieved. Based on an interest rate of approximately 3.5 per cent on debt and equity capital, the estimated negative impact of real estate on the 1998 result, excluding write-downs and losses on disposal, was in the order of FIM 0.5 billion. In order to enable faster downsizing of the real estate portfolio, a write- down of somewhat FIM 3.7 billion was charged on the real estate holdings of Merita Real Estate Ltd in the closing of the 1998 accounts. Strong equity base for further expansion Despite the heavy write-downs on real estate, the Group retained its capital strength. After deduction of the proposed dividend, the Tier 1 ratio at the year-end was 7.3 per cent, against 7.4 per cent the year before. The total capital ratio fell from 11.3 to 9.9 per cent, owing to a reduction in the subordinated debt volume. Operating results, return on equity and earnings per share MeritaNordbanken's operating profit for 1998 was FIM 8,145 million, an increase of 13 per cent compared with the pro forma result for 1997. Despite major write-downs on real estate, presented on the income statement after operating profit, the return on equity was 14.3 per cent. In addition to real-estate write-downs, the year's result reflects the impact of a number of other items affecting comparability. Excluding these, the operating profit was FIM 6,889 million, up 16 per cent from the preceding year's figure, similarly adjusted, and the return on equity was 18.7 per cent. Earnings per share amounted to FIM 1.96 in Merita Plc (FIM 2.51 excluding items affecting comparability) and SEK 2.92 in Nordbanken Holding AB (SEK 3.74 excluding items affecting comparability). Rise in income During the year, the Group's total income rose by 6 per cent to FIM 19,922 million. Net interest income stable Net interest income showed a stable trend, amounting to FIM 10,806 million, a drop of 2 per cent compared with 1997. Net interest income from Sweden decreased, largely because the comparative figure for 1997 had been boosted by debt prepayments, which no longer exerted a favourable influence on the 1998 results. In Finland net interest income increased primarily as a result of a reduction in low-yield receivables and a decline in problem loans. The fall in market interest rates, combined with intense competition, added to pressures on margins. Furthermore, growth in the Group's lending has focused on low-risk business, such as housing loans, which has also contributed to the narrowing of the average interest rate spread. Improvement in net commission income Net commission income was up 5 per cent at FIM 4,294 million, a rise attributable primarily to continued brisk growth in mutual fund savings. Increase in net result from financial operations The year's net result from financial operations was a hefty FIM 2,643 million, reflecting a combined capital gain of over FIM 2 billion from the disposal of the Group's equity holdings in the Sampo Insurance Company, Nokia Corporation and the Tieto Group. The broadening of the ownership base of the Finnish real estate company Sponda Plc during the year caused a loss and write-down totalling somewhat under FIM 200 million. A provision of FIM 195 million was charged against the year's result for the potential loss arising from unauthorized equity transactions. The transactions in question are under investigation by the police. The continued decline in interest rates on the Swedish market boosted the prices of interest-bearing securities. As a result, realized and unrealized gains on the Group's bond portfolios carried at market value increased to FIM 545 million. The result from currency-related operations also developed favourably, amounting to FIM 460 million, up from FIM 284 million in 1997. Towards the end of the year, prepayments of debts prompted by the downward trend in interest rates caused extra expenses of somewhat over FIM 200 million, an amount which will be offset by lower interest expenses over the coming years. Income and expense items affecting comparability, FIM bn 1998 1997 Capital gains on the disposal of equity holdings +2.0 +1.3 Contribution from Nordisk Renting +0.3 Restructuring expenses -0.6 Harmonization of accounting and valuation principles -0.4 Write-downs on real estate holdings in Finland -3.7 -1.0 Surplus refunded by pension foundations and pension fund +0.9 +1.5 Increase in other operating income Other income for January-September was up 16 per cent at FIM 2,179 million. The increase stemmed principally from a rise in dividend income in connection with the ownership restructuring of Nordisk Renting. Expenses The Group's total expenses, including merger-related restructuring expenses, increased by 7 per cent to FIM 11,016 million. Excluding restructuring costs and other items affecting comparability, overall expenses declined somewhat. Personnel expenses Personnel expenses amounted to FIM 5,236 million. This includes FIM 374 million of restructuring expenses. Adjusted for the impact of restructuring and the increase in the transfer to profit-sharing foundations as a result of the establishment of a personnel fund in Finland, personnel expenses rose by 4 per cent. The number of banking employees within the Group at the end of the year was approximately 18,300, a net fall of over 700 persons since the announcement of the merger plan. The year-end figure included approximately 250 new employees who joined the Group within the IT organization and as a result of expansion in the Baltic region. Other expenses Other expenses, adjusted for items affecting comparability, fell by 5 per cent. Loan losses Net loan losses declined by as much as FIM 623 million, i.e. 43 per cent, to FIM 824 million. They represented 0.2 per cent of total lending (0.4). The Group's Asian exposure at the end of 1998 was down at FIM 3,700 billion, of which 68 per cent consisted of receivables from banks. Receivables from a number of risk regions are shown in the attached table. Business area reviews Regional Banks, which are part of the Retail organization, contributed FIM 4,866 million, i.e. 60 per cent, of the Group's operating profit. Earnings rose, reflecting increasing business volumes, while expenses decreased thanks to ongoing efficiency programmes. With loan losses also on the decline, the Regional Banks achieved good profitability. Return on equity exceeded 25 per cent. The Corporate business area benefited from the merger in terms of strengthening competitiveness and growing business volumes. The year's result, FIM 338 million, reflected the negative impact of major provisions for international credit risks and low-yielding assets dating from the financial crisis in Finland, which depressed profitability to a low level. Markets reported an operating profit of FIM 217 million. In this business area, the year was characterized by volatile market conditions resulting in considerable fluctuation in earnings. Reflecting the sharp swing in the market in the latter half of the year, money market trading showed a loss for the third quarter while producing good results for the other quarters. The result from currency-related business developed favourably, although the euro's adverse effect on earnings began to be felt already in 1998. For most of the year, equity trading mirrored the strong performance of the stock market. However, unauthorized transactions revealed in the equity brokerage unit necessitated a charge of FIM 195 million for possible losses. Asset Management, which comprises mutual funds, institutional portfolio management and life assurance, had a successful year, with mutual funds performing strongly despite the market turbulence in the latter half of the year. Mutual fund assets under management increased by 16 per cent, and income rose to FIM 1,200 million. Earnings from discretionary management also showed an upward trend. Premium income from insurance increased significantly, boosted by the launching of unit-linked insurance products on the Swedish market. The combined result of Asset Management products, after expenses arising from administration, sales and distribution, was FIM 655 million. Real Estate business was subject to in-depth review during the year, and it was decided to accelerate the divestment of properties in Finland. With this in mind, major write-downs were made in the 1998 accounts to enable substantial disposals already in 1999. The amount of equity capital allocated to real estate represents a capital ratio of approximately 35 per cent. The negative influence exerted by real estate holdings on the Group's operating results will diminish gradually as the divestment programme proceeds. Treasury: Reflecting the fall in market interest rates, which boosted the prices of interest-bearing securities, Treasury's contribution to Group profit, after debt prepayment expenses of somewhat over FIM 200 million, was FIM 1,455 million. Investments in the Baltic region During the past year, MeritaNordbanken acquired a controlling interest in Investment Bank of Latvia, Riga, which has a staff of 60. The Group further increased its ownership interest in Estonian Industrial Leasing Ltd, Tallinn, to 80 per cent. A new branch was opened in Tallinn, and at the year-end MeritaNordbanken was the third largest deposit bank in Estonia. The year 2000 and the euro Preparations for the year 2000 proceeded on schedule and will be completed in early autumn 1999. The Finnish banking system adopted the euro as of January 1, 1999. Demand for euro-denominated products is expected to increase also in Sweden. Thanks to its combined euro expertise which can benefit Swedish and other customers alike, the MeritaNordbanken Group is well positioned to meet competition. The Group's total investments in euro-related changes in its data systems were approximately FIM 160 million. General meetings The Annual General Meeting of Nordbanken Holding AB (publ) will be held on Thursday, March 25, 1999 at 3.00 p.m. local time at Globen, Annexet, in Stockholm. The Annual General Meeting of Merita Plc will be held on Monday, March 29, 1999 at 3.00 p.m. local time at the Helsinki Fair Centre (Messukeskus), Congress Wing, Rautatieläisenkatu 3, Helsinki. Stockholm, February 23, 1999 Hans Dalborg President and Group Chief Executive Officer Further information: Hans Dalborg, President and Group CEO, tel. (+46 8) 614 7800 Arne Liljedahl, EVP, Accounting and Control, tel. (+46 8) 614 7996 Björn Westberg, Investor Relations, tel. (+46 8) 614 7850 Taina Mäkijärvi, Investor Relations, tel. (+358-9) 165 43041 Lars Thalén, Corporate Communications, tel. (+46-8) 614 7951 Timo Nikinmaa, Corporate Communications, tel. (+358/9) 165 42471 www.meritanordbanken.com and www.merita.fi and www.nb.se The Annual Report of the MeritaNordbanken Group for 1998 will be available in early March. The Interim Report for January-March 1999 will be published on April 29, 1999, that for January-June 1999 on August 25, 1999 and that for January-September 1999 on October 26, 1999. Tables Appendices MeritaNordbanken Group A. Merita Plc Income Statements B. Nordbanken Holding AB (publ) Financial ratios C. Merita Bank Plc (publ) Share-related indicators D. Nordbanken AB (publ) Balance sheets Problem loans Exposure to certain risk regions Quarterly income statements Business area reviews Derivative contracts Off-balance-sheet commitments Assets pledged as collateral Group structure Income statements FIM million 1998 1997 Change Pro forma % Interest income, note 1 30 318 29 168 4 Interest expenses, note 1 -19 512 -18 166 7 Net interest income, note 1 10 806 11 002 -2 Dividends received 496 355 40 Net commission income, note 2 4 294 4 092 5 Net result from financial operations, note 3 2 643 1 915 38 Other operating income, note 4 1 683 1 515 11 Total operating income 19 922 18 879 6 Personnel expenses -5 236 -4 594 14 Other expenses, note 5 -4 772 -4 753 0 Depreciation and write-downs on tangible and intangible assets -1 008 -946 7 Total operating expenses -11 016 -10 293 7 Profit before loan losses 8 906 8 586 4 Loan losses, net, note 6 -824 -1 447 -43 Profit from companies accounted for under the equity method 63 96 -34 Operating profit 8 145 7 235 13 Write-downs on real estate holdings -3 670 -980 274 Refund of surplus in the Pension Fund/Foundation 901 1 545 -42 Taxes -1 173 -1 419 -17 Minority interest -25 -36 -31 Net profit for the year 4 178 6 345 -34 Non-statutory pensions are covered by Group pension foundations/fund, partly in the form of a refund of surplus funds accrued. Any refund in excess of the costs to be covered is reported in the income statement after Operating profit under the heading "Refund of surplus in the Pension Fund/Foundation. Exchange rates applied 1998 1997 SEK 1 = FIM Jan - Dec Jan - Dec Income statement (average) 0.6741 0.6782 Balance sheet (at the end of period) 0.6267 0.6863 Note 1: Interest income and expenses Change FIM million 1998 1997 % Interest income Loans to credit institutions 3 485 2 917 19 Loans to the public 22 032 22 045 0 Interest-bearing securities 4 603 4 309 7 Other interest-bearing assets 198 -103 Total interest income 30 318 29 168 4 of which: net income on leasing operations 285 293 -3 Interest expenses Due to credit institutions 4 845 3 735 30 Deposits and other borrowing from the public 5 373 5 237 3 Debt instruments outstanding 7 769 7 633 2 Subordinated debt 1 234 1 340 -8 Capital loans 133 178 -25 158 43 Total interest expenses 19 512 18 166 7 Net interest income 10 806 11 002 -2 Note 2: Net commission income Change FIM million 1998 1997 % Commission income Payment transmission 1 148 1 138 1 Lending 1 043 1 044 0 Deposits 171 189 -10 Guarantees 236 290 -19 Securities 1 900 1 587 20 Other commission income 345 245 41 Total commission income 4 843 4 493 8 Commission expenses Payment transmission 417 293 42 Securities 89 73 22 Other commission expenses 43 35 23 Total commission expenses 549 401 37 Net commission income 4 294 4 092 5 Note 3: Net result from financial operations Change FIM million 1998 1997 % Equity-related items Realized gains/losses 2 352 2 099 12 Unrealized gains/losses -499 -210 138 1 853 1 889 -2 Interest-rate-related items Debt redemption -212 -12 Other realized gains/losses 710 315 125 Unrealized gains/losses -165 -561 -71 333 -258 Other -3 - Foreign exchange gains/losses 460 284 62 Net result from financial operations 2 646 1 915 38 Note 4: Other operating income Change FIM million 1998 1997 % Sale of shares and participations 83 19 337 Sale of shares and participations, Group companies 100 23 335 Sale of real estate (net) -10 -105 -90 Net operating result from property taken over 21 35 -40 Real estate income 1 018 1 067 -5 Insurance compensation - 106 Sundry operating income 471 370 27 Total other operating income 1 683 1 515 11 Note 5: Other expenses Change FIM million 1998 1997 % Information technology 755 700 8 Marketing 371 321 16 Postage and telephone 436 427 2 Other administrative expenses 1 118 1 055 6 Compensation to Sweden Post 510 536 -5 Rents 711 586 21 Real estate expenses 599 622 -4 Sundry expenses 272 506 -46 Total other expenses 4 772 4 753 0 Note 6: Loan losses, net Change FIM million 1998 1997 % Actual loan losses during the year 2 344 1 983 18 Previous loan loss provisions utilized during the year -1 538 -1 474 4 Recoveries of loan losses incurred in previous years -286 -301 -5 Specific loan loss provisions made during the year 1 671 2 599 -36 Reversal of previous provisions -1 367 -1 160 18 Charged against unallocated credit write-offs - -200 Total loan losses 824 1 447 -43 Of which: country risks 175 -37 Financial ratios proforma 1998 1997 Jan - Dec Jan - Dec Return on equity, % 14.3 24.8 Income/cost ratio - before credit losses 1.8 1.7 - after credit losses 1.7 1.5 Loan losses/lending 0.2 0.4 at the beginning of the year, % Average number of employees - full-time 18 179 19 490 - part-time 2 297 2 094 Share-related indicators proforma 1998 1997 Jan - Dec Jan - Dec Number of shares at the end of period, mill. Merita Plc 832.0 830.5 - after full conversion 859.1 859.3 Nordbanken Holding AB 1275.3 1275.3 Earnings/share (EPS) Merita Plc after full conversion FIM 1.96 FIM 2.97 Nordbanken Holding AB SEK 2.92 SEK 4.40 Equity/share at the end of period Merita Plc after full conversion FIM 13.64 FIM 13.43 Nordbanken Holding AB SEK 21.30 SEK 19.10 Market price at the end of period Merita Plc FIM 32.20 FIM 29.80 Nordbanken Holding AB SEK 52.00 SEK 44.80 Dividend Merita Plc FIM 1.05 FIM 1.00 Nordbanken Holding AB SEK 1.64 SEK 1.50 Effective dividend yield, % Merita Plc 3.3 3.4 Nordbanken Holding AB 3.2 3.4 P/E ratio Merita Plc after full conversion 16.4 10.0 Nordbanken Holding AB 17.8 10.2 Market capitalization/shareholders' equity Merita Plc 2.4 2.2 Nordbanken Holding AB 2.4 2.4 Balance sheet FIM million 1998 1997 Pro forma Assets Liquid assets 5 926 4 975 Debt securities eligible for 46 231 52 303 refinancing with central banks Loans to credit institutions 66 364 79 662 Loans to the public 355 722 339 867 Interest-bearing securities 35 197 38 478 Shares and participations 3 075 4 530 Shares and participations in 3 687 3 521 Group and associated companies Intangible assets 617 796 Tangible assets Real estate holdings 17 785 22 560 Other tangible assets 1 643 1 720 Other assets 25 532 23 966 Prepaid expenses and accrued income 9 221 10 506 Total assets 571 000 582 884 Liabilities and shareholders' equity Due to credit institutions and central banks 103 654 106 864 Deposits from the public 228 744 233 309 Other borrowing from the public 12 203 15 649 Debt instruments outstanding 134 891 133 294 Other liabilities 37 530 33 220 Accrued expenses and prepaid income 7 330 5 870 Provisions 1 106 1 146 Subordinated debt 13 357 19 901 Deferred tax liabilities 1 651 1 559 Capital loans 1 780 3 793 Minority interest 388 420 Total liabilities 542 634 555 025 Shareholders' equity Share capital 13 915 14 431 Restricted reserves 4 723 5 029 Non-restricted reserves 5 550 2 054 Profit for the year 4 178 6 345 Total shareholders' equity 28 366 27 859 Total liabilities and shareholders' equity 571 000 582 884 Capital adequacy Capital base 37 401 40 693 Risk-weighted amount 378 936 361 720 Total capital ratio, % 9.9 11.3 Tier I ratio, % 7.3 7.4 Problem loans Pro forma Dec 31 Sep 30 June 30 Mar 31 Dec 31 FIM million 1998 1998 1998 1998 1997 Doubtful receivables, 18 937 19 639 20 860 22 383 23 391 gross Loan loss provisions -12 969 -13 199 -13 591-14 431 -15 057 Doubtful receivables, net 5 968 6 440 7 269 7 952 8 334 Low-yielding receivables 100 142 158 234 264 Problem loans, total 6 068 6 582 7 427 8 186 8 598 Loan loss provision/ doubtful receivables, 68.5 % 67.2 % 65.2 % 64.4 % 64.4 % gross Doubtful receivables, net, 1.7 % 1.9 % 2.1 % 2.3 % 2.5 % percent of lending Exposures to certain risk areas FIM million Total of which banks Asia 3 722 2 537 of which Japan 743 636 China 794 548 Singapore 411 178 Thailand 369 143 Indonesia 345 170 South Korea 223 223 Malaysia 109 51 Eastern Europe 1 409 703 of which Estonia 367 311 Latvia 264 84 Lithuania 247 30 Poland 130 21 Russia 62 54 Latin America 1 759 1 084 of which Brasilia 859 504 Chile 299 101 Argentina 175 134 Other Turkey 666 480 Quartely income statement Pro forma Q 4 Q 3 Q 2 Q 1 Q 4 FIM million 1998 1998 1998 1998 1998 1997 Net interest income 10 806 2 707 2 638 2 757 2 704 2 798 Net comission income 4 294 1 123 1 036 1 130 1 005 1 114 Net result from financial 2 643 919 20 194 1 510 330 operations Other income 2 179 468 339 590 782 348 Total operating income 19 922 5 217 4 033 4 671 6 001 4 590 Personnel expenses -5 236 -1 499 -1 266 -1 271 -1 200 -1 163 Other expenses -5 780 -1 477 -1 312 -1 522 -1 469 -1 478 Total expenses -11 016 -2 976 -2 578 -2 793 -2 669 -2 641 Profit before loan losses 8 906 2 241 1 455 1 878 3 332 1 949 Loan losses, net -824 -227 -196 -170 -231 -917 Profit from companies carried 63 -87 53 64 33 10 under the equity method Operating profit 8 145 1 927 1 312 1 772 3 134 1 042 Writedowns on real estate -3 670 -3 670 - - - -720 holdings Refund from pension 901 901 - - - 1 447 foundation/funds Taxes -1 173 184 -286 -387 -684 -322 Minority interest -25 -1 -6 -9 -9 -9 Net profit for the period 4 178 -659 1 020 1 376 2 441 1 438 Quarterly figures have been adjusted compared to those given in the interim reports. Results by Asset business area Regional mana- Real Business area banksCorpor Marke gemen estate Treasury Other Total ate ts t 1) Results (FIM million) Income 12 347 1 629 934 1 200 486 1 475 1 851 19 922 Expenses -6 825 -797 -717 -247 -1 166 -20 -1 244 -11 016 Loan losses -656 -494 - - - - 326 -824 Profit from companies accounted for under the - - - - - - 63 63 equity method Operating 4 866 338 217 953 -680 1 455 996 8 145 profit/loss of which 885 44 -138 -791 - - reallocated Write-downs on -3 670 real estate holdings Result -4 350 Volume (FIM billion) Lending/guarante 275 113 es Savings and 302 15 investments Personnel Number of 11 244 1 312 615 238 270 employees Product-specific results Income 1 200 Administrative -247 expenses Sales and -298 distribution expenses Product-specific 655 result 1) Net interest income has been deducted from income. Depreciation according to plan (FIM -339 million) and capital losses (FIM -317 million) are included in expenses. Derivative instruments 1998 1997 Contracts made Contracts made for hedging for hedging FIM million purposes Other purposes Other Nominal value Interest rate-related Futures and forwards - 1 112 556 1 647 2 069 736 Options Purchased - 9 186 - 23 150 Written - 11 815 - 31 563 Interest rate swap 20 774 586 523 27 398 573 815 agreements Currency-related Futures and forwards 176 955 239 994 232 920 292 216 Options Purchased - 10 018 - 17 222 Written - 9 916 - 14 766 Interest rate swap 11 050 15 834 11 400 11 669 agreements Equity-related Futures and forwards - 869 11 336 Options Purchased 1 406 112 1 060 1 550 Written 997 90 935 183 Other derivative - 191 1 083 167 instruments 1998 1997 Credit equivalents Interest rate-related 16 022 19 829 instruments Currency-related 13 783 17 020 instruments Off-balance-sheet commitments FIM million 1998 1997 Guarantees 29 410 31 566 Stand-by facilities 27 843 21 198 Credit lines 30 916 32 823 Other commitments 5 233 13 346 Total 93 402 98 933 Pledged assets FIM million 1998 1997 Assets pledged for own liabilities - property mortgages 538 848 - leasing contracts 1 505 1 687 - securities, etc. 36 213 27 090 Other pledged assets 301 312 Total 38 557 29 937 MeritaNordbanken Group structure [REMOVED GRAPHICS] Merita Plc (Finland) and Nordbanken Holding AB (publ) (Sweden) are the sole owners of MeritaNordbanken Plc, a Finnish company with subsidiaries in Finland and Sweden. The two holding companies together form a transparent channel for investment in the MeritaNordbanken Group. Pursuant to mutual agreement, the MeritaNordbanken Group is managed as a single unit. Shareholders of Merita Plc are entitled to 40 per cent of the Group's capital and shareholders of Nordbanken Holding to 60 per cent. Appendix A Merita Plc and its associated companies ANNUAL REPORT FOR 1998 The holding companies Nordbanken Holding AB (publ) and Merita Plc are the sole owners of MeritaNordbanken Plc, the parent company of the MeritaNordbanken Plc Group. Together, the MeritaNordbanken Plc Group and the two holding companies form the MeritaNordbanken Group This annual report of the MeritaNordbanken Group, including income statements and balance sheets, constitutes an integral part of the annual report of Merita Plc. On April 1, 1998 Nordbanken Holding transferred its equity holding in Nordbanken to MeritaNordbanken Plc as a contribution in kind in consideration of shares in the company. Similarly, on March 31, 1998, Merita Plc transferred all its businesses to MeritaNordbanken Plc as a contribution in kind in consideration of shares in the company. The MeritaNordbanken Plc Group was created as a result of these transfers. Pursuant to the Cooperation Agreement of October 13, 1997, Nordbanken Holding AB, Merita Plc and the MeritaNordbanken Plc Group are managed as one single entity. For this purpose its is provided in the Agreement, inter alia, that differences in the holding companies' capital structure or assets and liabilities, including liquid funds, shall not financially affect the respective shareholder communities and that Merita Plc and Nordbanken Holding shall, where necessary, arrange a transfer of funds between MeritaNordbanken and its holding companies. Merita shareholders are entitled to 40 per cent of the Group's capital and Nordbanken Holding shareholders to 60 per cent. Merita Plc's share (40 per cent) of the consolidated profit of the MeritaNordbanken Plc Group is reported under "Profit from companies accounted for under the equity method", together with an adjustment of SEK 478 million pursuant to the Cooperation Agreement. After these items, the profit represents 40 per cent of the profit of the entire MeritaNordbanken Group and amounts to SEK 1,671 million. Including the equity interest in the associated company and an adjustment in accordance with the Cooperation Agreement, the equity capital of Merita Plc, representing 40 per cent of the equity capital of the entire MeritaNordbanken Group, is FIM 11,346 million. The adjustment takes into account the result of Merita Plc excluding the MeritaNordbanken Group, FIM 816 million, and the result of Nordbanken Holding AB xcluding the MeritaNordbanken Group, SEK 42 million. Dividend The Board of Directors proposes that a dividend of FIM 1.05 be paid per share, totalling FIM 874 million, and that FIM 1,455 million be retained in the profits account. Tables Income statements Balance sheets Appendix A 2 (3) Merita Plc Income statement Merita Merita Plc Plc incl. the associated company Pro forma FIM million 1998 1997 1998 1997 Interest income 151 67 151 67 Interest expenses -108 -209 -108 -209 Net interest income 43 -142 43 -142 Income from equity investments Group companies and - - 6 680 participating interests Other companies 0 27 0 27 Commission income - 0 - 0 Commission expenses -1 -3 -1 -3 Net results from financial 792 114 792 114 operations Other operating income 40 14 40 14 874 10 880 690 Administrative expenses Personnel expenses Salaries and fees -4 -9 -4 -9 Staff-related costs Pension costs -18 -0 -18 -0 Other staff-related costs -0 -0 -0 -0 Other administrative -66 -36 -66 -36 expenses Depreciation and write-downs on tangible and intangible assets -0 -0 -0 -0 Other operating expenses -7 -11 -7 -11 -95 -56 -95 -56 Profit from companies 2 403 - - accounted for under the equity method 2 419 Adjustment in accordance with -478 - - the Co-operation Agreement Operating profit 2 704 2 373 785 634 Refund from the Pension 360 618 26 631 Fund/Foundation 1) Group contribution - - - 457 Write-downs on real estate -1 468 -392 -64 - holdings 1) Profit before taxes 1 596 2 599 747 1 722 Income taxes 2) 75 -61 69 -252 Profit for the financial year 1 671 2 538 816 1 470 1) 40 per cent of the refund from the Pension Foundation/Funds of the MeritaNordbanken Group and 40 per cent of the Group's write-downs on real estate holdings have been included in the income statement. 2) Income taxes includes only Merita Plc's taxes. Merita Plc's share of other MeritaNordbanken Group taxes is reported under "Profit from companies accounted for under the equity method" and amounts to FIM 545 million (in 1997 FIM 506 million). Appendix A 3 (3) Merita Plc Balance sheet Merita Merita Plc Plc incl. the associated company Pro forma FIM million 1998 1997 1998 1997 Assets Debt securities eligible for 938 10 938 10 refinancing with central banks Loans to credit institutions 214 48 214 48 repayable on demand Other debt securities 906 905 906 905 Shares and participations 1 887 1 887 Participating interests 10 267 11 828 9 811 0 Shares and participations in - - - 11 536 Group companies Tangible assets Real estate and shares and participations in real estate companies - 13 - 13 Other tangible assets - 1 - 1 Other assets 3 6 3 6 Prepaid expenses and accrued 79 1 049 79 1 049 income 12 408 14 747 11 952 14 455 Liabilities and shareholders' equity Liabilities Due to credit institutions, - 803 - 803 other than repayable on demand Bonds outstanding - 1 774 - 1 774 Other liabilities 70 6 70 6 Accrued expenses and prepaid 81 91 81 91 income Statutory provisions Pension provisions 8 2 8 2 Other statutory provisions - 21 - 21 Subordinated liabilities 903 906 903 906 Liabilities 1 062 3 603 1 062 3 603 Shareholders's equity Share capital 8 320 8 305 8 320 8 305 Share premium reserve 30 - 30 - Ordinary reserve 211 211 211 211 Profit carried forward from 1 513* 866* 1 513 866 previous years Profit for the financial year 816* 1 470* 816 1 470 Share of equity capital in 656 the associated company 292 Adjustment in accordance with -200 the Co-operation Agreement Shareholders' equity 11 346 11 144 10 890 10 852 12 408 14 747 11 952 14 455 * Excluding the associated company Appendix B Nordbanken Holding AB (publ) and its associated companies ANNUAL REPORT FOR 1998 The holding companies Nordbanken Holding AB (publ) and Merita Plc are the sole owners of MeritaNordbanken Plc, the parent company of the MeritaNordbanken Plc Group. Together, the MeritaNordbanken Plc Group and the two holding companies form the MeritaNordbanken Group. The annual report of the MeritaNordbanken Group, including income statements and balance sheets, constitutes an integral part of the annual report of Nordbanken Holding. On April 1, 1998 Nordbanken Holding transferred its equity holding in Nordbanken to MeritaNordbanken Plc as a contribution in kind in consideration of shares in the company. Similarly, on March 31, 1998, Merita Plc transferred all its businesses to MeritaNordbanken Plc as a contribution in kind in consideration of shares in the company. The MeritaNordbanken Plc Group was created as a result of these transfers. Pursuant to the Cooperation Agreement of October 13, 1997, Nordbanken Holding AB, Merita Plc and the MeritaNordbanken Plc Group are managed as one single entity. For this purpose its is provided in the Agreement, inter alia, that differences in the holding companies' capital structure or assets and liabilities, including liquid funds, shall not financially affect the respective shareholder communities and that Nordbanken Holding and Merita Plc shall, where necessary, arrange a transfer of funds between MeritaNordbanken and its holding companies. Nordbanken Holding shareholders are entitled to 60 per cent of the Group's capital and Merita shareholders to 40 per cent. The profit of Nordbanken Holding for the year under review, excluding earnings from the associated company, was SEK 42 million, compared with SEK 4,934 million (proposed dividend) for 1997. Its share (60 per cent) of the consolidated profit of the MeritaNordbanken Plc Group is reported under "Profit from companies accounted for under the equity method", together with an adjustment of SEK 710 million pursuant to the Cooperation Agreement. After these items, the profit of Nordbanken Holding AB for the period under review represents 60 per cent of the profit of the entire MeritaNordbanken Group and amounts to SEK 3,719 million (SEK 5,613 million pro forma in 1997). Including the equity interest in the associated company and an adjustment in accordance with the Cooperation Agreement, the equity capital of Nordbanken Holding, representing 60 per cent of the equity capital of the entire MeritaNordbanken Group, is SEK 27,157 million. Dividend The Board of Directors proposes that a dividend of SEK 1.64 be paid per share, totalling SEK 2,091 million. SEK 972 million is retained in the profits account. Tables Income statements Balance sheets Appendix B 2 (3) Nordbanken Holding AB (publ) Income statement Nordbanken Holding Nordbanken AB including the Holding AB 1) associated company Pro forma SEK million 1998 1997 1998 1997 Operating income - - - - Operating expenses Personnel costs -0 - -0 - Other operating expenses -12 - -12 - Operating profit -12 - -12 - Income from financial investments Anticipated dividend - - - 4 934 Interest income 78 - 78 - Interest expenses -8 - -8 - Profit from companies accounted for under the equity method 5 432 - - 5 113 Adjustment in accordance with the Co-operation Agreement 710 - - Profit after financial 6 200 5 113 58 4 934 items Refund from the Pension 802 1 367 - - Fund/Foundation 2) Write-downs on real -3 267 -867 - - estate holdings 2) Profit before taxes 3 735 5 613 58 4 934 Tax on profit for the -16 - -16 - year 3) Profit for the year 3 719 5 613 42 4 934 1) Nordbanken Holding AB (publ) was registered on October 8, 1997. The first financial period of the company thus covered the period from October 8, 1997 to December 31, 1997. 2) 60 per cent of the refund from the Pension Foundation/Funds of the MeritaNordbanken Group and 60 per cent of the Group's write-downs on real estate holdings have been included in the income statement. 3) Tax on the profit for the year includes only Nordbanken Holding AB's taxes. Nordbanken Holding AB's share of other MeritaNordbanken Group taxes is reported under "Profit from companies accounted for under the equity method" and amounts to SEK 1 028 million (in 1997 SEK 1 255 million). Appendix B 3 (3) Nordbanken Holding AB (publ) Balance sheet Nordbanken Holding AB Nordbanken including the Holding AB associated company Pro forma SEK million, December 1998 1997 1998 1997 31 Assets Fixed assets Financial fixed assets Shares in credit - - - 13 053 institutions Participating 25 373 20 512 13 242 - interests Long-term receivables - 1 981 - 1 981 Total fixed assets 25 373 22 493 13 242 15 034 Current assets Short-term 7 1 913 7 1 913 receivables Short-term 1 800 - 1 800 - investments Bank receivables 239 1 239 1 Total current assets 2 046 1 914 2 046 1 914 Total assets 27 419 24 407 15 288 16 948 Shareholders' equity and liabilities Shareholders' equity Restricted equity capital Share capital 8 927 8 927 8 927 8 927 Share premium reserve 3 036 3 036 3 036 3 036 Non-restricted equity capital Retained earnings 3 021* - 3 021 - Profit for the year 42* 4 934* 42 4 934 Profit from companies accounted for under the equity 11 812 - - method 7 459 Adjustment in accordance with the Cooperation Agreement 319 - - Total equity capital 27 157 24 356 15 026 16 897 Liabilities Short-term 262 51 262 51 liabilities Total liabilities 262 51 262 51 Total shareholders' 27 419 24 407 15 288 16 948 equity and liabilities * Excluding the associated company + Appendix C Merita Bank Group ANNUAL REPORT FOR 1998 The result of banking operations developed favourably, mainly reflecting a rise in net interest income and lower loan losses. The operating profit rose by 21 per cent to FIM 2,586 million. Total income remained broadly unchanged at FIM 9,110 million. Net interest income was FIM 5,310 million, a rise of 8 per cent, or almost FIM 400 million, compared with the preceding year. It was favourably impacted by a decline in low-yielding receivables, fewer problem loans and changes in the deposit structure. On the other hand, intense competition sustained pressure on interest margins, notably in housing loans. Net commission income was FIM 2,326 million, an increase of 4 per cent from the year before. It was boosted by growth in mutual fund business and other asset management services. Commission income from bank guarantees declined on account of a decrease in re-lending by pension institutions. The fall in net income from securities trading is due principally to lower gains from the sale of equity holdings. The largest individual gain in 1998 was FIM 374 million posted on the sale of the Group's equity holding in the Sampo Insurance Company. Net income from foreign exchange dealing almost doubled to FIM 284 million. Personnel expenses rose to FIM 2,807 million. Excluding restructuring expenses and the transfer to the personnel fund, they remained at the same level as in 1997. Other administrative expenses, FIM 1,154 million, increased by approximately FIM 80 million. Approximately FIM 160 million of the total amount stemmed from the new practice of booking acquisitions of computer software directly as expenses. In previous years these have been taken to the balance sheet and depreciated over their useful lives. After depreciation charges, the income/cost ratio was 1.74, compared with 1.86 the year before. The surplus refunded by the pension fund was eliminated in the calculation. Net loan losses within the banking group shrank further by FIM 247 million to FIM 995 million. In addition to specific loan loss provisions, a separate country risk provision of FIM 543 million was entered mainly for non-OECD countries, based on respective ratings. The country risk provision reflects the harmonization of provisioning principles within the MeritaNordbanken Group. In this connection the unappropriated part of the FIM 500 million provision for South East Asia established at the end of 1997 was released. The write-downs of FIM 3.5 billion reported under extraordinary expenses resulted from the decision of the Board of Directors of MeritaNordbanken to accelerate the disposal of the Group's real estate holdings, which necessitated substantial write-downs on properties owned by Merita Bank's associated company Merita Real Estate Ltd. After these charges, the banking group reported a net profit for the year of FIM 418 million. The positive impact of taxes is explained primarily by the fact that deferred tax liabilities and receivables were taken into account from the beginning of the year. During the year, the total assets of the Merita Bank Group increased by FIM 7.7 billion, totalling FIM 302 billion at the year-end. Lending to the public rose by approximately 12 per cent to FIM 167 billion at the end of the year. Most of this was denominated in FIM, while foreign currency lending accounted for 20 per cent. Problem loans decreased by 29 per cent during the year. The volume of low- interest-rate receivables was down 35 per cent. Deposits from the public increased by 3 per cent,. totalling FIM 138 billion at the end of the year. The equity capital of the Merita Bank Group at the close of the year stood at FIM 12.4 billion, a fall of FIM 2.8 billion compared with 1997. The decline stemmed principally from the repayment in February 1998 of the remaining part of the Finnish Government's capital investment. Furthermore, the Bank paid a dividend of FIM 1,235 million to MeritaNordbanken. The capital ratio at the end of 1998 was 9.8 per cent, down 1.0 percentage point from the end of the preceding year. The Tier 1 ratio was 5.7 per cent. Tables Income statements Balance sheets Appendix C 2 (4) Merita Bank Group Income statements FIM million 1998 1997 Interest income 13 426 12 816 Interest expenses -8 116 -7 902 Net interest income 5 310 4 914 Income from equity investments 36 100 Commission income 2 539 2 435 Commission expenses -213 -208 Net income from securities transactions and foreign exchange dealing Net income from securities 757 1 286 transactions Net income from foreign 284 146 exchange dealing Other operating income 399 472 Administrative expenses Personnel expenses Salaries and fees -2 164 -2 063 Staff-related expenses Pension expenses -318 -307 Refund from the Pension Fund 619 903 Other staff-related expenses -325 -172 Other administrative expenses -1 154 -1 072 Depreciation and write-downs on tangible and intangible assets -341 -332 Other operating expenses -855 -884 Loan and guarantee losses -995 -1 242 Write-downs on shares held as - -5 financial fixed assets Profit/loss from companies accounted for under the equity method -372 -933 Operating profit 3 205 3 039 Extraordinary items Extraordinary expenses -3 451 -44 Profit before appropriations and -245 2 995 taxes Income taxes Taxes for the financial year -12 -383 and previous years Change in deferred tax 709 -63 liabilities Minority interest -34 -31 Net profit for the year 418 2 518 Since 1998 Finnish banks have been allowed to value securities held for active trading purposes at market value. Related unrealized gains of FIM 188 million are included in net income from financial operations in the income statement for 1998. In accordance with the new accounting regulations and the Group's harmonized accounting principles, items in the income statement and balance sheet have been reclassified. The figures for 1997 have been adjusted accordingly. Appendix C 3 (4) Merita Bank Group Balance sheet FIM million 1998 1997 Assets Liquid assets 4 747 3 734 Debt securities eligible for refinancing with central banks Government securities 5 494 9 967 Other 23 448 22 769 Loans to credit institutions Repayable on demand 1 974 1 293 Other 53 102 52 887 Loans to the public and public 161 865 145 458 sector organizations Leased assets 5 021 4 063 Debt securities Issued by public sector 1 301 2 480 organizations Other 12 238 15 663 Shares and participations 1 318 1 663 Participating interests 2 185 13 559 Shares and participations in 1 408 1 536 Group companies Intangible assets Consolidation goodwill 42 51 Other long-term expenditure 44 105 Tangible assets Real estate and shares and participations in real estate companies 146 110 Other tangible assets 785 964 Other assets 19 740 11 333 Prepaid expenses and accrued 6 243 6 327 income Deferred tax receivables 561 - 301 662 293 962 Appendix C 4 (4) FIM million 1 998 1 997 Liabilities and shareholders' equity Liabilities Due to credit institutions and central banks Central banks 2 5 Credit institutions Repayable on demand 1 263 3 689 Other 49 017 51 407 Due to the public and public sector organizations Deposits Repayable on demand 90 114 83 923 Other 47 427 50 229 Other liabilities 8 202 11 387 Debt securities outstanding Bonds 7 740 6 581 Other 56 252 42 681 Other liabilities 14 608 13 228 Accrued expenses and prepaid 3 793 2 303 income Statutory provisions Pension provisions 97 94 Other statutory provisions 553 691 Subordinated liabilities 10 070 12 306 Deferred tax liabilities 7 161 Minority interest 84 49 Liabilities 289 230 278 733 Shareholders' equity Share capital 6 024 6 024 Revaluation reserve 21 25 Other restricted reserves Ordinary reserve 2 052 2 180 Capital securities 1 780 3 793 Profit carried forward from 2 559 689 previous years Net profit for the year 418 2 518 Anticipated dividend -422 - Shareholders' equity 12 432 15 229 301 662 293 962 Capital adequacy Own funds 21 113 21 893 Risk-weighted amount 215 231 203 477 Total capital ratio, % 9.8 10.8 Tier I ratio, % 5.7 5.9 Appendix D Nordbanken ANNUAL REPORT FOR 1998 Nordbanken's operating profit increased by 6 per cent to SEK 6,396 million, after restructuring expenses of SEK 328 million and a provision of SEK 290 million for potential losses from unauthorized equity transactions. These transactions are under investigation by the police. The net profit for the year was SEK 5,164 million (SEK 4,862 million in the preceding year). Net interest income declined by 10 per cent to SEK 8,832 million, mainly because the 1997 figure was boosted by debt prepayments, which no longer exerted a favourable influence on the 1998 results. Credit demand developed favourably, and average total assets increased by 12 per cent. Net commission income was up 12 per cent at SEK 2,872 million. Commission income rose by 9 per cent, principally reflecting continued growth in mutual fund savings. Commission expenses fell by 7 per cent. The net result from financial operations amounted to SEK 844 million (89). The decline in market interest rates offered opportunities for successful transactions in interest-rate-related instruments. Realized and unrealized gains from interest-bearing securities classified as financial current assets totalled SEK 1,171 million (-292), while unauthorized equity transactions produced a loss of SEK 269 million (+144). Net income from foreign exchange dealing was SEK 256 million, against SEK 254 million the year before. Expenses arising from debt prepayments, primarily purchases of bonds issued by subsidiaries, amounted to SEK 314 million (17). Other income totalled SEK 1,156 million (758). The rise stemmed in part from a non-recurring dividend payment and capital gain in connection with the ownership restructuring of Nordisk Renting. Expenses Operating expenses were up 9 per cent at SEK 7,526 million. Excluding restructuring costs of SEK 328 million, the rise in expenses was 4 per cent. Personnel expenses amounted to SEK 3,406 million. Adjusted for SEK 270 million of restructuring costs, personnel expenses increased by 7 per cent. Other expenses, adjusted for restructuring items, rose by 2 per cent. Loan losses The continued sharp fall in interest rates and the generally favourable economic environment enabled significant reversals of earlier provisions. Together with the appreciation in assets taken over for the protection of claims, these contributed a net amount of SEK 218 million to the year's result, compared with a charge of SEK 303 million in the preceding year. The 1998 accounts include a separate country risk provision of SEK 181 million. Tables Income statements Balance sheets Appendix D 2 (3) Nordbanken Group Income statements SEK million 1998 1997 Interest income 25 841 24 791 Interest expenses -17 009 -14 956 Net interest income 8 832 9 835 Dividend 596 322 Commission income 3 371 3 089 Commission expenses -499 -534 Net result from financial 844 89 operations Other operating income 560 436 Total operating income 13 704 13 237 Personnel expenses -3 406 -2 937 Other administrative -3 753 -3 632 expenses Depreciation and write- downs on tangible and intangible assets -367 -336 Total expenses -7 526 -6 905 Profit before loan losses 6 178 6 332 Loan losses 243 -314 Change in value of property -25 11 taken over Operating profit 6 396 6 029 Pension costs 523 155 Taxes -1 755 -1 322 Profit for the year 5 164 4 862 Net commission income 2 872 2 555 Appendix D 3 (3) Nordbanken Group Balance sheet SEK million 1998 1997 Cash and balances in central 1 882 1 808 banks Debt securities eligible for 27 575 28 510 refinancing with central banks Loans to credit institutions 43 953 37 105 Loans to the public 318 580 284 153 Bonds and other interest- 36 569 34 153 bearing securities Shares and participations 852 501 Participating interests 9 9 Shares and participations in 80 80 Group companies Intangible assets 3 917 4 367 Other assets 21 063 17 762 Prepaid expenses and accrued 4 908 5 214 income Total assets 459 388 413 662 Due to credit institutions 99 871 73 053 Deposits from the public 158 727 144 703 Borrowing from the public 4 954 5 031 Debt securities outstanding 116 546 123 144 Other liabilities 38 976 27 635 Accrued expenses and prepaid 5 401 5 116 income Statutory provisions 3 307 2 402 Subordinated liabilities 11 645 11 048 Liabilities 439 427 392 132 Shareholders' equity Share capital 5 482 5 482 Restricted reserves/ordinary 10 133 9 520 reserve Reserve for unrealized gains 368 - Non-restricted -1 186 1 666 reserves/Profit carried forward Profit for the year 5 164 4 862 Shareholders' equity 19 961 21 530 Total liabilities and 459 388 413 662 sharesholders' equity Capital adequacy Capital base 27 401 25 833 Risk-weighted amount 273 248 232 077 Total capital ratio, % 10.0 11.1 Tier I ratio, % 6.3 7.1 ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1999/02/23/19990223BIT00240/bit0001.doc http://www.bit.se/bitonline/1999/02/23/19990223BIT00240/bit0002.pdf